PTC Inc. (PTC) Earnings Call Transcript & Summary

Well, thank you. Welcome to day 1, Global Industrial Conference. This is my first meeting of the day. We have PTC, which is the cornerstone of our new industrial software franchise. I couldn't be more excited to have Jim Heppelmann here. He's the Chairman and CEO of PTC. Jim, welcome.

Thank you so much.

Thank you for joining us. So I think the format is going to be -- it's a fireside chat format. I have some questions prepared. We have ability to ask questions online. So with that, I have my agenda, but for folks online, feel free to ask questions, we'll incorporate them.

So let's start with digital transformation and supply chains post-COVID-19, a very simple topic. COVID-19 has exposed the need for flexible and quickly changing supply chains. Look, as an industrial analyst, I have in-depth appreciation of how vastly complex supply chains can be. And it's a challenge, right, when managing software across the value chain. So how has this changed PTC's strategy? And what technologies are emerging that enable this idea of seamless digital thread? And how realistic is it that customers can change and manipulate their supply chains and still deploy simultaneous updates to software across the entire value chain?

Yes. Well, that's a great question, Andrew. And let me say, even before COVID was creating a problem for supply chains, there was trade wars that were a problem. And before trade wars, there were earthquakes and tsunamis and lots of different problems. So I definitely think manufacturers appreciate more than ever the need to be flexible in, what you might call, agile with their supply chains. In fact it was the thesis of a recent event, 2-day event held by the National Association of Manufacturers here in the U.S. So people are definitely thinking that way. And I think software can help a lot. And I think PTC has some special software. One of the things that gets in the way of supply chain agility is what I call friction. And for example, in the traditional model, an entire supply chain used to install the same version of the same software on-premise. So that ,that supply chain could collaborate with each other. And that might mean that does us even hundreds of companies all have to upgrade on the same day and so forth. So its a very friction filled kind of environment. So today, when you go to real SaaS, this is a software you just use. You don't own it, you don't take possession of it. You just log in and go. And you can switch from device to device and you can bring new parties into the mix and phase out old parties and so forth. So definitely, SaaS is the answer here to supply chain agility, to get to the point where like, if I want to call an Uber, I just do it. I don't download an app and set up an infrastructure, so I call an Uber. I just pull up the app on my phone and off I go. And I think that OEMs would like to find suppliers like you and I would find an Uber: very quick; lock into a relationship easily, very low friction. So our SaaS technology like Onshape and Arena now are super supply chain-friendly. Again, as software is ready-to-go, you're just joining or running the system. And then, of course, our more classical PLM software Windchill, we pioneered pure web technology decades ago, actually, in this field, and we're still the only vendor that really has no installed footprint for PLM. So even our Windchill software stands head and shoulders above the rest of the crowd in terms of enabling supply chain agility, but also workforce flexibility, work-from-home or work from anywhere, frankly. So that's definitely been a driver for pretty good results that we've been able to post in the PLM arena over the last 2 years.

And maybe, that sort of would allow us to transition. Can we just talk about the key drivers of the PLM market? And you guys have clearly done very well in the PLM market in terms of your own outgrowth. So what do you see as the key drivers of the market growth and your outgrowth in the core PLM market? And maybe a follow-up just both end-market and your strategy in the market. How is your view on industrial recovery being same or different the cycle? And as I said, what's specifically driving PTC's outgrowth of the market?

Yes. So first, on the outgrowth, we wrapped up a year of 15% PLM growth last year, and that's against a market that was purportedly growing about half that rate. And that's the third year of sort of double-digit to mid-teens PLM growth in a row that we posted to kind of double the rate of the market. I also don't know that the market grew at that same, let's call it, 8% last year because somewhere, our major competitors, Siemens and Dassault posted negative, flat to down PLM growth in the same environment where we were prospering so strong. So to me, the biggest driver of all is digital transformation. I think that the industrial companies are starting to really get it, with both excitement and fear, about what digital can mean to them. And when they set out to think about a digital future, you don't get fire before you say, product data being digital would be important and would have to be well-managed and under control and accessible, so that anybody could get to it, but that they get the right version of data, whether they're working from home or whether they're a supplier, what have you. So I think that PLM has become an anchor tenant system for digital transformation for industrial companies. And then, I think that PTC has responded well to that. Not only do we have the PLM story, but we have the IoT story and the AR, augmented reality, story that are both integrated with PLM and both also seeing as big drivers of digital transformation. So I think we're just viewed as a portfolio of strong products, but even the combination in the portfolio being pretty unique, and it's been helpful to us. In terms of how the market looks? I think right now, and the PMIs would back this up, there's a lot of optimism in the industrial world. I think, there's companies that sort of had a real scary moment, like, let's say, a year ago for 1 quarter or 2, and then going back 1 and 2 quarters, we started to see a nice rebound. And certainly, when I look at our forecast, and when I look at the PMI numbers, I don't see any end in sight to some bullishness in the industrial world. I don't know if it will stay. We're not out of the woods yet on pandemic, but certainly, the PMI numbers are in a very, very healthy position right now, which speaks to optimism. Probably the larger enterprises are more optimistic than the smaller ones. I think, the smaller ones suffered more during the downturn. But definitely, we feel like the manufacturing world is coming back in a good way right now.

