PTC Inc. (PTC) Earnings Call Transcript & Summary

Okay. Great. All righty. Good morning, everyone. Welcome to Day 1 of the Barclays tech conference. My name is Saket Kalia. I cover software here at Barclays. I'm honored to have with us here from PTC, we've got Neil Barua, CEO-elect. We also have Kevin Wrenn, Chief Product Officer, there in the audience; as well as Matt Shimao, Head of Investor Relations. Thanks so much for being with us here today.

Great to be here.

So just to frame this discussion, we've got about 30 minutes together. Let's spend maybe the first 20 or 25 minutes with some fireside chat, right? And then I'd love to make this interactive. We've got a good group here in the room. If you've got any questions, just pop up your hand. I think we've got a mic runner here as well as for the benefit of the webcast. So maybe with all of that, Neil, Thanks so much. First Barclays conference here for you the first of many.

Many more. Yes. Absolutely. Absolutely.

Maybe it's a good place to start, Neil. For new investors in the audience to PTC, maybe give us a little bit of a brief overview of PTC as you've seen. And maybe how your role has expanded here.

Yes. Thanks for having me. This is one of the most incredible companies I've ever been a part of. Honored to be the next CEO of PTC. Very simplistically, PTC for everything important is built around the world. Our software allows those companies, industrial manufacturers that we all rely upon to design those products, engineer those products, bring them to life, move into manufacturing. And then ultimately, our software product service those very critical piece of equipment around the world. And we've been doing it for many decades. We're the leader in it and much more opportunity ahead.

Yes, absolutely. Talk a little bit about your role as well and kind of how that's expanded, where you started at PTC and of course, now in the incoming CEO position.

Yes. So I was previously a CEO of ServiceMax. And fortunately, we have found the best home for ServiceMax within PTC. So I had the great fortune of not only bringing ServiceMax into PTC but also learning about the culture, making myself more visible in Boston, learning the business. And over the course of just getting excited about PTC, as I did early in my tenure as we closed the acquisition last year in January -- or this year in January, I started really realizing I want to continue to build momentum in my career here. And the Board as well as Jim Heppelmann, who's done a phenomenal job building the company to where we are right now, has chosen me as the next CEO of the company. So since July of this year to February 15 of this upcoming year, Jim and I have been working through a very good, thorough transition as I hit the ground running, February 15.

Yes, absolutely. The word is you've been on pounding the pavement out there with customers and employees, and it's great to hear. Maybe we could think about your time before PTC, right to your point at ServiceMax. Tell us a little bit about your background and kind of how you got to ServiceMax.

Yes. So for the last 10 years, before PTC, I ran 2 Silver Lake-backed portfolio companies. So a lot of PE experience over the last 9-plus years. Before that, I was at Global Crossing, 8 years directly reporting to John Legere, one of the most demanding and successful CEOs, I think, of all time. And so really built an operational rigor. And part of, I think, between John as well as my experience with Silver Lake, what I'll bring to PTC, which we'll talk about, is really focusing on the things that matter the most for customers and then, ultimately, how that accretes to free cash flow and really thinking about that, which we'll talk about.

Yes, absolutely. Can't wait to talk about that for sure. But maybe just a continuing sort of building this foundation, want to talk about ServiceMax a little bit, right? Like we got to meet a little bit kind of before PTC. And maybe this was benefit of the group, give us a brief overview of ServiceMax, what they did and why you think it was a good fit for PTC to kind of join forces.

The ServiceMax actually is the leader in all of the complex assets around the world, we called it MRI machine, needs to actually get serviced, maintained, repaired by, call it, Philips Healthcare, a customer of ours, where technicians need to fix those critical assets by which our families can get serviced at a hospital. ServiceMax for 10-plus years had built the technology by which Philips and their technicians really understand what's happening in that MRI machine out in the field. And that is the basis of ServiceMax, which now is interesting within PTC, that asset, which was actually designed and engineered in our other products at PTC with Creo and Windchill. We now have ServiceMax and the asset system of record, what's actually been designed, engineered and actually serviced in the field and potentially flow back into the life cycle and the build of the new products that Philips might design, to make their products more resilient for us to have more uptime in those clinics.

Certainly brings it full circle, right, designing the product and then servicing it, sort of making that, I don't know if you can call it a design system record, but also that asset system of record as well, to your point.

Yes. I think you know this, outside of becoming a public company, handle of ServiceMax, this is the absolute ideal home for ServiceMax, in fact, much better even than being a stand-alone company, given the complementary nature I think that PTC has done with what ServiceMax brings to bear.

