PTC Inc. (PTC) Earnings Call Transcript & Summary

So Kristian Talvitie, PTC's CFO and then Matt down here in IR. I think there's nobody else from PTC here as far as I knew -- know. So thanks for joining us here. I'll run through questions here. And if you have questions, let me know. I will stop here in, I don't know, 20 minutes or so, and we'll see if there's any from the audience. This is -- I'll just preface this fireside, but this is one of our favorite opportunities from a stock perspective. I think there's multiple growth catalysts, the profitability side of it, the multiple expansion opportunity. So when I look in kind of the SMID-cap space, I'm really intrigued with PTC, and it's really driven by product. So we're going to touch on that stuff in a second here, Kristian.

But you guys came off of a Q4. And there's been a lot of -- you look at PMI and you freak out, yet your results have been very, very consistent over the year. Maybe just level set us quickly on your ability to deliver consistent ARR and, maybe even more impressively, free cash flow during a lot of this uncertainty.

Yes. Well, first of all, thanks, Matt, for having us, and thank you all for the participation and interest. PTC has gone through various evolutions, including product, but also including business model. And frankly, compared to 5 years ago, the business model that we have now, which is a subscription business model, still primarily on-premise subscription so as to differentiate between SaaS and subscription that comes with that, has really been helpful and some of the things that we've been doing along with that to help weather some of these more turbulent macro environments that we've been in on the top line, but as you point out, maybe even more so on the bottom line. And on the top line, again, multiple different vectors of growth opportunity. So we've seen softness in pockets and then we've seen that offset by strength in other pockets, right? We could talk about the channel with CAD, for example, for the past few quarters has been softer, offset by, for example, some real interest that we're seeing in ALM right now with Codebeamer. I think it's also fair to say there's no doubt that we've seen the impact of challenging macro. On our slides in Q4, we show a slide that shows how much net new ARR we added in last year or the year before and what's required this year. And you can see that last year, we added about the same amount as in the year before. So we'll call it flattish organic growth there. I think is indicative of a difficult...

Difficult macro.

Difficult macro. On the bottom line side, also very near and dear to my heart because of nuances with ASC 606, which is software revenue recognition, for an on-premises subscription company, it really makes using revenue and therefore, the entire P&L challenging. So we talk about ARR, which for us is annual run rate and which is effectively our billings, annual billings, and we bill annually upfront regardless of term length. It's always on an annual basis. And then for our bottom line metric, we use free cash flow. And ultimately, I say all this because the way that we think about the business is really on a cash basis, it's cash in, cash out. Most of our cash coming in is on a recurring basis. And frankly, because we're a software company, most of the cash out is also on a recurring basis. So when we're thinking about making investments, we're trying to be mindful of the macro environment that we operate in, in general. And frankly, I would say that we -- a lot of our expense or investment growth is more tied to bookings than to ARR, which is the top line. And so in a more challenging, i.e., flattish -- flattish kind of growth environment like that, I would say, well, we don't really need a lot more salespeople to sell the same amount that we sold last year. We don't need more G&A people. Again, we may want to elect to invest in R&D, but that's not really going to help this year's or next year's sales, that's kind of future sales, and those are important investments. And so we'll make those and we've evolved the quarterly budgeting process really to line up with, hey, here's what we're seeing. Should we release more funds or sit tight for another quarter or if we wanted to invest somewhere selectively, where might we do that? And what that's resulted in frankly, is pretty consistent cash flow and cash flow growth, and that's really how we manage the business so.

So let's talk about sort of some of the core -- let's talk about core CAD and PLM. You continue to display sort of strong growth there, double-digit-ish growth kind of in core. What do you think -- obviously, on a net new, it's been more challenge, but still good underlying growth for core. What do you think has been driving some of that? And we'll talk about Windchill+ and Creo+ and some things like that. But just like core Windchill, core Creo, where are we in that cycle? And why are you effectively taking share on a market growth perspective?

Yes. Great question I think. Let's start with CAD because we really break out our reporting into CAD and PLM. And within CAD, I would say it's primarily 2 different variables. One, much of the industry still actually sells on a perpetual basis, although they're making migration to a subscription model as well. And so there's just -- I'm not going to get into the mathematical explanation. We've done it, I think, 2 Investor Days ago. You can find the math on the website. But the subscription model is just going to grow faster than the perpetual model even on the same underlying kind of seat growth. So part of it -- part of our CAD market growth outperformance is simply that business model difference. And then part of it as well is I think we are taking share with Onshape right now, again, relative to the overall industry, even relative to our CAD portfolio, small numbers at this point, but it is -- but we are seeing some share gain there. And -- so that's on the CAD side. On the PLM side, I would again note the business model difference. And then I would also say there, I think we are also taking share with core Windchill as well as seeing expansion of the use of Windchill of the PLM system further outside of the engineering deployment. For decades now, the CAD and PLM have been engineering-centric tools. And now it's really been more about leveraging that rich product information, the product DNA outside of the engineering department and into, for example, quality or into manufacturing or into service. And PLM is really the backbone for that kind of digital transformation in our -- in the part of the enterprise that we serve.