Are you seeing any difference -- real-time difference in being able to get on-premise access?

That's definitely opening up. I think, we're all learning to do more, too, without going on-premise. But certainly, the one part of our business that grew last year, but not at the rate we wanted to, was the IoT business, and that's because we were doing a lot of smart factory projects. And suddenly, we were precluded from going to those factories. By the way, I'm on the Board, too, of an industrial company. And these factories had to keep running. And so there was a real move to like be careful who you led in there because we don't want a super spreader event in our factory that we shut our production down. So there was a period of time where it was like stay away. But that's, on one hand, relaxed and the second is, we got a little more used to deal with. And so, we're certainly seeing our IoT growth rates increase again. I wouldn't say they're back to where we want them to be, but certainly, showing some more momentum than we were starting to see a year ago as we were sliding into the downturn.

Got you. So maybe we can just talk about your digital implementation and your digital performance management offering. How is your approach to digital implementation different from competitors? And just talking about industrial customers, customers increasingly want to see use case of ROI before deploying digitalization offerings like ThingWorx. So every start-up you talk to, right, everybody supposedly sells every product, you look at the customer list, and it's always spectacular, but then it turns out, they sort of never get out of that pilot purgatory. So how do you address this issue of pilot purgatory?

Yes. Well, let me say, first of all, we've been in the industrial IoT business now for 7 years, believe it or not. And we started with an acquisition of $2 million of perpetual revenue, and we're coming up on the ARR a little bit out in the future, but not too far, an ARR of 200. So we've come a long way. And as businesses do, we've also evolved. And we started really low in the stack, providing cloud computing and everything else. And over time, as Amazon and Azure entered at that level, we went up the stack. And I think it's a good thing we did because the reason there's pilot purgatory is because people like Azure and AWS, and previously, PTC, were selling tools to manufacturing companies that would allow manufacturing companies to create custom solutions quickly. The problem is the manufacturing companies don't know how to create custom solutions, and just giving them better tools, that only solves part of the problem. They're not sure what to do with the tools. And they don't necessarily have that talent on staff, and it's hard for them to recruit that talent and retain it and so forth. So PTC has gone up the stack and really focused on solutions like digital performance management and the precursor we called Factory Insights as a Service, so that we could go to the customer and say, here's functionality you just use. We're not -- don't develop anything because you'll get lost in that, and you'll end up in pilot purgatory -- just functionality you should just turn on and use. And by the way, here's some reference customers that are a lot like you and used this functionality and got these kind of returns. So certainly, that's our goal is to get into reference selling of turnkey solutions with value props that are both strong and referenceable to other customers that would give people confidence to move faster. That's what the market needs. I think, we were in that early phase thinking that development tools would be interesting. The original ThingWorx value prop, by the way, was to make your developers 10x more productive. And now, I would tell a customer or our manufacturing customer, you don't have time for developers. That'd just be a productivity sync if you're trying to develop your own solutions where you could just be buying and using solutions that are ready-to-go.

Got you. And can you just talk about where is your customer base in terms of -- you sort of noted that some customer base of the talent. Where is your customer base... [Technical Difficulty] Hold on a second. I think, we have technical problems. So just let's wait for Jim. And in any case, if folks want to send their questions, please do. I assume that the problem is Jim and not myself. Operator, I just want to make sure that the problem is with Jim and not myself. Technical differences -- sorry, difficulties. So let's just go and talk about IT evolution. We're talking about customer readiness to embrace new technology just as Webex went out on us. So maybe, we need better -- maybe customers need better technology sometimes as well. But just what about customers embracing the latest technology, Jim? What have you experienced then?