Yes. We hopefully love a good cross-sell that we'd be talking about as well. So -- but again, maybe just to sort of put a bow on sort of this transition and a little bit of your background, you talked about sort of [ kind of repayment ]. I think you said you're making a trip to India here soon to celebrate PTC's 30th anniversary in the country. But maybe just more broadly, help us about how the transition is going. How have you been spending your time to make it a productive and smooth transition as -- and I think you said it was February that you takeover as CEO, right? So maybe talk to us about sort of how you and Jim have sort of been spending your time between -- in that time, in that transition period.

Planes, trains and automobiles in most of the offices around the world. We've just been visiting a number of employees, through going to the Romania where we have 350 great employees of the company. We spent time with the customers there as well, same in Munich. Same will happen in India. We're going to Japan and Korea. Obviously spending a lot of time in Boston and Freeport and across the country. So a lot of time really understanding -- our employees. I personally have been spending a lot of time doing skip-level meetings, really hearing directly what's happening with the company, what we can improve going forward. And same goes with customers. We've met with some of our top customers. It's a nonstop alignment with customers, having Jim do the handoff to me around those relationships, done extremely well, learning about what we do for these type of, finding all the great potential that we have to do even more for them. And building that tie of really thinking about the next stage of PTC and the evolution of already what you've seen great momentum, but there's so much more to go. And so customers, employees, and quite frankly, I've been spending time with a number of shareholders -- of recent new shareholders really interested in the company, really thinking about how do we actually articulate the story? How can I talk about the durable growth that we're seeing? And how do we actually give the convincing piece of, everything I'm seeing internally, customers, how does that translate to shareholders as well.

Yes. Sure. On that point, Neil, right, as you've gone out there and invest in many employees and customers, I mean, what sort of excites you as you get to know this business? Of course, there's still more to do. But in this sort of short time that you are in this transition, what have you learned about the business when it comes to you about it?

The stage and the level of digital -- digitization at the world's leading companies that, again, create, build, service the most complex products out in the world that we all rely upon, where they are in this digitization is also early, right, number one. So like as far as the eye can see, how do we use software to actually help them be more efficient, more effective, more competitive? We'll talk about those themes. I'm blown away by where they are at the state of their digitization. I'm equally blown away about how they're now moving at pace to digitize. You read the newspaper and you think the macro environment, you read the PMIs. And when I see customers, it's dislocated from -- they are now squarely focused on we need to digitize to make sure we're actually relevant in the next 3, 5, 10 years. Quite frankly, a small anecdote. I'm also seeing a changing of gait of some of the largest national companies that have been around for hundreds of years, where people that look like me are now taking charge and thinking about digital strategies to like really be competitive. So that's number one. Number two, really importantly, the product capabilities off the shelf of PTC, this is truly a great testament to the work that's been done, the vision of the company so far. It's off the [ trough ] we have that these companies are needing to digitize their businesses. So great end market kind of alignment on what's happening as far as the eye could see, and we're squarely pacing capabilities that actually address those needs that they have to actually be relevant. So 2 combined, that's what it excites me the most. And third, probably the most important, I met a lot of employees, meeting a lot more, as you mentioned, on India this Sunday. We have 2,000-plus employees. The employees of this company, top-down, are phenomenal. Nothing like I've seen before, have real deep customer relationships, great caliber of understanding the product. And I'll tell you an excitement, like it's palpable around the next stage of the journey of PTC.

Yes, absolutely. One of the things you didn't mention in your background but I think is really interesting is just the time that you spent working with private equity, right, and just so much to the financial background that you bring to also the business acumen. And one of the things that you talk that I think -- and maybe I'm not using the exact words, but sort of maybe a more metrics-driven approach or an ROI-driven approach. Help us a little bit about that and how you think about that at PTC.

Yes. I'm never going to run a company off a model, that's inappropriate. However, the discipline on what matters most is something that I'm indoctrinating into the go-forward way in which we operate as a management team, putting together management systems where we're looking at each one of our product categories and really thinking about how do they actually return value to customers and then how does that accrete to our free cash flow, right? And that's just discipline of just thinking about it in that manner allows us now with the stability of this cash flow, right? We have basic [ capability ] of the cash flow, allows us to put more wood behind the arrows that actually have high ROI and at the same time, be very disciplined on those areas that might sound good, might make a good marketing message, but underneath it might not have tremendous customer value. It might not be differentiated versus customers. In those areas, we're going to put more wood behind the arrows of the -- those that return more ROI. And those ones that are lower ROI, you better make sure you prove out the product category, why we should be investing more. So it will be a very unemotional view of running the company.

