PTC Inc. (PTC) Earnings Call Transcript & Summary

All right. Good afternoon. Welcome to the afternoon session here at day 1 of our virtual TIMT conference. We're excited to have PTC with us. Kristian has been -- I've known Kristian for a long, long time, for -- while he was here, and then we're obviously excited that he's back now for a couple of years now. And so we look to cover a lot of topics in this conversation. So for those on the line, please submit your questions either by the portal or through -- even e-mail me directly at [email protected]. I've got a list of questions, but feel free to submit some questions, and we'll certainly -- as those come in, we'll put them into the appropriate line in the call. So Kristian, thanks again for joining us today. You guys just closed out your fiscal '21. And I guess just at a high level, I want to get into some of the changes in reporting and really, this new focus on SaaS, which has taken on a whole new perspective inside of PTC. But can you just start out with just sort of state of the union of sort of where we're at from a demand perspective across your various business? I know there's a lot of focus on the growth aspect as well as sort of what's going on in kind of Creo and Windchill side of the business. So let's start there, and then I want to get into -- and then dovetail that into sort of what made you guys change sort of how you're grouping products and then how that's going to have a profound impact on what we think is the growth rate as you sort of fully embrace SaaS to a greater extent.

Yes. Sure. First, Matt. Thanks for having us. Happy to be here. And before we get into answering some of those questions, I would remind you and remind all the listeners that we'll be making forward-looking statements and those forward-looking statements, of course, come with risks and uncertainties, and we do -- we try to outline many of those risks and uncertainties in our periodic filings with the SEC and in our press release and risk factors and so on, so on. I encourage you all to look at the risk factors as well. So with that, yes. I think -- so we just closed out our fiscal '21, ended on a pretty strong note in Q4. Came in at the high end of our ARR guidance range. Had a strong bookings quarter. And also met -- modestly exceeded our free cash flow guidance for the year, but kind of essentially in line there. So ended off on a solid note. The demand environment, we saw growth in all geographies. We saw growth across all product lines, which I think was also a positive outcome. In terms of the -- in terms of the reporting structure, that's a good question. And really, what we've done is a couple of things. One, tried to organize in the 2, we'll call them business units: one, digital thread, which is really our kind of heritage products, obviously, CAD, PLM, the FSG products as well as IoT and AR. And those products, we have a large installed base, particularly with CAD and PLM and some of the FSG products and I think have a good opportunity to cross-sell both IoT and AR into that base. And those products kind of play off of 1 another as well with this whole digital thread concept. So they're focused on a certain kind of customer segment. And yes, we want to go out and win some new logos, but probably the bigger opportunity there is with expansion and cross-sell opportunity. And then the other unit is the, what we call now, velocity, which is really Onshape and Arena, which are 2 kind of native SaaS properties. And the reason that we went with the velocity name is really because what we found is customers that are interested in those products, they're interested in a different style, if you will, of product development and more -- kind of more agile product development process. Not necessarily meaning that they're focused either on market or down market, it's how they want to leverage technology in their own internal design methodologies. And so those 2 properties go well together when going after customers, who are looking at that -- looking for that kind of technology. And then, of course, lastly, the acceleration of the investment into SaaS. This has been something we've been talking about for a while, kind of SaaS-ifying the portfolio, obviously, investments with the Arena and Onshape acquisitions, and have been looking at how to leverage Atlas, which was the SaaS platform that really came with the Onshape acquisition, how to leverage that more broadly across the PTC product portfolio. And so this kind of reorganization that we've announced is meant to do a couple of things. One, take that digital thread kind of business unit, that was still largely organized like a perpetual -- perpetual software business, in contrast to how many SaaS businesses organized themselves, and reorganize more along those lines. As a result, we ended up with some cost savings, which -- most of which we then are turning around and reinvesting back in the business in SaaS-ifying the business. And that goes to investments in Atlas platform as well as additional investment in the product itself, including Onshape and Arena, but also including incremental investment in SaaS-ifying Windchill and Creo as well.

That is a great overview. It gives us a lot to kind of drill into. So I guess, we've been talking about replatforming Windchill and Creo and Atlas for a little bit now. Where -- I don't recall if you've given like a real sort of defined time line for when you expect -- I know you're introducing SaaS services that are built on Atlas, but what is sort of the time frame today for kind of SaaS-ifying effectively Windchill and Creo on Atlas?