Well, I think COVID was a real eyeopener. And in fact, we do surveys of readiness, for example, on CAD and PLM for IoT. And there was a minority of people who were really pulling on, let's say, cloud-based CAD and PLM technologies pre-COVID. But after a year at COVID, the most recent surveys show that being a dramatic majority. So I think, digital saved the day during COVID. And I think companies are realizing that we should lock-in on some of the gains, hybrid workforce ideas and all that. So I think there's a lot more interest in technologies. Now the technology has got to meet the customer where they are. And that's why I think, for example, for a smart factory, they need solutions, not development tools. And I think that's exactly how we pivoted over the last couple of years. So I'm pretty optimistic that the COVID tailwind will continue for a long time as digital transformation, whereas the COVID headwind of downturn and business conditions and so forth will fade away for our customers, and the tailwind will blow uncontested going forward.

So let's skip to the sexy stuff, Onshape and Arena. Can you just give us update on Arena Solutions acquisitions? What are the key roadblocks? And what is management integration strategy of the 2 platforms? And I think, one of the questions, how will you integrate Arena with the Atlas platform? And then we can just sort of talk about -- I know you're excited about Onshape. So let's just sort of hit their renamed integration, then we can move to...

Okay. Let me start just back up one step. This is an industry that's more than 95% on-premise or managed service private instances of software. So this is an industry, CAD and PLM and industrial software in general, that the cloud has not yet penetrated much. But we think that's going to change. So PTC made a bet that there would be a future incarnation of this industry. And it would probably be led by pure plays who built their whole strategy around SaaS as opposed to other companies who kind of retrofitted. And so we set out to position ourselves to be the pure play, and we acquired first Onshape for CAD and then more recently, Arena for PLM, and both of those have gone well. The acquisitions have fit well into our culture. To integrate, we've created a SaaS business unit, which houses 3 properties that are all pure SaaS now or very close to pure SaaS, Onshape, Vuforia and now Arena. We have a SaaS business unit President, Mike DiTullio, who had been our long-time Head of Sales and Marketing. So Arena has been integrated into that. Now we have some work to do to more tightly integrate the technology and bring Arena more on to Atlas, so that we have some common infrastructure there. But yes, we think we're building the SaaS leader of tomorrow. And when the industry turns over, we're going to be the company way out in front and hopefully be the beneficiary of disruption that's headed that way.

So maybe, we can talk about Onshape that, I think, is going to prove to be an incredible home run. Particularly, your timing could not have been better on that deal. Can you just tell us the experience so far? Maybe orders trending? And I think you sort of alluded that SaaS is starting to move the needle. But when does Onshape really start to move the needle on ARR growth?

Yes. So Onshape in the first year added about 1 percentage point of ARR just through the acquired revenue -- or acquired ARR. In the second year, it will add another point -- will add a point, again, this time from bona fide organic growth inside of PTC. So honestly, it's adding about a point of growth, and I think that will expand over time as Onshape gains scale. We expect that Onshape's year-over-year growth will be somewhere in the upper double- to low triple-digit range year-over-year. And yes, COVID actually was very helpful. It was helpful because a lot of people were cornered with systems that just didn't work. And Onshape is an obvious answer. It's just the cloud, you use it. You don't need to install or set up anything. And then, of course, the education industry, we just had a blockbuster year with Onshape because all these students were sent home and they don't have Windows PCs at home. They have MacBooks, they have Chromebooks, they have phone, tablets. Maybe, they're going to use mom or dad's MacBook. And so, teaching class in this hybrid school from home environment was virtually impossible with any products other than Onshape. And so Onshape took tremendous amount of market share. And that's important because that's tomorrow's workforce. And so, tomorrow's workforce is learning CAD using tomorrow's technology, and they're never going to go back. So very strategic and fortunate circumstance for us.

Can I just -- before we sort of go into overall SaaS transition, just we did a big event last year, and I think everybody in the industry sort of agreed that our numbers may be a little bit higher for the industrial world on SaaS than for sort of more traditional PLM. But maybe SaaS today is 10% of the industry at most, and the view is that it's going to go to 50% sometime between middle of decade and late in the decade. So two questions. So the first one, do you think, and you sort of you've outlined sort of the fact that if you move to SaaS, it actually improves your TAM in terms of dollars available. So a, -- so question number one, do you think transition to SaaS actually accelerates the growth of the PLM industry? And I use broader definition of PLM industry. Do you think it accelerates the growth of the industry or do you think growth comes purely at the expense of more traditional offerings? And I'll cover the math on that, but does it grow the size of the overall pie faster?

