PTC Inc. (PTC) Earnings Call Transcript & Summary

Great. Well, good afternoon, everyone, and thank you so much for joining. My name is Adam Borg. I'm an analyst on the software team here at Stifel. Really excited to have PTC with us, and joining us is CFO, Kristian Talvitie. In terms of the format, I'm going to kick it off with some questions. If anyone in the audience has a question, you could submit it through the chat on the webcast page and we'll look to get to those as well. So Kristian, let's jump in. Thanks so much for being here. I really appreciate it.

Yes. Great. Adam, thanks for having us. And before we get started, I would -- of course, my employers would be upset if I didn't remind everybody that we may be making forward-looking statements, and you should refer to the safe harbor language in our press releases, in our Qs, Ks on the website, et cetera, for risks and uncertainties inherent in those statements. With that, thanks again for having us, and we're thrilled to be here.

Excellent, excellent. I love it. So let's start with the big picture, right? So obviously, with the past year, a lot of headwinds and opportunities we've seen in the industrial economy and accelerating to deal transformation as well. When you speak with your customers, where are they in their journey around digital transformation? And how do they -- and how does PTC help them?

Yes. It's certainly been an interesting 15, 16 months for the entire planet, for sure. And thoughts and prayers go out to everybody -- and knock on wood, we're seeing a light at the end of the tunnel here. And it's gone through various stages of confusion, uncertainty, almost paralysis, what do we do to, "Okay, we can start easing our way back into -- we've got to continue to do business. So we're going to do that and do that cautiously." We saw some impact on term lengths, for example, kind of earlier on in the pandemic, which shortened up a little bit. And then as we've kind of progressed through and the light at the end of the tunnel, if you will, started to become a little bit clearer, I think we've seen some good bounce back. We've had 3 solid quarters of good bookings growth here over the past 3 quarters, which has been great. And one of the dynamics that I guess I would point out is we're seeing customers now get more comfortable with entering back into longer-term arrangements. And for us, that's obviously a positive. And a lot of the things that we sell particularly on the PLM, the IoT side, those are large, multiyear enterprise deployments and transformational deployments for our customers. So seeing them get comfortable enough to want to start committing to these things again is great. How they're being committed to, I think people are still a little bit cautious, if you will, with their pocketbooks. I can't blame them. I'm cautious with mine. But they are -- they do want to make those longer-term commitments, right? So we see interest in ramp deals, continues to be strong, great for us, great for the customer. They get visibility into a longer-term road map. They get visibility into commercial terms. We get the commitment from them. And so that's where we are.

That's a great overview. And even before running through the product portfolio, I'd love to start about PTC's embrace of the cloud. So obviously, that's really been jump-started by your Onshape and Arena acquisitions. And we'll talk more about those. But just to frame for the audience, maybe you can help us understand what is the overall SaaS strategy. And let's talk a little bit about the replatforming efforts for Creo and Windchill onto Atlas over time.

Yes. Well, I mean I think that in general, the PTC story is, in many ways, a remarkable one, and it's really revolved around staying relevant for our customer base, right? It's a 35-plus year old stand-alone software business, started off in CAD, has expanded the product portfolio over the years into PLM, into SLM and ALM, IoT, AR. And as technology evolves and customer needs evolve from a product standpoint, PTC has continued to evolve with it both through organic and acquired R&D. The other piece of the PTC strategy that's evolved over the years is financial discipline. When I started back in 2008, PTC was north of $1 billion with 18% non-GAAP margins. Today, we're going to be north of 30%. So that's been an ongoing journey as well and, I think, has also been part of what is good for customers. It allows us to continue to have firepower if we need to, to go out and continue to invest in the product space. And then on the -- just on the commercial evolution side, as you know, given when PTC started, it was a perpetual software business. And what we found is that customers -- it's not really how customers want to buy anymore. They want to subscribe to things. So about 5 years ago, we embarked on a journey to transform the commercial model from a perpetual to a subscription model. Now obviously through that last year, it couldn't have been at a more fortuitous time really for PTC given the pandemic that hit. But I think that the value of that transformation really showed through in terms of stability on both the top line and free cash flow generation for the business. And lastly really to get to your question, Adam, you were talking about the SaaS strategy. And I've mentioned those other 3 elements because it's all related to how customers -- the value that we can bring to customers. And not only do they not want to buy things. They want to subscribe to them. Increasingly, they want the delivery model to move from on-prem to the cloud, into SaaS. And then there's distinct benefits to doing so. And our section of the software universe, technical software has not moved as quickly, if you will, as other spots like CRM or even ERP. But we are seeing interest from our customers that this SaaS delivery model is something that we want. And so we've embarked on that journey, as you pointed out, with both acquisitions, Onshape and Arena. And with Onshape actually came a SaaS platform, which we call Atlas, right? And the Onshape application, the CAD application was built on top of that platform. And now we're looking at how to further leverage that platform, SaaS-ifying core products like Creo, like Windchill. Obviously, that's going to be a multiyear effort. Yes, we've got interest from customers, but timing plays into it. And how quickly they're willing to actually migrate and adopt is a function of both what we have to offer as well as their own timing considerations.