Yes, absolutely. I think that's really thoughtful. I want to build on that point for a second. Like what are -- I mean, do we [indiscernible] on sort of what those areas might be that higher ROI where you want to put a little bit more wood behind the arrow and conversely, maybe some areas where we want to balance sort of the resource allocation?

Yes, I want to be clear. My hands are firmly on the steering wheel. Jim has done a great job transitioning the business. He's really letting me run the business at this current time, and it's been great. So not only is a learning tour, I now have opinion. And we've had our first executive offsite last week. We set the priorities of the company, which relate to this element of where do we put more wood behind the arrow. Those 4 categories are the following. One is Windchill, our flagship PLM product that's out there. We believe the expansion of PLM Windchill amongst our existing customers is just, again, a very huge opportunity that's already been happening, but we're going to be very programmatic around how we're going to expand Windchill across the enterprise beyond core engineering. So [ priority ] number one, do what we've been doing but accelerate it because we're seeing the themes play out. And we're going to align the organization around making sure that, that happens extremely well, consistently and durably for multiple years. Number two is we've caught the tiger by the tail on ALM, product called Codebeamer. Simplify this, the automotive industry, compliance-heavy industries like automotive, med tech, [indiscernible] space in the energy in some cases, are building software and integrated hardware. And Codebeamer is at the epicenter of making sure software releases are done, treatment really are done in a compliant manner. We're really pushing on ALM because we see some very interesting developing in a space that is growing at a pretty rapid pace. We're at the epicenter of it. Three is ServiceMax. And this relates to cross-sell. ServiceMax is one of the most perfect solutions to cross-sell. As you asked before, we had 300-or-so customers at ServiceMax. We have now identified 3,000 similar-type customers within already a PTC relationship that should be buying ServiceMax licenses. So we're putting on the structure of cross-sell of ServiceMax into all of PTC and really making sure that machinery is done consistently, obviously, getting more accretion on growth from ServiceMax and free cash flow but making sure the cross-sell motion, we really make rigorous going forward. And lastly, we're continuing to invest in our SaaS transition. And we got a lot of work, progress being made on that. And it's a multiyear, I said 10-plus-year journey that we're ahead of, but we're excited about the opportunity there as well.

Got it. I think those 4 points are super important, right? You said PLM, we said ALM, we said SaaS and what's the fourth one point -- and ServiceMax, right? I want to dig into some of those a little bit deeper. How much probably [ PLM ] part of the business? I mean I've covered the stock for years and years and PLM has always been around. But really, it seems like there's such a renaissance in PLM. Can we just go a little deeper into that PLM expansion? I mean maybe just for the benefit of everybody in the audience, what is PLM? Why is PTC excited about it?

Yes. So at a very high level, products get designed on Creo, a CAD -- there's only 3 real CAD systems, we're one of them. That is important to then move to 3D model that works to make that 3D model actually live, right, before it gets manufactured. So PLM, Windchill, which is our flagship PLM offering, allows that design to now have all the components, the configuration, the management, the parts, the supply chain, the -- what we call the engineering bill of materials to be comprehensively then sent to the manufacturing facility, right? And what's happened there is within Windchill, the complexity of products, multiple platforms that companies are needed to have, multiple manufacturing facilities, multiple supply chain risk mitigants facilities we have, all those things play into needing a comprehensive product life cycle management tool like Windchill. And part of this -- as some people call the renaissance of PLM is because the complexity of their customers has increased. Hardware aligning with software, together for a product release, is a really difficult thing. And so you need sophisticated products. PLM is the epicenter of that. We're the leader. Like this is -- there's very few that can match the strength capabilities, referenceability of Windchill. So that's what's causing it is -- and that's why, as far as the eye can see, companies need to stay relevant by their building of these products that are more complex across very difficult and complex supply chain and a wage environment that's actually increasing. So they need to think about effectiveness and quality, and that's why Windchill is so effective here.

Yes, yes. Absolutely. Maybe we can ask the exact same question just on ALM. Application life cycle management, Codebeamer, these pure systems that we added as well. Talk just maybe a quick intro of kind of what ALM kind of means to you and why it's exciting area. I mean, I think we've had -- I think it was a deal that you worked on as well with Volkswagen, really interesting activity happening here with Codebeamer. Talk to us about the ALM [ trends involved here ]?