Yes. I think it definitely grows the size of the pie. For one thing, with traditional on-premise software, customers would buy the software. They'd also buy a server. They'd hire a system administrator, et cetera. And now, that server and system administrator and the upgrades and the system integrator, the SI, all of that is bundled into the SaaS offering. So you're basically paying the software vendor the combination of what you used to pay the software vendor, the system integrator, the hardware vendor and the system administrative. So definitely, it roughly doubles the size of the market right there. And then, the second thing is it lowers the part of entry, and it opens up much more in the market. There's a lot more of the market that would use SaaS if SaaS were easier to use. So it certainly allows us to go much further down the market, where there's a big volume of business to be had than we ever could have with on-premise software. I want to say one last thing. To me, when we use the word SaaS, it's a little confusing sometimes. There's 3 different states. There's on-premise software that's installed on-premise. There's on-premise software that's installed in the cloud and served back to the customer as a single-tenant managed service. I tend to call that cloud, but there's no industry standard terminology here. There's good demand for that. The problem is, a company like PTC, all we did was move the problem. Like upgrades still have to happen. It's just that the customer doesn't do them, now PTC has to do them. And so, that type of business is less interesting to us because of the gross margins will always be lower. It's the pure multi-tenant SaaS where -- represented by Onshape and Arena and Vuforia, where the system is running, and there is only one system, and you just climb on and use it. And when that system is upgraded, that one system, the entire installed base is upgraded. So Onshape, for example, upgraded their system in the entire customer base 16x last year, and that's what the benefit of multi-tenant SaaS is. So that you have one infrastructure used by more and more clients, and the gross margins go up and up and up. So that's where we think the real future is, and that this cloud or single-tenant managed services, that's a phase on the way to the real outcome, which is salesforce.com style SaaS solutions.

So if you run the math on SaaS transition, right, it's just -- it's not hard to come to a conclusion that SaaS is going to eat up all the growth in the industry, if not even more, from more traditional offerings. So how do you think about, as you grow Onshape and Arena over the next 5 years, a, how do you keep growing your traditional PLM offerings? And b, what happens to your competition, which largely seems to be behind in terms of their SaaS capabilities?

Yes. Yes. Well, I think we are way out in front, particularly on the multi-tenant SaaS with Onshape and Arena. And so our strategy has been to take the underlying platform from Onshape, which is very well done and to generalize it, and we named it Atlas, Atlas will carry the PTC SaaS world on it's shoulders. So we're bringing all of our products onto this multi-tenant Atlas platform. It will take some time. Some of it's already in the market like Vuforia, but other pieces will come. But ultimately, we want Creo and Windchill on Atlas next to Onshape and Arena. And we'll use Onshape and Arena to innovate like crazy and disrupt competitors, and will offer Creo and Windchill customers an upward migration path with full upward compatibility. So we'll say, if you want the benefits of SaaS with upward compatibility, think of that like Office 365, we have a path to bring you there, and the spend will roughly double when you leave the server and the system integrator and system administrator behind. On the other hand, if you're -- somebody looking for cutting-edge stuff, no constraints whatsoever, and obviously, we'd be pitching this to competitors, then we have Onshape and Arena, and there's nothing like them because they were built from the ground up, with brand-new thinking and not constrained by any legacy concerns. So PTC went through a conversion ourselves from Office to Office 365, and it was pretty seamless. It's not quite the same as Google Docs, but it's most of the benefit of SaaS with none of the pain, and that was important to us. So I think we'll give customers both options.

And what do you think -- just what do you think the competition is in terms of your assessment, your competitive position relative to...

Yes. I think, the only competitor that has a real SaaS strategy is Autodesk, and it's not quite as SaaSy as ours. It still involves a client installed on the desktop. But as far as Dassault and Siemens, I think they're way off in some other place with respect to SaaS and not really doing the hard work to build a real SaaS multi-tenant system, really more in the strategy of offering cloud-based single-tenant managed services offerings, which I think is a bad idea. And then, Dassault furthermore, is trying to be in the horizontal cloud infrastructure business, actually competing with AWS and Azure. I don't think customers are going to accept that. So I think that PTC is outfront and positioned to take a lot of share in the coming decade, let's call it, and also positioned to take the nearly $1 billion of ARR we have in Creo and Windchill and convert that, doubling as we go to something much greater as we SaaSify those properties, as we like to say.