Yes. Well, I mean I think it's still going to be a multiyear effort and still be done in incremental features and functionality that are going to leverage platform. So it will still happen in phases over time. It's just that now, we're going to try to accelerate that with some of these incremental investments. So I think it's still going to be a multiyear effort, but we are trying to hasten that a little bit as well as think about how we can take the demand signals that we've been seeing from the market, from our customers, in terms of wanting to move to SaaS. And in fact, maybe one of the things we haven't truly articulated in our results historically, and we'll try to do that. We have an Investor Day coming up in mid-December. So I'd encourage you all to attend that. But point being, we have actually built up a business of effectively single-tenant SaaS for PLM over the years, and that has really been market pull, right? We haven't been actively out trying to push that in the market, and that's another piece of this SaaS acceleration. It's not just investment in the product and platform, but also thinking about how we can be maybe more aggressive in the market, leading with a SaaS value proposition as opposed to providing it when asked for by customers.

So one of the things that struck me early last year, and you and I have talked about this and talked to Jim about this, this is a market, at least from a CAD and PLM perspective that is more reluctant to change -- change vendors. You guys had a number of large replacement deals earlier in last fiscal year that I think we're really exciting and I think, to me, spoke to how the market was increasingly viewing your leadership from a SaaS perspective, today, Onshape and Arena, but in the future, Atlas across the broader portfolio. And I know some of these things are -- they can be hard to predict. But what can you tell us about sort of the where PTC sits in sort of the thought leadership position within Windchill -- within CAD and PLM? And does this increase focus on SaaS, do you think open up some additional replacement deals that maybe customers are looking at you as the thought later at these days?

Yes, sure. Thanks. Good question, Matt. I think if we think about the technology position that we're in, and if you were to look at the Gartners and other industry analysts of the world, I think that you would see that consistently, PTC now for a number of years has been ranking in the upper right-hand quadrant -- kind of the upper right hand part of the upper right-hand quadrant from a product perspective, both with CAD and PLM. And I think you're right as well that certainly, historically, it has been true that switching vendors for systems like these has been difficult, right? Customers have not really been willing to do that, certainly at scale, right? And it does, to your point, open up the question, what would create compelling enough value proposition for our customer to start considering maybe moving off of the platform that's well entrenched in their ecosystem. And I mean I think that leading with SaaS that may well open up some opportunities. I guess time will tell. We're still in the early days of accelerating right now. The reorganization that we announced, we're -- we effectively just started that here when we announced earnings, and so we still have a lot of people to go out and hire, and bring on board to help drive this acceleration. But I do think that over time, this could potentially open up some doors.

New market opportunities, yes. I want to ask about kind of the -- within the digital thread business, we just spent a little bit time talking about core, and now on the growth side, I think works in Vuforia. You guys disclosed the growth rate of those businesses. And I believe it was mid-teens for 4Q. A lot of investors saw that as a bit of a disappointment relative to, sort of, I think, maybe prior views of these growth businesses. Can you help us better understand the outlook for this growth segment within digital thread? And there had been some headwinds to IoT, some of them are pandemic-related. How do we think about that business -- that subsegment of digital thread progressing over the course of fiscal '22?

Yes, sure. And I think that we would probably agree with many of the investors that the -- that result is also a little bit of a disappointment to us. We still think that the market opportunity there is significant. We think we have a good technology position to go and play in that space, and we intend to continue to do that. We've recently launched DPM, which we'll see how that plays in the market here over the coming quarters. But we do think that in fiscal '22, we will start to see growth resuming in the growth segments, if you will. I mean, candidly, 15% is not a horrible outcome. It's just not the outcome, I think that any of us were looking for. And I think in '22, we should see that return to something with a 2-handle on it. Probably not in the first quarter, but I think as we get into Q2, Q3, we should start to see kind of a 20-something growth rate for the growth businesses and then exiting the year with the 2-handle on it as well.

What are -- that's interesting. So when you sit sort of with your forecast have, what are some of the key components to drive that sort of like 20-ish growth from an exit rate perspective this year?

Yes. Well, I mean again, I think we have seen demand start to pick up on the IoT side. AR has been a pretty good grower. There was a year-over-year comp issue with AR in Q4. So the demand side does seem to be picking up. We're seeing expansions. We had seen expansions continue to a certain degree during the darkest parts of the pandemic. But new logo acquisition was definitely impacted at that point in new deployments. And so I think that what we're targeting here is that we'll get back to a healthier mix of both new logos and ongoing expansions as we progress through the year.