So I want to talk about -- because it really feels like competitively, you guys are starting to separate -- I shouldn't say starting, you have been separating yourselves from peers for quite some time. First on the subscription transition, but even more so, profound on the SaaS side in Onshape and Arena, and obviously, the plus variance with ServiceMax. Let's spend a couple -- just we could keep going on Windchill alone, but I know that you're incredibly bullish on just Windchill, but let's talk about -- let's talk about Windchill+ because has it been out for a little over a year?

Yes, all coming up on almost 2, I think now, yes.

Okay. That's my COVID dog year math. Yes. Okay. Almost 2 years. Why has that been such a disruptive product? And are you seeing the conversation with Windchill or Windchill+ for that matter, start to encroach competitively upon market share that historically has not -- maybe customers don't switch solutions all that often, but like in terms of net new business, your win rates seemingly are a lot higher today than they were years ago. Is Windchill+ sort of a key component to that separation?

It's a driver. I think if we just talk about SaaS in general, and again, I guess I'll just offer 1 guy's opinion, but my belief is that the technical software space in general is ultimately going to move to SaaS just like other parts of the software industry. There are some historical reasons why it wasn't a first mover. There's -- we can save those for anybody who wants to talk about that, call us up later. It's a longer discussion, but there's some historical reasons for that. And then there's the future opportunity in front of us. And I think it's at least for me, it's more of a question of when not if the bulk of the technical software space is going to move as well. So we are seeing traction. We're seeing early learnings, particularly with, we'll call them, net new deployments of Windchill+. Those actually are going pretty smoothly. And then with what we would call lift and shifts, which is migrating a customer who has an on-prem deployment, migrating them from that on-prem deployment to the SaaS here, I would say, it depends. It depends how customized and kind of what -- how old of a version of the platform they're on. It's not that it can't be done. It's just that the older the version and the more heavily customized, the more complicated it is. And the bigger the lift to shift. But we've been having good success there as well. And every time we do one, we learn more, our partners learn more, customers learn more. And I think it all just will eventually build into further momentum. But right now, I think we're still in the flatter part of the S-curve.

I mean and I think like investors always want more, and they see that 2x uplift on conversion is just like my goodness, could you push a little faster on that? What are some of the biggest factors that determine -- or maybe said differently, what are the things that you're looking at, both internally and from a partner perspective, to maybe even drive faster conversion there? Or is it just really the customers are like, "You know what, I'm going to move when I'm ready, come back in a year" and...

Yes. I mean a lot of it is customer readiness. A lot of it, we're still working on the back end as well for certain parts of certain industries, right? You need to have certain certifications and so on. So there's stuff that we're doing on the back end to make sure that we're ready. And then from a customer perspective, again, they need to think about how complicated it is, when their next upgrade is coming, what their overall strategy is relative to on-prem, SaaS and how quickly they want to move. They have their own cost calculations they need to do. But again, I think it's a question of when not if.

Yes. Do you think if you sit -- I mean you've got -- Creo+ just came out this summer. So Windchill+ has got a bit of a head start. Do you -- in 5 years' time, do you think you're going to see Creo+ conversion at a faster rate than Windshield+, like just from a core like design phase? Or is -- do you think they'll be kind of similar with obviously Windchill having a bit of a head start -- Windchill+ having a bit of a head start?

Yes. It's a great question. I'm a little bit loathe to answer it because I know that my product guys are going to give me a hard time when I get back. So if you want the technical answer, you'll have to go to them. If you want my opinion, I think fast forward 5 years, again, 1 guy's opinion, I think we'll have seen the momentum pick up faster with Creo than with Windchill.

It feels that way just from an outsider's perspective, but...

But then you can't hold me to that because I'm going to get in…

Yes. Yes. No. We won't. We won't. We're going to move at a very similar pace. What's that? This line here.

[indiscernible]

A little louder.

Okay. Okay.

Sure. Normally, nobody ever says that to me.