That's really helpful. And while this may be a little bit unfair of a question, I'll at least ask anyway. As you think about your installed base for Creo and Windchill, what percent of those do you think would be interested in adopting, call it, SaaS-based versions of Creo and Windchill in coming years? And how should we think about the ARR uplift as you go from on-premise Creo and Windchill to cloud-based Creo and Windchill?

Yes. Well, I mean, I think that the portion of customers that we believe would be interested, there's a time scale to it. If you were to say right now, we would get a lower number. If you look out 2 to 3 years, I think -- we think that 2 to 3 to 5 years, approaching 30% of the customer base. And beyond that, I think it continues to ratchet up from there. Do we think today that 100% of the customer base moves? No, I don't think so, and there are certain, unique customers that have unique requirements in terms of whether they're government agencies or designing things for the U.S. Armed Forces, for example, that really would right now say they have no intention to move into cloud. Those are smaller portions of the business. So we think that, that interest is there and will continue to grow. And then really the second part of your question is a good one, and we continue to evaluate it. I think that our experience to date -- we do offer, for example, a hosted Windchill environment, right? They're not kind of multi-tenant SaaS. They're kind of single-tenant, hosted models. And I think that we see uplifts in the range of -- approaching 2x. And we think that that's probably a reasonable place to start from our expectations. So we'll continue to monitor that as we get more and more of the products migrated over to Atlas and see what the market bears, but that's the thinking for now.

That's really helpful, and that's actually a great segue into the product. So let's even just start with Windchill. That's been an area that has really been delivering great growth over recent years, mid-teens, call it, growth for a number of quarters now. Kind of what's leading to the strength? And really, how sustainable is this above-market growth in coming years?

Yes. Well, Windchill, as digital transformation, I'm sure we all get the e-mails from all sides about digital transformation in all parts of industry. And it is really a theme. It has been. It's been growing in prominence. And I think that one of the things that the pandemic and the kind of work-from-home or work-from-anywhere environment really demonstrated to a lot of companies is that digital transformation doesn't just sound interesting. It's actually a business imperative. And for our part of the enterprise, the customers that we serve, PLM is really the backbone for that broader digital transformation. And so we've seen really solid strength in the performance of Windchill. It's been going on for a number of quarters now but continued even throughout the pandemic. And we're not really seeing a letting up of interest in that digital transformation story as the sales teams are on top for the customers.

That's great. And even just thinking about Creo, so that's also been growing above market in the high singles. And you recently announced some new capabilities not just with your Ansys partnership around Simulation but Generative Design with Frustum. So how should we think about the addressable market here for Generative Design and Simulation within the installed base? And what kind of uplift can these offerings collectively offer?

Yes. So I think that the opportunity to continue to upsell both Creo Simulation Live and Generative into the base is significant. We are starting to see -- it's small numbers but growth rates of both of those are approaching pretty attractive levels, which I think is a good sign, but it's still a very small penetration rate within the broader base. So I think that creates an opportunity that can persist here for quite some time.

Great. Let's switch from the core to the growth businesses. Again, just a reminder, if there's any questions from the audience, please feel free to submit it to the chat, and we'll look to get to those. Let's start with Arena. So this just closed a few months back. Maybe you could just remind us what exactly Arena does. And now that it's closed, what are the top priorities from both an R&D and go-to-market perspective?

Yes. So Arena is a, if not the, leading SaaS PLM offering. It has a slightly different product market fit than Windchill, but it fits into that PLM category solidly. They've actually been delivering and delivered throughout the pandemic, solid growth as well and continue to do so. And now that they are part of the PTC broader portfolio, a couple of the things that we're really looking to do is explore how we broaden their reach in the market. And that includes both international. They've primarily been a U.S.-focused -- so we're exploring how to broaden that reach, and that has obviously both go-to-market as well as R&D implications, and then also what are the -- what kinds of cross-sell opportunities would that create going either way from kind of core PTC product portfolio into the Arena base or vice versa. And so those are the 2 elements that right now we're really exploring well, continuing to execute on a pretty impressive growth trajectory that they've been on.