So automotive, as everyone I think knows, need software to be relevant, to actually sell cars. Software is such a big component now of any car that we buy. And Volkswagen, as an example, across all their brands is making sure their software releases, whether it be the autonomous driving release or how the -- when you press a button on the screen for heating, that's software, right? And so all the alignment of hardware design, which we have done, which every one of the companies are very advanced in, and all the brands here around the world, now need the same sort of expertise, the same sort of diligence on how software is built in alignment with the hardware of the car. That's why Codebeamer has such a strength because it is the only tool out there that allows software developers to have a traceability in an agile environment to actually understand before we release an autonomous driving software update over the year to a BMW car or to a [ Porsche car ] [indiscernible] would be to make sure that it actually is the right thing. Think about the importance of it. That's why we're getting told on we're racing to deploy Codebeamer because we need that rigor that we had for hundreds of years to build a BMW car. We now need it for the software part of the BMW car or the Porsche car. That's what's causing the real uptick in demand that we're seeing in ALM.

Yes, absolutely. I mean, when you go into an account and telco dealer, are you displacing something? Or what is the competitive backdrop there, looks like for Codebeamer, out of curiosity, high-level?

Yes, this is a share -- initially a shared displacement. There's a kind of product out there. I won't name who it is, but it is what it is because we're -- it's rear view mirror for us. But there's a company that has now focused on Codebeamer. We're taking advantage of scale, enterprise-ready, fee for rich, works in an agile platform, a differentiated product offering in ALM. And we're off to races on that piece of it. But what's happening, Saket, is that the cases are expanding. If software becomes more and more critical part of product companies, how they built hardware, how the lives of software, it's becoming more critical to all the industries. Think about it, anything we buy is now embedded software. Medical device companies. You ship a medical device equipment out there. It's not just a piece of equipment. It's a software that's actually the strength. Alcon Vision is one of them, right, they're a customer of ours. Ophthalmology expertise softwares that 80% of the value that they ship in a hardware to clinic that check their eyes, so become very relevant.

Got it. Maybe some other verticals that we could hear about with Codebeamer besides auto as well.

Yes. I think that's the promise over the next few years. I mean it will take time. It might come faster than what we predict given what I'm seeing. But we're being methodical around it, we're investing behind this, and we feel it's a real right for us to win in this space.

Yes, absolutely. Maybe somewhat related but a bit more broader, cross-sell seems like an important priority for you, whether that's ServiceMax, whether that's Codebeamer and the rest of the portfolio. Where do you see some of the biggest opportunities here for cross-sell?

Yes. First of all, like one of the other really great things about the company is through organic growth plus also inorganic, which the company has done a decent amount over the last number of years, we have most of the customer relationships ready in all of the industrial manufacturing, right? Someone is using, in all the top companies some part of PTC. So we don't -- we have a cross-sell motion that has already happened, it's happening, right? It's been a good part of the growth that we've seen over the last number of years. What I think going forward is we just want to institutionalize the way in which we do that. And that relates to how do you set up account plan? How do you do territory management? How do you think about account-based marketing? And it's more the discipline around very precise ways in which we cross-sell. That's point number one. We've already been doing it. This is we're going back to the [ gym ]. We do it even better, in a more precise, consistent manner. The areas that we feel, again, like I'm mentioning, ServiceMax is top of the list right now in terms of being able to cross-sell into an existing [indiscernible] just because it's a really tangible ROI, the products works at scale, ServiceMax, both of the great employees of ServiceMax continued on with PTC. So we've got a body of knowledge at scale being able to support the PTC sellers who actually implement ServiceMax. So that's number one. That's why we're pushing hard on that. We see the opportunity there.

A lot of great targets too that you...

A lot of great targets, Saket. And then two, Codebeamer, right? This is something -- again, it's not like we're walking in brand-new into accounts. Some we are, by the way, and I'll talk a bit about that. But a lot of these are relationships that use Windchill, let me think, wait a second. We use hardware configuration management, product life cycle management is like Windchill. That's for hardware. But now we got software needing -- depends on that. Guess what? Codebeamer with Windchill is an ideal marriage that allows the customer to be integrated value to the -- to the 2 actually work together well, and we're working through that.

Yes, absolutely. Let's talk about the sort of fourth and last pillar that you talked about SaaS condition, right? I mean if you come out with SaaS verticals multiple products here, right, whether it's Creo+, whether it's Windchill+. You also have some other native SaaS products in the portfolio as well like Onshape. And it sounds like here is some revenue uplift, right, when an on-prem customer converts to a plus version. Maybe you could just talk to us about how you think about this SaaS transition.

