PTC Inc. (PTC) Earnings Call Transcript & Summary

Let's go and get started. So my name is Jason Celino, and I am one of the software analysts here at KeyBanc. With me today, I have the pleasure of introducing PTC's new CEO, Neil Barua. For the new investors in the audience, maybe can we just start with a brief overview of PTC, your background and anything else you'd like to warm up with.

Sure. Thanks for having us. Let me talk about PTC, which I think is truly one of the greatest companies on earth. And what we do, very simply, is help industrial manufacturers that build, design, and service the most critical products that we all rely upon. We provide the software for them to do that. So as an example, take an MRI machine. That needs to get designed on a software that we call Creo in 3D with all the mathematics involved with it. So that that could then move to PLM system, what we call Windchill, which is in essence taking all those 3D models of the MRI machine and all the components associated with that MRI machine and building the recipe by which that could ultimately be built on the manufacturing floor. After the PLM system, which is the core of what we do at PTC, we have an ALM part of our business which creates all the software release management, test management, as well as all the configuration management of the software. And then ultimately, once the MRI machine is manufactured on the factory floor through ultimately an ERP and MES process, it gets delivered to the field, at a hospital as an example. And that MRI machine that's been all this time working through the software that PTC enables is ultimately, at the end, serviced by software, what we call ServiceMax, to fix, maintain, and repair that MRI machine. So we do this at scale, been doing it for decades, and we do it for the most important brands in the world. We feel very honored to be part of that enablement of what happens within our customer base.

Okay, great. So you mentioned ServiceMax. You came with the acquisition a couple of years ago. Obviously, ServiceMax is at a different scale, but can you maybe talk about some of the lessons learned or successes, playbooks that you had there that you're trying to bring in at PTC?

Yes. So the focus, which is very naturally of PTC, around really thinking through how do we create depth of our product to help the customers do all the things that I mentioned, is very similar at ServiceMax as it is at PTC. So really understanding that end market, speaking their language, is something that we see commonality in. But very importantly, one of the things now with ServiceMax part of the portfolio and one of the things we're working on at PTC is making sure that everything that we do really thinks about product data, that recipe that's created in PLM, actually traverses across the entire enterprise and ultimately into the field, by which people could actually design, build and service much more resilient products with faster cycle times.

Okay, interesting. And then obviously, you came with the acquisition, but then the results of the CEO transition, maybe people will write case studies of how well it went or how maybe it didn't -- well, and only time will tell. But how do you feel like you're fitting in? And then the different business units and the leaders operating them, anything you can share on the team [indiscernible].

Yes, always about the team. And the transition with Jim Heppelmann, a legend in this industry and did a lot of great things at PTC, there couldn't have been a better transition. And I think that's seen by employees, customers, investors around the depth by which he handed off the keys to myself, by which 2.5 weeks ago, when I took over formally as the CEO, I'm hitting the ground running. So that's really good. From a team perspective, we have 7,000-plus PTCers around the world. I had the chance to meet almost all of them over the last 6 months and intend to meet the rest of them regularly here as I begin the journey for the next era of PTC. The team is extremely strong. And part of the reason why it's strong is the depth and experience of doing things with the BMWs of the world, the Bobcats of the world, the John Deeres of the world, the Medtronics of the world. That real understanding of what's happening in these enterprises and being at that mission-critical layer of software that allows those companies to be competitive, that's created a loyalty, a joy and an experience level within the employee base and the team that is clearly a head start for any new CEO to leverage.

Okay. So you talked about hitting the ground running. So do you have an agenda or a 5-year plan? I guess, how would you frame it?

Yes. I've set the priorities of the company, very focused manner, with consistency. And those priorities, across all the things that have been happening at PTC, are the following. Number one, PLM, Windchill. We have been doing great in Windchill growth over the last number of years; we have plenty to go. And so a programmatic, disciplined approach by which Windchill expands across our customers' environment, meaning more seats are looking at Windchill product data for their value, is going to be job #1. So we've set that straight here as a company, and we'll have a focus over the next few years to continue to expand PLM. Two is Codebeamer, our ALM solution, as I mentioned, is a really valuable part of how companies that have historically built hardware now have software that they now need to have compliance, same rigor around release management and ultimately configuration of software. And that will be continue to focus in an investment area that we want to accelerate the great growth of what we're seeing already in Codebeamer. Third, ServiceMax. Bought a company called ServiceMax, as you all know. It's fitting within and resonating with our customer base at PTC. And we're making sure that ServiceMax captures all the seat potential of field technicians worldwide, leveraging the PTC customer base to make sure that we are even more prominent in ServiceMax as a system of record for assets that are out in the field. And then lastly, it combines with customer experience, is our SaaS journey. We have already had, for the last few years, a journey in SaaS. I've said publicly that it's a 10-year journey ahead of us. Could happen faster where our customer base takes on SaaS and moves from a great on-prem solution to SaaS faster. But we will do it very methodically in concert with our customer and the complex user environment with the support that PTC has to offer, because that's something that we are proud of and also enables us to capture more demand from those customers. Those 4 things is 1, 2, 3, 4, every single morning is all I think about.