The other business that we're really excited about and then it'll dovetail into Neil is ServiceMax. And I know we've spent time on the road here since Neil was sort of brought in as CEO, and it just feels like there's an incredible cross-sell opportunity with ServiceMax. What is sort of the -- because you've got -- I mean the thing about PTC that I love is you could have a number of drivers and they don't all have to work, for this thing to be a very consistent growing story. But it really does feel like ServiceMax if you're using Windchill or Creo, you ought to be using ServiceMax. And so how do you think about -- and how does Neil and the Board think -- and Jim think about that opportunity and the ability to move quickly and sort of like directionally smart in that domain?

Yes. I mean I think that's right. I think that that's exactly why we made the acquisition because we believe that there is real value in linking, if you will, the service system of record to the products system of record, right, in this case, which would be PLM and obviously, ServiceMax. And so that is part of the closed-loop model -- the [indiscernible] model that we espouse. And I think that also we are optimistic about the future opportunity for ServiceMax as part of PTC. We're working on integrations with other parts of the SLM portfolio, including Servigistics, which is kind of spare parts or inventory management, spare parts management, working on integration actually to Windchill as well as integrations capabilities, leveraging ThingWorx, IoT and Vuforia augmented reality. So I think all that is true. I think that ServiceMax, just like any other business, and now it is part of us, but not immune to the macro as well. So I think that, again, we -- when we acquired them, at that beginning of Q2, we set out a target of $170 million in ARR for the end of the year. We did $170 million in ARR. I know also when we acquired it, we said it was kind of a mid-teens grower, and we thought that it could over time get to high teens. I think we all still actually believe that is true as well. Just given the macro environment where we are right now, I'm not sure that I'd be betting on fiscal '24 as being that inflection year. So I think we see kind of more of the same here and we'll see what happens with the macro.

If a customer is not using, call it, your broader SLM estate. What are they doing? What are they...

Yes. For complex field service management, either they're running their own homegrown thing. There is another competitor out there called IFS, that we run into periodically, or they're trying to leverage a system that's probably not quite right for it into managing that experience. So again, we think that there's a lot of opportunity there, especially once we continue to integrate the product portfolio.

So today, when you think about cloud and SaaS, it's obviously a very early Creo+, Windchill+, it's ServiceMax, it's Onshape, it's Arena. Is that kind of the bulk of cloud and SaaS today?

It is the -- it's the bulk of it. I mean we have some FlexPLM, which is kind of a retail PLM. We have some of that, that is also SaaS. We have some Servigistics that's also SaaS, but certainly Onshape, Arena, ServiceMax are all native SaaS, the other ones will sell in an on-prem or a SaaS environment.

You guys don't break that out, that mix do you?

The mix of.

Of cloud SaaS to the total business from an ARR perspective?

Ending fiscal '23, we ended right around 1/4 of the business.

1/4 on cloud and SaaS?

Yes, ARR.

Yes, ARR, okay. Yes, it seemingly feels like that when we sit here a year or 2, 3, 5 years from now, that's seemingly -- I mean it will be an interesting catalyst, I think, from a growth perspective. And I think there's a profitability angle there as well. That's helpful. I'll get your questions lined up here because I'll ask a few more, and then we can get to some out in the audience. Talk about Neil. What is -- Jim's been part of the business in some form or fashion for 27 years, which is an incredible run. Talk about what Neil means to the business, why Neil? Sort of impression from a customer-facing or internal PTC perspective? He hasn't been there long, but sort of like help us think about a rather significant changing of the guard.

Yes. Sure. So for those of you who don't know, we're obviously in the midst of a CEO transition. Jim is -- announced his retirement, and we announced Neil Barua as CEO elect. Neil Barua was the CEO of ServiceMax, which we acquired now about 9 months ago. And so in terms of how is that transition going? Listen, I think that it's going actually in a very orderly fashion. I think that Neil and Jim have been spending a lot of time out on the road meeting with customers, meeting with employees, meeting with partners. We're trying to make sure that Neil is getting his share of time with the investment community as well. I think he has a good understanding of the overall business. I think he's digging in deeper and deeper into the many aspects of the business, which is great. I think that he's doing a good job at building, at least from where I can -- where I sit, at building relationships with the broader team as well. And I think that's actually a super healthy part of the transition that he actually is getting a team, many of whom have been there for a long time, right, including Mike DiTullio, the COO, including the Chief Legal Officer, including the Head of Strategy, including myself, including the Head of Sales. There's just a lot of people who are in it to make PTC successful and what that also means is we're all in it to make sure that Neil is successful as well. And so I think he's doing his part in getting engaged. I think Jim is doing his part in making sure that the transition is happening smoothly, that he's transitioning as many of those relationships as he can. And that's where we are.