As the industry accelerates adoption of cloud, which industries and customers are early movers and most ready for cloud disruption in your view? Who do you see as...

Yes. I think it's almost to say who's in and who's not. The defense guys are the most conservative least ready. Although they will -- in many cases, if you have a fed ram compatible, single-tenant system, they'll use that, and we do have that. But as a general industry, Defense is most paranoid about cloud, which is why they need [indiscernible] and all that. On the other hand, if you look at med device, retail, good old-fashioned industrial electronics, they're all pretty open to it. There's a lot of people now who think that cloud is more secure and probably more performant than an on-premise system. So why not?

And what's your view around the timeline for industry cloud adoption? Does it take 2 years, 3 years, 5 years? What's the journey like?

When we talk about the tipping point, and the tipping point is where a new customer making a new decision would be more likely to go SaaS than on-premise, and we think we're coming up to that. And COVID accelerated by several years when we get to that tipping point. But we think that tipping point is in the next year or 2 or 3. But in terms of the whole phenomenon, it will take 5 to 10 years before most of the industry that's going to go to SaaS has settled into that. But for us, that's a doubling -- that's a factor that could double the size of the business even if there were no other growth over that period of time. So you're talking about maybe 5 to 10 percentage points of tailwind in many of the years there now.

So I think we have 5 minutes left. So I'll take one question from the audience. So the question is, what's your latest thinking on cooperation and partnership with Rockwell Automation? And does it make a difference to you?

Well, Rockwell is an important partner. They have emerged as our largest reseller, and we have many. So they're certainly an important partner. And we've collaborated effectively with them, penetrated a lot of new accounts, a lot of new verticals that we wouldn't be in. So certainly, we expect to keep that going. We hope to see it continue to grow. And Rockwell has made some moves lately that we welcome. They hired a couple of new leaders, one to lead their Software Business unit is Brian Shepherd, who worked for me for more than a dozen years here at PTC. He's a good solid guy that we know and trust. And then they hired a Chief Revenue Officer with Oracle and Veritas background, which I think will really put a lot more software selling skills into their organization as well. So we see Rockwell as a really important partner and expect to continue to grow that partnership.

And just the last question. Prior to COVID before people have sort of got addicted to the cloud, and I've heard some very colorful descriptions of what this addiction is like, I think the AR/VR was something very, very excited with [indiscernible] channel checks indicated that customers were very, very excited about that. So how should we size the market? And how has the experience evolved, particularly the monetization model for this AR/VR experience because you do have an amazing product?

Yes, we do.,, And it's a super interesting opportunity for us. Most analysts size the market around $1 billion, and we'd have, I don't know, somewhere around 4% or 5% of it right now, it's early. I'm not sure it's $1 billion myself, but that's the reports I read. So I do think that in the industrial vertical and broad industrial, the role of AR is all about remote support, training and enablement of frontline workers. And keep in mind, during COVID work-from-home, we all did what we did, just find on a Zoom meeting or Webex like this or what have you. The frontline workers still had to go to work, but they lost their whole support and enablement infrastructure. And so AR is a way to do that remotely. It's to bring the benefit of digital not just to the knowledge workers like us, but also to the frontline workers, and it's really the equivalent of Zoom and YouTube and PDF and so forth, but in the frontline work environment. So I'm very excited about that because for every knowledge worker, there's 3 frontline workers in the industrial business that we're talking about here. So there's a massive opportunity around training and enablement. And I think we have the leading product by far. And I think it's a 3D business. We understand 3D deep in our DNA. It's about configuration management because a lot of times, you have to configure the content, of course, that draws on our PLM heritage. So this is a place where we have tremendous market opportunity, a leading portfolio of augmented reality products under our Vuforia brand and a very strong right to play in access to the market, so I'm very bullish on that.

I believe we are out of time with that. And, again, thanks so much for joining us. It's a pleasure.

Yes. Sorry.

And [indiscernible] feel free to reach out to us with questions, and have a wonderful day.

Bye.