Got it. Okay. I want to -- before kind of pivoting over to the Velocity business, this is -- I guess, it's a somewhat related question, because it will have impact on sort of the reinvestment. But for those investors, I mean I've known PTC for years and years and years. And I think part of the pushback for investors now is like this seems like the right strategy, but it also feels like another wave of restructuring and change. And so to those people that worry about this is just another iteration of change and evolution, maybe just talk to us about the significance of this refocus, this restructuring and then the reinvestment to then, I think, reinvigorate really growth across the entire platform, let alone the digital thread business. But maybe -- I guess, the question, on the magnitude of disruption about this latest restructuring, how does this compare to like prior restructurings that PTC has gone through?

Yes. So first of all, by no means, the largest restructuring that PTC has undergone. And I mean if you just -- if I step back and just look at it, big picture, PTC is a 35-year-old stand-alone software business that is still growing. At this point last year, I guess, 12% growth, which is a pretty nice growth rate for a business our size. And you really only get there by staying relevant for your customers. And to take a business that started off as perpetual ages ago, expanded from a single product, CAD company into CAD and PLM, SLM, ALM, IoT, augmented reality; a model switch from perpetual to subscription along the way, increasing the profitability. Back in 2008, I think we were at 18% non-GAAP margins to today, in the kind of mid-30s, low to mid-30s. All of those things take some effort and have taken some of these restructurings in order to help achieve where we are today. And therefore, why we're actually still relevant to customers today, right? We have the technology that they want. We have the commercial model that they want and now are moving to the delivery model that they want as well. So I get it. Nobody likes surprises. And then on the other hand, I also say customers seem to like the direction that we're going in. And I think that over the long term, that's the -- those have been good moves for PTC to make over the years.

I think the perspective there is helpful, Kristian, because I think we forget that you guys are -- you've been around for a long time. And I think the subtlety to what you just told me was you're doing all this to stay relevant. And I think in some regards, you're probably more relevant today than you were even a couple of years ago, with this increased view on SaaS, even relative to some of your sort of bigger peers out there that maybe haven't pivoted as aggressively. And so I think what you're saying is that all this stuff is required. We're still growing 12% last year, which is no small fee for a company your size. And that ultimately, that these steps are going to better position the company for durable growth in the longer term and profitable growth in that regard. I want to pivot a little bit to Velocity, Onshape and Arena. Do you think -- I mean I want to ask about sort of like -- because it feels like there's obviously a lot of enthusiasm. Those are great stand-alone assets. And it feels like even in regards, you're doing even better as part of PTC with these businesses. Do you think within this growth segment, are we largely done with the M&A build-out of, I would say, the kind of the growth -- the Velocity side of the business? In other words, is Onshape and Arena sort of what's required to achieve these financial outcomes?

So to achieve the financial outcomes that we've...

Maybe not the guidance, because the guidance is predicated on the current business. But I guess I'm thinking like strategically positioned longer term, is -- do you have the right assets today to achieve a multiyear view of where you -- where the Board wants to take the company?

So yes, I mean I think that we do have a very relevant product portfolio for our customers. Do I think there's opportunity to continue to think about inorganic ways to expand that? It's very difficult to predict kind of M&A activity. I think there's a reasonable possibility that over the next few years, we'll still be involved in M&A activity. Can I tell you right now that there's x number of things that we're actively looking at? No. But again, these things are more difficult to predict. But as far as product capability, product positioning that we have right now, I think PTC is pretty well set up.

So when you look at the success of what is now Velocity, where is that coming from? Because it seems like there's obviously so many new markets for you that wasn't present -- or that wasn't available prior. So talk about kind of that new logo side of Velocity. But then also something I talked to you about in the past -- because I think one of the questions we get is like, is there a cannibalistic nature to Velocity doing so well that maybe some of your customers want to move off of Windchill and take more of a SaaS-based solution today. Talk to us about kind of those 2 vectors.

Yes, sure. Okay. I think you're right. And if I oversimplified -- way oversimplified, you could say that on the one hand -- because there's a mix of new logo acquisition, expansion and kind of cross-sell opportunity, right, within any business. And if you way oversimplified, you would say the Velocity piece is probably more heavily weighted to the kind of new logo acquisition and the digital thread is probably more heavily weighted to cross-sell opportunities, particularly with IoT, AR into the base there. But again, it's not that both businesses aren't looking to continue to expand footprints that they have with customers and they are both looking to add new logos. That's just maybe a super oversimplification of how to think about those. In terms of the cannibalistic nature, I would say, maybe. Although going back to I think what we talked about earlier, the reason that we call it Velocity is because of the kind of development process that customers who are making those technology decisions really have, which is more around kind of agile design. Agile design processes for products that have shorter life cycles where you're not necessarily leveraging designs from -- for years, which is more the mainstay, if you will, of the digital thread story and businesses. So could it be? And have we seen instances where you have customers that are current Creo, Windchill customers wanting to use Onshape for certain things within their business? Sure, we've seen a little bit of that. Have we seen Onshape actually disrupt some of our competitors' customers and have them switch wholesale off of that product onto Onshape? I think we've got a couple of examples of those. And at our Investor Day a couple of years ago, we talked about Garrett Motion, certainly not a small customer who did exactly that, because they wanted to change how they were bringing products to market and they needed different tools in order to do that. So I guess that's the way to think about it.