That's great. And even just shifting from Arena to cloud-based CAD with Onshape, and we talked a little bit earlier about the platform, but I'm really curious to talk a little bit on the education market, right? You've been seeing some good success commercially, but education has been this area that not just yourselves but many vendors in, call it, the technical software space are really focusing on as you look to see the next generation of engineers on your platforms. And I think you've talked about 1 million education customers so far ahead of expectations. And I know there is just typically a free element. But last year, you did introduce this education addition. That was a paid version that you -- was for free for the first year, but then after the first year, would it be expected to be paid? I guess -- I understand this had some management capabilities. But as you think about the opportunity, how should we think about the conversion of free Onshape education into paid as those come up for renewal in coming quarters?

Yes. I mean listen, I think that there will be some impact to ARR, or annual run rate. It's already factored into our guidance. But to your point, I think the real story to watch is the general adoption and uptake in utilization because that is really the future of engineers. And they want modern tools, and they're going to want to bring modern tools into the workplace as well. And so really, the goal is to make sure that the broader market is getting educated and really understands the benefits that a true SaaS CAD can bring.

Got it. And as Onshape continues to add capabilities, I know a few months ago, you did a couple of tuck-in acquisitions to kind of broaden the Onshape portfolio, is there an opportunity or -- I don't know if there's a risk or potential for Onshape to somehow be competitive with Creo. And how should we think about potential cannibalization opportunities? I know one is typically upmarket. One is typically down. But as customers think about do they want to move to the cloud now versus maintaining their Creo footprint and migrating to the cloud over time, how do we think about Onshape's ability to move upmarket as well as their ability to be potentially cannibalistic to Creo?

So as I answer this, I also want to point out I'm not an engineer, but my understanding is that the technical capability of Onshape is already substantial. And in fact, most of where we're winning business with Onshape today is in the customer bases of our competitors. That's where the vast majority of the -- of our customers are coming from Onshape today, which, I guess, speaks to that because our customers all have solid CAD technologies as well, right? I think in terms of is it a risk to Creo in the short term, I still think it's a slightly different product market fit. And I think that as you move further and further up the stack, you've got customers that have very long life cycle products that have been using something like Creo, for example, for a long time in the development of these products. And they're leveraging the rich CAD data that was created years ago in current and future product designs. And that's probably the bigger stumbling block. To get these folks to migrate over right now is they want to be able to continue to leverage these designs. And that's really the crossover point. I think your question is probably going to come around the SaaS-ification of Creo, which is to migrate Creo and Windchill to SaaS-ified versions so customers can get both the benefits of a SaaS, true SaaS delivery model as well as leverage that legacy historical data that's so valuable to them.

Got it. That makes a lot of sense. Let's switch to IoT and augmented reality. And let's even just start with -- in the context of the Rockwell partnership. So obviously, the Rockwell partnership has been an important opportunity for both yourselves and Rockwell. And now that we're a few years into that relationship, it was great to see that extended not too long ago. Maybe you could start with just a state of the union in terms of where you guys are seeing the most success and where is the opportunities to continue strengthening that relationship.

Yes, yes. I mean I think the relationship is successful. I think it continues to grow, obviously, with the expansion of the contract. In addition to selling really IoT and AR, they can now also sell PLM. So Rockwell clearly has a strategy to continue to expand its own software footprint through its FactoryTalk automation suite. But there are elements of our portfolio that are critical to that effort, including IoT, including AR and -- as well as the interest in PLM as well. So I think they were both pleased with the results that have been achieved to date. And I think that we both believe that there's significant opportunity ahead of us to continue to leverage the relationship to drive growth, drive value for our customers.

That's great. And just following up on the IoT side of that. So I think at Analyst Day last year, we talked about some newer, higher-level IoT solutions. I think the first one was around digital performance management, and that's what's to come out later this year. Maybe you can help us understand kind of what exactly is this offering. I know ThingWorx started at almost as like a development platform and we're moving more to these solutions. So help understand, I guess, a, what's the strategy around the evolution of ThingWorx in general? B, what is this digital performance management offering that's expected later this year? And how should we think about potentially other higher-value solutions on the IoT side as you continue to kind of move up that stack?

