PTC Inc. (PTC) Earnings Call Transcript & Summary

Okay. Well, good afternoon, everyone, and welcome to Barclays TMT conference. My name is Saket Kalia. I cover software here. Very happy to have with us the team from PTC. We've got Kristian Talvitie, Chief Financial Officer; we've also got Tim Fox, Head of Investor Relations. We've got about 25 minutes together. Let's take maybe the first 15 or 20 minutes to go through some fireside chat with Kristian. And then let's make it interactive. Any questions that you've got, just feel free to e-mail me at [email protected], and I'll do my best to weave them in, in the time that we have. And so with that as sort of a framework, Kristian, Tim, thanks so much for being with us here today.

Yes. Thank you very much for having us. We really appreciate the opportunity here. And secondly, before we get into the questions, my general counsel would smack me if I didn't remind everybody that we may be talking about forward-looking statements, and we would encourage everybody to go look at our safe harbor language and risk factors that are listed in our -- on our website, in our press releases as well as in our recent SEC filings. So with that, back over to you, Saket. Thanks again for having us.

Excellent. Sure thing, sure thing. Boy, where to start, Kristian? I mean, there was a lot of good stuff on the last earnings call, whether it was ARR or bookings or new ACV. Maybe just to level set, to sort of frame the rest of the discussion, could you maybe recap some of the items from fiscal '20 that you as a management team were most proud of? And what you've said about 2021 so far?

Yes. Great. So appreciate that. I think from a fiscal '20 perspective, I think we started off strong. We had strong expectations for accelerating growth in fiscal '20. And we're actually well on track. If you remember, we actually raised guidance after Q1 for the year nominally -- did so for the full year. And felt like we were in a very good place as a business. And then, of course, the unfortunate -- unfortunate for all of us, the global pandemic hit. And that took some wind out of the sails and, in fact, created, I think, quite a bit of confusion, maybe even some fear in the markets. What does this mean? What kind of impact might this have? And by the way, we went through all of those same emotions and dialogues internally as a management team as well and tried to understand what we -- where do we think the parameters are, how bad could things get. And the first couple of months were, frankly, a little bit dicey. New sales, as you might remember, ground closely to a halt, just given the uncertainty. And the bright point then -- the bright points after that started to emerge. Renewals, for example, the retention rate of our customers held in. I think there was some real concern about what may or may not happen there. But as it turns out, customers are getting real value from the solutions that we have. We worked with a lot of customers to make sure they had appropriate licensing access during some of those darker moments and renewals held in. And then new sales started to come back, particularly in our fourth quarter. Q3 was still down, but -- Q4 was down, but not down anywhere near as much as we thought. And renewals held in remarkably well. And frankly the transition from the perpetual to the subscription model, which we, in essence, completed in fiscal '19 couldn't have come at a more timelier moment. And because of that transition, our cash flows held in really nicely as well. And one of the other non-pandemic related that was notable that happened in the year was, of course, the acquisition of Onshape. And the timing of that, in retrospect, also maybe couldn't have been any better. The product's in a great place. It comes with a pure native, multi-tenant SaaS platform. And then in the midst of all this, the world goes into turmoil, and it starts -- questions within customers and companies, our customers and elsewhere, about transformation and leveraging, leveraging SaaS more broadly. And now we're pretty well positioned on that front. So all in all, summing up, started off with a bang, interrupted with uncertainty, and then ended the year with solid results because of the subscription transition, and really well positioned for the future with the product portfolio that we have as well as this emerging interest in SaaS. So...

Absolutely. Absolutely. That's a helpful recap in what was certainly a different year. I want to maybe start with the CAD business here, Kristian. I think we said in the last call that ARR growth there, on a constant currency basis, was in the high single digits. And I think we all have historically thought about market growth here of sort of mid-single digit, kind of GDP plus, if you will. And so the question is, what do you attribute the better sort of new ACV to, in your view, in CAD specifically?

Yes. A really interesting question, Saket. And part of it, just tailing off that last answer, part of it for sure is going to be related to the business model transition, right? And I think that the business model, in general, is going to add a little bit of growth in the equation. Part of it as well, I believe, is really the competitive positioning that we see right now in the product portfolio. And by the way, the broader product portfolio also strengthens CAD performance. And then last year, we also benefited modestly from the last vestige of the subscription -- or perpetual to subscription mix shift. But I think we're very optimistic about what the future holds here. We launched Creo 7 earlier in the year. It comes with generative design capabilities, which is really some kind of groundbreaking technology, if you will, for the design space. We're starting to see interest in that. I think the partnership with ANSYS and embedding simulation capabilities into the product and getting those earlier in the design cycle, all leads up to this competitive positioning that we have and some of the momentum that we're seeing.

Sure, sure. So there's a lot that we could dig into, just in CAD individually. But I actually want to -- actually want to make sure we touch on PLM here a little bit as well because -- I would say even more than CAD, PLM surprised the heck out of me, right? When Jim, I think, said in the last call that the business is actually ahead of its pre-COVID plan. I think that grew mid-teens constant -- ARR specifically grew mid-teens constant currency, which again is kind of well ahead of what you would expect for PLM market growth. And so maybe the same question that we asked for CAD in terms of what you feel like drove that sort of better than market growth. Same question for PLM. What do you think is happening there that drove that?