Yes. And I guess the way that I've always personally thought about it is the alternative is you don't have Onshape and you're losing share to somebody else that owns Onshape, because you don't want to -- if you're going to cannibalize, I would think it's because customers want it rather than you losing a logo because of it. So I think it really speaks probably to the leadership of what you guys are doing with that -- kind of that Velocity side of your business. And I think as we think about Atlas and replatforming, it feels like a lot of that can bubble over to the digital thread side of your business as well. It wouldn't be a conversation without talking about partners. You guys have a long list of partners from Rockwell, ANSYS to Microsoft. Can you talk about sort of what you're most excited about from a fiscal '22 perspective? I know Microsoft has been a big player for you guys, and I know you've had a lot of success with ANSYS. Rockwell, there's been some growing pains there. But kind of where are we at from like your level of excitement on partner contributions to '22?

Yes. So I mean we're reminding -- and I know that you know this, but for others who may not know the story as well. We also have a long list of other partners, right, hundreds of other partners that have been with us for a long time. Collectively, our partner economy generates roughly 1/3 or so of our ARR. So it's certainly been a vibrant part of our ecosystem for quite some time. We call these 3 out. They're larger names, people recognize them. And so they've all been additive. Microsoft, you're right, has a -- and they're all different actually in their nature, right? Rockwell is really a reseller of PTC technology; Microsoft is a go-to-market-with partner; and ANSYS, we're actually a reseller of their technology. So there's kind of 3 different flavors of partnerships. So it's difficult to -- you say if you want to pick your favorite child, it's difficult to do that. They all have specialties that have their own place within our environment.

We got a question from an investor. And it says, would PTC consider accelerating some of their server repurchase activity given the underperformance and reduced leverage?

So as I think we articulated on the call, number one, in Q4, we did actually buy back 100% of our free cash flow essentially in shares in Q4. And the plan here really for fiscal '22 is to buy back 25% of our free cash flow, including the restructuring charge, so 25% of a $450 million...

Will it be share repurchase?

Will be share repurchase. And we use the other part to continue to rapidly delever really from the Arena acquisition. We'll be essentially done with that certainly in the early part of next year. So that's the intent. I appreciate the question. I got the same question from another investor in the breakout sessions earlier, and we'll take the feedback and take it under advisement.

Yes. No, I think, yes, because I think from a signaling perspective, obviously, there's a lot of value here. Even a slight change in allocation that I think would be well received by The Street, just speaking to, I think, the confidence of the vision and this focus on SaaS, right? Maybe in closing -- we've got a minute left, Kristian. This was fast. In your seat, you're paid to be a CFO, you've got an operational hat on as well. So I can appreciate that there's a conservative nature to your views as a CFO, which we certainly appreciate. What gets you the most excited about the next year or 2 for PTC that you think shareholders would need to kind of continue to think about when evaluating owning PTC?

Yes. Well, it may seem as counterintuitive here, but I will tell you that the reorganization that we're going through now, I think, is actually really critical to PTC's future. And making sure that we have the right organizational construct in place to be able to interact with our customers in the way that they want to be interacted with is actually, I think, a pretty big step forward. So I'm actually pretty excited about the opportunities that this investment brings and the organizational design that's going to let us try and get out there and get after it.

Well, in a lot of regards, it feels like this company has been around for a long time, but it really does feel like while it was a surprise, I think, to the market, this is -- it's still a new PTC in a lot of aspects and one that I think is increasingly being seen, at least for our checks, as a thought leader. So yes, I think to the extent that, that continues to play out over the course of this year, maybe there's some headwinds to turn into tailwinds. And it feels like you guys are at a good baseline to kind of continue to execute here. So Kristian, really, from all of us -- I've known you for a long time. I appreciate everything you've done for us in your time, and for Matt in IR, thank you again for your participation in this conference. And really from all of us at RBC, best of luck, Kristian, and the rest of the PTC team.

Great. Thanks, Matt, and thanks to everybody on the call. We appreciate the support.

Cool. Thanks, everybody.