Cool. I'm going to pause here for a second. Is there any questions to folks out here? Yes, upfront. The microphone's coming.

If you just looked across the existing client portfolio and then the product portfolio, could you give us kind of a status about how well you're penetrated, if you thought about the opportunities just inside the client base?

Yes, it's a great question. And actually, one we've been getting increasing flavors of or variants of and so on the one hand, I'll try to answer it like this in a very brief way, while also then saying that this is, I think, something that we're going to try to address in a more fulsome fashion when we have an Investor Day, which will likely be sometime in the spring once Neil's fully ensconced in his role. But I think this has been a core tenet of PTC's success for actually a long time. And I think that's one thing that we've been able to do well is actually take new technologies, integrate them with some of the other existing technologies into the CAD PLM technologies and penetrate them further into the base. I actually think we have a lot of opportunity to continue to grow even just within the base with the portfolio that we have today. Let alone taking share.

Right ahead of you, if you've got another one, but I'll keep going. The cash flow generation has been remarkable. And I think even within the guidance range you provided, I think we've had conversations that we may debate, is it going to be 11%? Is it going to be 12%, 13% ARR growth, whatever it might be? It feels like that kind of call it $725 million-ish free cash flow feels pretty solid right now. And I think as you mentioned it before, tied more towards bookings than ARR. How do we think about the ability to flex -- I guess, confidence, first of all, in kind of that free cash flow range? Seems high to me. But then how do we think about the ability to flex that even higher if maybe PMI starts to improve a little bit or -- because I know there's -- if it's not as tied to ARR, is there a torque in that if things start to get better from a macro perspective?

So number one, a, thank you for noticing because again, it's a very different business than if you went back and looked at the prior 5-year period, 10-year period year, 20-year period before 2020. And then secondly, I would say that I agree with you that I think the confidence in that cash flow range is -- or guidance is higher than what am I going to bet on the high end to the low end of the range, the ARR range, I don't know, with probably the one biggest exogenous variable being FX rates which we're mindful of. But absent that, in terms of upside, upside torque, I would say, because of what I was talking about earlier with how we manage the business and how we think about expenses, to the extent that we actually started to see bookings growth and net new ARR growth ending up near the high end of the range, we would actually be opening up more investment -- more investment spickets. So I'm not 100% sure. I feel pretty comfortable with the range. I'll just leave it there.

Sure. That's helpful. Maybe to close, there's a lot more that we could talk about here, but I've known you for a long time. Let's take the macros aside because who knows what PMI is going to do next month or next year. Your level of enthusiasm today versus a year ago, 2 years ago, 3 years ago, can you help us think? Because this is a -- I mean from a CFO, you want this kind of -- you want kind of an even keel guy, you're not the height man in necessarily the business, but your enthusiasm for the economic value that PTC is generating, where is it today versus a couple of years ago? Macro side again, I mean, are you as bullish as you've been on kind of the core tenets that are driving this business?

Yes. I mean over the long term, this business a, this industry in general technical software and b, PTC specifically, is really a unique value proposition. The tools that are used to create everything that you -- trains, planes, automobiles, bicycles, whatever and next generations of those and all of that, it's all based on this technology, which makes it very sticky to begin with. And couple that kind of very steady end-market demand with some other secular tailwinds like ESG, again, next versions need to come out, decarbonization, everything else, everything can be made faster, better, lighter, cheaper, which just leads to the steadiness of demand. And then couple that, frankly, with the business model transition that we've made, and I'll talk about the perpetual to the subscription model is really been great for the business. It's been great for customers because the steadiness of the cash flow allows us to continue to reinvest in the business, even in seemingly difficult macros, right? So that's a great thing. It actually allows for generating great returns as well. So I think that's a great model. You could layer onto it. SaaS, that's a delivery model. That's a demand question, but that to me is, again, how customers ultimately want to consume the software, but it's really the fundamental underlying demand for the software that I think is most important. And then the model that actually generates the cash to keep the whole thing moving. I'm very...

Yes, excited about that. Yes. And from a stock perspective and just another plug, I just think that -- I think there's a lot of opportunity to revisit PTC, which is what I tell people, the people who've been around the block for more than a decade or longer kind of remember the old PTC. But I think in some regards, this is not the old PTC for so many reasons. And I think if people sit back and look at the free cash flow generation, especially versus peers, you and I've had that conversation, something's not right. Either some companies are valued too much or you guys are undervalued. But it really does feel like there's a real opportunity. So yes, PTC does remain a real favorite of ours. So really, Kristian, from all of us RBC and, Matt, thanks for coming, Kristian, all the best.

Matt, thanks for having us. Thanks, everybody.