Yes. So I guess I would try to just sum it up like this. I think that again, the environment that we're living in today, and have been here for the -- almost a year has maybe caused companies to rethink their own digital footprint and leveraging the digital capabilities that exist today. This conference is a great example, right? A year ago, we would have been -- we were just talking about this before the call. We would have been, we would have gone out to dinner last night, and we would have -- we'd be sitting next to each other on stage. And now here we are. And by the way, that is just pervasive throughout businesses around the world. And as they think about their own digital transformation journeys and the various aspects of it, if you're going to think about digital transformation for your kind of design into manufacturing space, PLM is really the backbone, and truly the backbone to [indiscernible] that. And so we're seeing a lot of interest. I think people were on a digital transformation journey previously. That said, I think there's a possibility that the environment that we're in is making them rethink or re-prioritize or rethink how fast they want to go through that journey. And we're seeing some pretty interesting customer wins and people accepting the technology and adapting to it and getting value from it. The Navy deal that we talked about 2 quarters ago is a great example. We have a number of other customer stories as well that we can get into. But suffice it to say, it's really about that digital transformation journey. And that's the opportunity for us. How can we get out there and help our customers get through this and does that provide a tailwind? And it seems like it has been throughout this year, and we'll see. We'll look forward to that, hopefully, continuing into the future.

Sure, sure. So we touched on CAD. We touched on PLM. I mean, I think it only makes sense to kind of do something similar for the IoT and AR business here. Let's just call it growth, right? But I think in early September, a lot of us were expecting the pandemic's effect on factories to impact bookings and therefore, new ACV for IoT, specifically, let's say. But I think -- I was certainly surprised when I think IoT and AR collectively grew in the high 20% range, when the year is all said and done. And it feels like a lot of that activity was in the month of September, right? And so the question is, do you feel like that was sort of pent-up demand through the year? Or is that maybe a sign of just maybe things starting to open up -- opening up, and people sort of coming back to the table to investing in IoT, if you will?

Yes. Yes. So it's a complicated question, and therefore, kind of a complicated answer, but let me try -- give it as succinctly as possible. The -- there's no doubt that the pandemic impacted, in particular, the IoT business. And there's different ways to kind of bifurcate the business. But in this particular answer, what I would say is you need to think about kind of net new implementations versus expansions. And where we saw the impact -- and frankly, continue to feel that impact, was in the net new implementation side of the business. This is where it's really helpful for the overall project to make sure that we've got people on site. Customers got people on site. You can understand exactly the problem that you're trying to solve and be there to help -- help the implementation process along. It's not that we didn't win any net new customers, we did. But the pace was certainly much slower than what was contemplated at the beginning of the year, even in prior years. And I agree with you that the growth rate still, as you say, in the kind of 20%-plus range and I think that's great, was definitely lower than our original plans and expectations for that business. And again, I want to bifurcate it back to there was that net new adoption. On the other hand, expansion deals continued quite nicely. Throughout the year and even throughout the back part of the year. And so that was also helpful. Rockwell, of course, plays a role in all of this as well. And I guess just the last piece that you were making a comment on was that maybe many of these deals were actually in Q4. And here's where I'd remind you that actually this is where that whole backlog equation kind of comes into play. We had backlog coming into the year, and these were deals that were already set to expand, and were expanding. Then there was the additional just organic, we'll call it, incremental expansion. And a lot of the business that was actually done, we'll say, in Q4 and towards the end of Q4, a lot of that went actually into -- in the future backlog for future years. So in general, I think given the environment, we're very pleased with how that business performed. And I think looking forward, we see a good runway for opportunity for improvement in that space as well.

Got it. Got it. I think some of the mechanics that you mentioned there at the end are a great segue into sort of the next line of question. We've kind of talked about ARR sort of bottoms-up, right? CAD, PLM, IoT. We didn't talk about FSG, right, because now growth is actually bigger than FSG. So I'm going to put that to the side. But I want to actually shift to talking about ARR from more of a top-down view, which is sort of backlog, bookings and churn. Which sort of combined to -- in some ways sort of combined to kind of give us net new ACV. And I wanted -- maybe -- I wanted to have a quick on the churn component. I think you've talked about potentially improving churn by about 100 basis points next year. And so the question is, how much of that is going to be dependent on the macro improving versus things that are in PTC's control? Does that make sense?

Yes, it does. It does. And we've -- in our outlook, we've tried to be mindful of things that we can't control, i.e., the macro environment. We've made assumptions, of course, like everybody has to, about what's going to happen with the macro, meaning stays somewhat consistent through the first half of our fiscal year and starts to get better in the back half of the fiscal year. So that's one overall planning assumption that we've made. And we've tried to be mindful of that macro. And then we've tried to layer in the things where we think we actually can control, to a certain degree, the outcome. Part of it, we had -- last year, the uptick was partially due to a small handful of known, kind of large customer engagements, that each have their own specific story of, well, why they came to an end, but they did. And then on the flip side, was the actual impact of COVID. And while there was some impact. I would tell you, Saket, it was not as bad as your friendly neighborhood CFO sitting here would have -- was fearing as we went into this, right? And I really -- it speaks to the -- again, I think the value that our customers are getting from the solutions that we have deployed with them. And so we've tried to be mindful of those opportunities that we have with our customer base and kind of layer in some of that macro overview.