So I'm like hopefully many others believe that at one point, there's an inevitability to all enterprises of being SaaS over time, other than maybe 10% to 20% of our base does very -- the actually A&D space, in particular, might never go to SaaS, right, given the complexity and the criticality of what governments do or defense communities do that we help them build. So -- but the broad base of our customer base will go to SaaS. I think what I've been saying is that we are going to work through the journey to get to SaaS. We're not going to be adamant that you have to flip to SaaS immediately just to get a price uplift. We will get that price uplift. But the philosophy of the company moving forward will be, let's make sure we do it hand in hand with our customers, go through the journey with them, refine the technology as we learn with our great customers that are going through this journey already with us, keep making sure it's scalable and keep making sure the customer experience is really good at the back end. Because my philosophy is, when do we do that particular Windchill+, the dam will break. But I don't want to break the dam on our side. I want the customers to actually do that for us, right? And at the same time, to be clear, because we're seeing such strong durable growth on our existing Windchill product, absent the SaaS, plus strategy, there's a value that we're getting already, 16% growth in Windchill as we disclosed, right? That's no SaaS, predominantly. But we see that and we have now the ability to do this the right way on the transition for our customers to go to SaaS. When they want, we're ready for it and do it thoughtfully. Creo+ on the flip side could happen faster. Creo+ is a less heavy customized enterprise system. In our customer base, we're seeing -- we launched it back in May of this year, we're seeing traction there. So maybe to summarize this, I think our SaaS transformation, I said it's a 10-year journey. It could happen sooner, but I want to be clear. We're going to do it very thoughtfully, and make sure we do this hand-in-hand with our customers. We're going to get the price uplift. We are actually -- we're not going to lose to a competitor. Our renewal rates are extremely strong. We're going to do it the smart way.

Yes, absolutely. We've got about 5 minutes left. I'm going to shift to some strategic financial questions here. But maybe before we do that, any questions here from the audience?

[indiscernible].

It's more around -- so it's already -- we already made progress there, to be clear. It's just -- our hypothesis, they will -- it's so accelerating in automotive that we can't even keep up with the demand. We believe it's going to turn into a [indiscernible] space. And the real simplistic way to look at it is software embedded in medical device. And if you go to any hospital clinic, you'll see that. And because of that, because it's a compliance-rich environment or the necessity compliance was high, it's going to enable us to be very successful in Codebeamer. And just for what it's worth, 27 out of the top 30 med device companies in the world use PTC at a very substantial level. So we have got relationships there. It gets us into...

There's already a foot in the door there, basically.

The cross-sell motion is a lot easier.

I'm going to pivot to some financial questions here to sort of tie things together. So as we think about these 4 things, Neil, that we spoke about sort of the -- your priorities, how do you sort of fit together to drive growth? What's a reasonable growth target for you? And what needs to happen for it to maybe be above or below? How do you think about sort of the flex factors in that growth rate, if you will?

Yes. As we all thought, right, we did 13% organic ARR growth this past year. I believe that -- and that's been in a difficult macro environment. And when we see macro, it's not around what I mentioned the customer demand. That I could see it's happening. It's the way in which the approval processes have at the companies, that just takes longer than it did like 3 years ago in my recollection, right? And so we do assume in the mid- and long-term ARR guidance that there will be an easing up of this pressure on like the way in which approvals happen at companies. So a bit of -- that's what if you called on macro to get to the mid-teens growth, right? And so part of the thesis and what we're executing on is across these 4 priorities, right, predominantly the first 3, I could see with good execution a mid-teen growth rate. We're already doing 13%, and we could see some of these [indiscernible]. So mid-teens is kind of where -- feel good that we have the opportunity to get there. It funs up the high teens, we're going to need SaaS kicking in or we're going to need an ALM bull case to come in, where just even the real strong growth, there's a potentially really loves to cover off the roof, right? So those 2 things might happen that allows us in the high teens. I want to be crystal clear, the way we manage the business, the way I will be managing the business, it's actually been done really well over the last few years. In any ARR growth scenario within the range that we've given, that free cash flow, we have very good levers to make sure that, that is a very solid high-competence interval free cash flow guidance that we put out there without starving the business at all.

Absolutely. Maybe that's a good topic to end on here in the last minute that we've got. But as incoming CEO, you will also have a seat in the Board. How are you and the Board sort of thinking about capital allocation? Historically, have been a very important part for PTC's investment case. Any thoughts on capital allocation, as you've guided in the call?

Yes. I take a lot of comfort in Kristian's advice here with our advisers as well. I think I am 100% aligned with the view that we will be paying down debt this year. And then as the year kind of comes to an end, think about how buybacks occur. Thinking about free cash flow per share is really important to me, and so we'll be thinking through that. And while we're executing across the organic business, we'll be generating cash that we'd indicated. And those are biggest 2 capital allocation strategies we've got currently.

Excellent, excellent. Well, I think that's about all the time that we have. Neil, thanks so much for the time. Wish you luck through this transition. I really look forward to the next stage here for PTC.

I appreciate it. Thanks for having me.

Yes, absolutely. Thanks.

Thanks.