Yes. So I mean digital performance management is really largely what it sounds like. It's really to help customers improve the throughput of their factories and to help them leverage technology to analyze where bottlenecks may be, to go and help figure out how to alleviate those bottlenecks, and then continue to rinse and repeat and move on to where the next bottleneck is. So a solution is supposed to be coming out later this year. I think we're pretty excited about it. Clearly, the team has other initiatives that they're working on as well. We're just not actually talking about those right now. We're staying focused on getting DPM out the door and into the hands of our customers. And we could take it from there. But clearly, a lot of work is still going on, on other initiatives as well.

Got it. And as I think about augmented reality, really interesting opportunity and you've been seeing a lot of success there, what's the mix today of, call it, stand-alone augmented reality customers versus customers that are purchasing augmented reality alongside other PTC products? And what are the efforts you have for the upsells and cross-sells? Because it seems to me there's a big opportunity to -- around augmented reality with IoT. And even a few weeks back, you talked about some newer solutions in Vuforia that you announced, linking it more tightly to 3D CAD model. So it seems like there's a lot of integrations that are available, and I'd love to kind of hear kind of who's stand-alone today, the upsells, et cetera.

Yes. So I agree with you and think that the cross-sell opportunity really for both IoT and AR into our existing base remains considerable. And on both of those, I mean there's a healthy mix of new customers being but also expansions that are happening within both IoT and AR. So I guess difficult to quantify since we haven't really done that before. We can look into how we might want to do that going forward. But suffice it to say that the cross-sell opportunity for both of those into the broader PTC base is substantial. And as we continue to do so and gain momentum, the upsell with those customers has proven to be very positive.

Great, great. And maybe let's switch to expenses for a minute. So during the pandemic, OpEx came in nicely just given the expense savings from the pandemic. And this year, snapping back given the pent-up demand from last year coupled with Arena, I guess could you talk a little bit about what expenses are coming back? Which ones aren't? And just given the success and the growth opportunities we've been talking about, how should we think about growth in the near term of OpEx relative to your kind of longer-term objective of OpEx growing at half the rate of ARR growth? Obviously, this year, it's been growing faster given what we just talked about, but why not continue that pace given the success you're seeing not just in the core but also on the growth areas?

Yes. Great question. So agreed, OpEx is coming back higher than that rate this year. It was lower than the 50% of ARR growth last year. I think if we average the 2 years out, it's pretty close to that range. I think over the midterm, we still think that's the right way to approach it. Could it be modestly above or below those in any given year due to certain investments that are being made? Sure. But over the medium term, we think that that's still the right amount of investment that we can make and consume efficiently into the business, I guess, is the right way to think about it.

Any particular areas where you're not expecting investments to come back? I'm thinking most likely on the go-to-market side, you're probably not going to go back to 100% travel. So how should we think about what investments stay and come back?

Good point there. Yes. So we obviously saw travel, T&E dropped precipitously during the pandemic. Now as things are starting to open, we are starting to see some of that travel come back in. I think that right now, we're looking at trying to maintain T&E at about half the rate of what it was prior to the pandemic not just because we're stingy but because behaviors have actually changed. And I think we're seeing customers and folks in general really have adopted this whole kind of digital strategy. Here at this conference alone is another good example of it. But will we start seeing more travel? Sure. Do we think it's going to go back to the way it was pre-pandemic? No, we don't. And that's frankly another way that we can repurpose those dollars that are spent into perhaps more productive -- into more productive R&D or sales assets than on T&E.

I'm sure hoping, next year, we're back in Boston doing this face-to-face, but I'm getting sick of doing this from my basement. Maybe just -- we have about a minute or so left. Maybe I can try to sneak in 1 or 2 more. Just on the Microsoft partnership, that's actually been going quite well. And as I think about -- and again, maybe an unfair question but I'll ask. As I think about kind of Microsoft and Rockwell partnerships today, I guess which one is a more material contributor? And as I look forward to, call it, 5 years, which one do you think would be a bigger contributor at that time, knowing they both are your favorite children?

Yes. No. It's a good question. It's a little bit of an unfair question. As you know, we don't really disclose the financial contribution of each of any of those partnerships. And they're different in nature, right? One, Rockwell as a reseller of our technology; and the other, we're a go-to-market partner with Microsoft. Both of them, I think, are helpful to all parties. It broadens the go-to-market reach of PTC, both of those relationships. And in their own way, both of those relationships also broaden the technology footprint and what those respective parties can bring to their customers, leveraging our technology. So listen, I think there's a lot of room for expansion on both fronts.

Totally fair. With that, unfortunately, we're out of time. Kristian, thanks so much for being here. I really appreciate it. And for everyone listening, again, thanks for joining in today, and I hope you join the rest of the conference. Thanks again.

Thanks. Thanks, Adam. Thanks, everybody, for the support.