Got it. Got it. That's helpful. I want to talk about the other component of this, which is the backlog. And maybe zero in on ramp deals, in particular. It just feels like maybe there are more ramp deals here now perhaps amidst COVID than we've seen historically. You said some interesting things on the last call, Kristian, just around ramp deals and how they could sort of maybe be a little bit more of a tailwind kind of going out into future years. Can you just talk about ramp deals and backlog and those mechanics a little bit? Because it would feel like that would be a trend that maybe could continue a little bit, for as long as the pandemic lasts, let's say. I don't know. Does that make sense?

Yes, sure. I mean, it does. I mean, it's an interesting phenomenon. And I agree with you that we have seen interest in these kind of ramp deals. It has, in fact, accelerated a little bit throughout fiscal '20 and we continue to see interest here in the early parts of fiscal '21 as well. And it does a couple of things -- just signals a couple of things to me. One, there are customers out there who are interested in leveraging the technology. And they understand that it's not a implement it, look at it and walk away. It's a journey, right? And they understand that, and it's a journey for them to transform their own operations, whether that's engineering operations or manufacturing operations, et cetera. And that's the journey that they're on, and they want to leverage our technology to help them go down that journey. And so, well, they know they want to start that and they know that it's a journey, they want to commit now. And again, in some 2, 3, 4, in some cases, 5-year ramps, these customers are committing, which is a great sign. And the reason that they're making these kinds of commitments is, from a commercial perspective, is to actually lock in some of that, we'll call it, more favorable pricing, if you will, at the beginning -- and the beginning phases of that -- of those ramps. So I understand that it makes sense to me, and I'm heartened by some of the commitments that we're seeing customers wanting to make. Because it really speaks to, again, the value of what they're seeing in their own digital transformations and how they view PTC. They're not viewing it as a transaction. They're clearly viewing it as a relationship, and they want to get started. So from that perspective and from a long-term perspective, I think they're great. Short term, can they cause a little bit of noise on a quarterly basis? Sure. Of course, they can, and they will but I think you'd really need to step back and look at what is that telling you, right, from an overall market demand and kind of customer perspective. And we're [indiscernible] nothing but goodness there.

Got it. Got it. Last couple of questions -- last couple of minutes that we got here. I think one of the most -- one of the more helpful models that we've seen for PTC in the past was one that we actually talked about last year. It's almost like a back of the envelope free cash flow model, kind of starting with the ARR. And of course, as we all prepped for Analyst Day next week and I won't ask what the new target will be, right? But maybe what would be helpful, Kristian, was -- what would be -- can you just remind us kind of how that framework works, right? In terms of -- I think you've got sort of -- you've got ARR kind of with a start, and you've got some cash expenses in there. I mean, can you just remind us about that framework? And is that still relevant? Is it not? How do you think about that?

Yes, super question. And frankly, given the noise, if you will, that the ASC 606 creates on the P&L, I really think it's the right way to look at the business. And that's frankly how we look at it internally. And it's really a cash in, cash out model. And I think, Tim, I think it's -- I think that it's posted even on the website as well. Tim can comment. Or if not, you can all reach out to Tim, and I think he'd be more than happy to share a copy with you. But what we've really tried to do is make it look a little bit like a P&L. And the good news is you can validate all of the information that comes off the P&L, comes off the balance sheet or cash flow statement that goes into this. And the only number that you really have to trust us on, if you will, is our ARR number. And I would tell you that we put a lot of effort into making sure that, that ARR number is accurate and reflective of essentially our billings that we're expecting out of the business. And so you get ARR on a trailing 12-month basis plus -- plus perpetual license revenue, which at this point is negligible, plus professional services revenue. And on an annual basis, that leads to cash generation. And again, tying that back to our own kind of invoicing and collections, I look at that every quarter, and it's very tight to what actually happens as well. And then you can go through cost of goods and operating expenses and add in CapEx, you need to add that in because that's a real cash expense and take out depreciation, et cetera. And you get from cash generation through cash expenses to free cash flow. And I think it's a pretty handy way to look at the business and try to model it and understand where you think we can take this over the next few years.

Agreed. Well, guys, there are so many more questions that I have, but unfortunately, only limited time, but hopefully, it was helpful for those folks in the webcast. I certainly enjoyed it. Kristian and Tim, as always, thanks a ton for taking the time here. I look forward to when we could do that dinner again in San Francisco in 2021, hopefully. And maybe the last point that I note here, just for those folks on the webcast, I think there's a really helpful and important Analyst Day coming up next week on the 15th. So definitely tune in if you've got time. We certainly will. So Kristian, Tim, thanks a ton for the time here. We really appreciate it.

Yes. Thanks, Saket.

Thank you, Saket.

We really appreciate the support. Thanks, everybody.

All right. Thanks, have a good one. Bye now.