Okay. Maybe if we tackle those in parts. So the CAD and PLM business, you sounded excited about Creo and Windchill. But they are somewhat mature industries, right? So I guess, what drivers or what main growth opportunities do you see in those [ areas ]?

I would counter PLM is actually one of the hottest industries that I've seen in my experience. And the reason for it is because, as you've seen, we've been doing very strong ARR growth on Windchill for the last number of years, right? Mid-teens in many cases. The potential that I see with PLM becoming enterprise-driven is coming out of the need for our customers to actually have faster cycle times within their product development teams, right? Number one. Number two is there's been several constraints our customers have been feeling around supply chain, as an example. And what many of our customers have already understood, which is why we're showing the growth, but so many more that have not -- that are starting that journey, is that PLM, Windchill, is where product data lives. It shouldn't be in ERP, it shouldn't be in MES. It actually is a system in real life where companies can manage the recipe of that product data in a collaborative environment that reduces the development time, increases quality, and actually has a more constructive view of how do you have configurable products combined with software in a way that actually customers could actually be proud of and make money on. So that's driving this theme, and it's multiple years. And I'd summarize, the reason why it's such an interesting industry, that we're already showing remarkable growth rates with plenty more to go, is because software is eating the world. In every one of my customer conversations, the storied companies in the world that build the best products that we all rely upon are now integrating software into everything that's hardware- and electronic-related. That difference needs technology underpinning culturally to make hardware work, development work at the same clock speed as software development. That's why PTC has the most remarkable portfolio to address that need.

Okay. Well, so if we tackle the PLM growth opportunity. How would you bucket the kind of this mid-teens growth framework or whatever you want to call it, to maybe expanding usage? To maybe share gains? Or anything other, call it, secular?

So we have two-pronged strategy there. Number one, where I'm emphasizing most, is we have great customers already that are using Windchill in a very segmented manner, meaning more of a data management of those CAD models.

So like traditional PDM?

Traditional PDM, right? We've seen cohorts of customers at the best of companies in the world expand usage of that into other seats within their enterprise. As an example, supply chain, right? Supply chain usually has resided in the ERP system. All the recipe is done in PLM, CAD designs there, and someone ships it off to the ERP system to go order the parts through an approved vendor list, right? That's done in ERP. When you have so many configuration changes in today's world for products in PLM, it's too late for the supply chain person to see what vendors actually can relate to the changes that a design engineer has done on the actual product. And so as we think about faster cycle times, customers are realizing, I want supply chain groups now to see the Windchill data. Because before it gets to ERP, I want the supply chain person to tell the design engineer, "Wait a second. We actually can't get that part in time because of geopolitical risk or constraints that are happening in the world. So redesign your product, by which we could actually ship the right parts to make the product." So those themes are causing share expansion within our customer base on seats that previously weren't seeing the PLM data. And secondly, while we're doing that, we have an advanced PLM system. I take competitors very seriously, but I could foresee share gains begin to evolve into the business as well as the world sees what I'm seeing.

Okay. So this expansion, I mean, do they have to upgrade their PLM or are they just adding...?

Adding seats.

Okay. So no, that's good. So maybe switching gears to ServiceMax a little bit. I think you've had a few like notable cross-sell wins so far. Maybe just talk about how that has gone and how you think of that as an opportunity.

So fundamentally, the thing that I like the best strategically about ServiceMax being part of the portfolio is, if you go back to an example of the MRI machine, right, in the field there is so much data coming out of the ServiceMax system around what's happened to that MRI machine. What part failed, how much do we spend to fix it, what isn't failing, right, as an example, a few data points that we get across thousands. To feed that back into the recipe maker or PLM, right, to a design engineer, that says, "Now I could see this part number in that MRI machine has failed so many more times than the other part, how can I redesign the MRI machine so it actually can survive longer in the field? And we could have our customers pay more for it." As an example. So strategically, it fits hand-in-glove in terms of the strategy that I have with the company to get product data of these companies broadly disseminated across the enterprise. From a momentum of ServiceMax, we're off to a good start. We've spent a year making sure we do the integration right, which is never easy in any M&A, but we did it thoughtfully. We have now go-to-market teams fully aligned with no friction, right? So they're aligned on capturing the 3,000 like-minded PTC customers that should be buying ServiceMax licenses, and we're pushing on that, right? And we've seen early success. I have cautioned everyone that sales cycles are long in ServiceMax because to have change management in the field service technician landscape is just hard for any company, right? But once they do it, it moves in a nice manner, and we've already seen early success. We just got to keep that momentum up.

Got it, interesting. And then on the ALM Codebeamer side, I've covered PTC for a long time. I remember when I was writing an initiation like 10 years ago, I looked at the ALM product. I'm like, I'm going to skip this section. So -- but it's had this resurgence. Maybe talk about what has specifically changed in the last year or 2.

What's changed is the marketplace. And I'll give you an example in the automotive industry. And this is not only the OEM automobile manufacturers, but all the supply chain underneath it. And as we know -- take even EV aside -- software-defined vehicles are becoming the only way companies can exist, right? Even hybrid or combustion engine, everything is software-driven in our vehicles. And that's necessitated -- we [ disclosed ] at Volkswagen, at the end of Q4 we won a large Codebeamer deployment. The reason for the underpinning of why they're deploying it with haste and urgency is because these companies now need to have the same discipline that they've had to build the mechanical components of a car with what they're delivering as software, right? Because 2 factors. Number one is compliance. If they don't have all the right mechanisms to have traceability of their software development -- let's say an autonomous driving release has a disastrous impact out on the roads -- that traceability of what happened is very critical from a compliance standpoint. So that's number one. Number two, competitively. The pace by which Chinese automakers in particular are developing cars that are software-defined needs to keep in pace with all the other automakers outside of China, right? And that's causing the we need digital tools to speed up that cycle time while remaining compliant.

Okay. So it sounds like, for ALM, automotive might be the leading edge. But could this also apply to aerospace and defense, industrial, or is it mainly just automotive?

Every single regulated industry, which includes federal aerospace and defense, which includes med devices, which includes automotive, which includes all the suppliers of the automotive teams, all need Codebeamer. I have a view long term, as you asked the 5-plus year outlook, that every industry will need this level of scrutiny around clock speed and discipline of software development in an agile framework with hardware development. And Codebeamer and Windchill will be at the epicenter of that as the world migrates to software being the major component of how hardware is shown with value towards the end customers.

Okay, interesting. And then I guess one question on the IoT segment and the AR. It was not on the top of your list of focus items. I guess, can you tell us why?

We have a fantastic collection of product capabilities that I didn't mention, right? That doesn't mean they're not important. But what it means in this next era of Neil Barua and team leading PTC is there is a very high bar to any product that we have, that they first have to fit the requirement that it supports product data at our customers to be proliferated across the enterprise. So if there's a feature in AR, as an example, or IoT, that does not enable that to occur, it's an extremely high bar for an investment dollar to be put into that group for something that doesn't help the strategy of the company. So that discipline is there. We're looking at it. This one is happening. And it's the way in which we will feed the strategy and the resource allocation to be where the most customer value is and ultimately where the most financial returns are for the company.

Okay, perfect. And then maybe just two financial questions. I usually ask these to Kristian, but that's okay. So when you first joined, you actually extended the long-term financial targets out by a year, the reach $1 billion in free cash flow. What gave you the confidence to extend those and reaching those goals?

Let's start with free cash flow. I now know how the company operates. I now know this point around how we think about resource allocation across the portfolio. And I believe the discipline that has been put into place will continue in terms of free cash flow generation and attainment with credibility around the targets that we put out for free cash flow. So I feel very confident around our ability to deliver our commitments around free cash flow given what I have seen as how the company operates, number one. On ARR growth, we put, 6 months ago or so, with Jim, a mid-teens ARR growth number. As most of you know, we've been doing organically a low-teens ARR growth number. There's a step-up. And the step-up happens with the assumption that our close rates currently need to get better in the midterm to achieve those. That's going to drive a significant portion of that sustainable mid-teens. And then subsequent to that will be how does SaaS create a better price per unit uplift, right, as that starts working its way into customers, actually working through the transition. And 2 and 3 is ServiceMax starting to punch above the company growth rate as we keep driving more bookings and expansion, and three is the bull case of what could happen with Codebeamer, which wide-eye, could be like something very differentiated, but as a measured tone in terms of looking at that mid-teens ARR growth.

Okay, interesting. And then maybe more near term, if we think about just how this year is set up, you had a strong Q1 ARR beat. And when you think about the potential upside to the business this year, what gives you the couple drivers or confidence or sources there?

I like the deals we're in. I like the pipeline. I'm involved in a lot of significant extremely large deals that are transformative for our customers, transformative for PTC. And I like what we're playing with right now across the portfolio. As you know, we've been -- historically, large deals have been important to the company, will continue because we're so mission-critical and so transformative for our customers. Those, we need to close. They're not going to go away, but we need to close within the year. And I think good things happen then. But we've got work ahead of us to do that.

Okay. So you're seeing a strong large deal pipeline, and you've talked about your close rates maybe probably being affected by macro a little bit, so those get a little bit better. Is that what you're kind of trying to say?

What I'm saying is, for the course of this year, we have enough pipeline at what we're seeing in current close rates to execute across the guidance range that we gave to you guys, right? In the midterm, we need to see a betterment of the close rates.

Okay, perfect. Any final questions? So I do like to try to close out with a fun question. I know you just moved to Boston over the last year. Favorite restaurant?

Favorite restaurant. That's a good one.

I think I might have stumped Neil.

My wife's cooking at home, because it's...

Good answer. Good answer.

She's not listening, but it's a lot of days of travel on the road and you kind of miss eating at home, so...

Perfect. Well, thank you, Neil. Thank you, PTC, and thanks, everyone, for joining. Hope everyone has a good rest of the conference.

Thanks so much.