PTC Inc. (PTC) Earnings Call Transcript & Summary

And do these people as they -- is the same type of license, same type of seats as because we've all said I think on one of the events we're talking about just how many more people on the manufacturing floor and I'll touch it. Can you just expand a little bit on that.

Yes. So first of all, what happened -- it's both the weight of seats near the core, let's say. So the CAD engineers will now have a more sophisticated seats so they can deal with the build materials. Then once you do that, then lighter weight seats for people who are involved in the change in configuration process, but again, more seats. And then even outside of that, more lightweight seats for people who want to look at up-to-date information and then, of course, publishing data to shop floor or to ERP is a different kind of a license. And there's lots more opportunity there, actually. We don't do enough in, let's say, supply chain collaboration, for example. We think that there's lots of opportunity around sustainability where people want to look at sustainability information in PLM. And so in the core, it's heavier seats and then it's consumer seats for all of these other, let's say, folks who aren't quite as close to engineering.

That's been a great story. And maybe we can talk about another great story, Codebeamer. Intland acquisition has clearly been a home run. You doubled sales in '23. It seems like there's a lot of momentum in the pipeline. Can you describe what customers like so much about Codebeamer? And what has made it such a great success? I think on our math, initial expectation or more for a 23% CAGR. It certainly has been outperforming. So what is so good about code Codebeamer?

Yes. So I mean, I've been at PTC for 30 years or 31 years actually. I haven't seen like adoption of a technology like this since like Pro/ENGINEER, mid-90s Pro/ENGINEER kind of thing in terms of draw. I think other than the things I talked about before, meaning combining traceability with Agile development is the engineers like the user experience. They like it a lot. And just to give you a little bit of background why we bought it was -- so as you know, as the Chief Product Officer, you, of course, get to such strategy, but you also get involved in the worst customer situations. So we had implementations of RV&S at a bunch of our customers, lots of automotive customers. And I'm not exaggerating when I say, I was in 3 escalations over a period of 2 weeks when Jim Heppelmann was still the CEO of the company. A couple of them got as bad that he was getting involved. And what they're saying to us is saying, "Hey, you need to help us here because there's this Codebeamer stuff kind of coming in the side door. People are buying it in departments." And so after 3 conversations with 3 big automotive customers of ours, Jim said, "Walk down this hall and talk to Jonathan Kateman, see if he can buy it." So we bought it. And the reason we bought it is because it's a tiny old company, but the likes of VW and ZF and BMW don't trust -- don't trust their software to a tiny little company unless there's something special there. And there was. It's this combination of usability, supporting modern software development practices and the ability to manage traceability. And so the users like it. The customers like the value. The deployments go viral. So it's really interesting. It's -- We're investing there because, frankly, we did buy it from a really small company. It was family-owned, who built some really good features, but sometimes not quite as scalable that you need as a company like VW, and so we're working on that at the moment.

And maybe we can go to ServiceMax and -- which is the third key focus here. It seems ServiceMax cross-sell is going well. I think you alluded to that. Is it more that PTC core businesses are getting existing ServiceMax customers or the PTC core customers are now buying ServiceMax?

It's much more sell ServiceMax into the PTC in store case. And it's the Windchill installed base, I think I might have mentioned that...

Yes, yes, yes. That was going to be my next question, but I think we covered that quite a bit. So maybe we can talk about sort of R&D priorities and portfolio integration. What are the key priorities for reinvesting into the business, specifically R&D? I think PTC talked about prioritizing R&D budgets with regards to ThingWorx, for example. Where is the company spending the most money? What are the areas that are most key to the business? And as you evaluate various products, how do you decide what the key new projects are? How does the company determine internal spending priorities?

It's a lot. So the focus areas are PLM and ALM, SLM and Specialty ServiceMax and CAD and then SaaS is maybe the -- so those are the priorities, and that's how we're investing. And the other thing that I talk about is IoT and AR. And so we thought that IoT and AR were separate markets. We thought they were going to evolve and grow as separate markets. And I think a lot of people thought that, including like McKinsey and all of the industry analysts. But now we think that those are actually features of something else. And so we recently did a reorganization where we're organized now where IoT and AR are much more, let's say, technology segments than business segments. And so the idea here is, let's say, on the engineering side, we have an offering called Navigate that's built on ThingWorx, is so -- to expand our Navigate portfolio. And then on the ServiceMax side, if you think about remote service, which is a big part of our IoT business, remote service should be run out of the middle of ServiceMax. And so remote service will start to become more of a feature of ServiceMax and differentiate ServiceMax. And we think the same thing for AR. AR isn't stand-alone applications. It should show up as a feature of PLM or a feature of CAD or a feature of ServiceMax if you think about work instructions, in the field to automatically be able to be created to do augmented service instructions -- augmented reality service instructions that we see in ServiceMax. And so that's how we see it and how do we determine where we're going next? So we do two things: One is because we compete in individual markets, each of the teams. They collect information from customer advisory boards. They collected from our user groups. And of course, every segment has its own strategy. And then at my level, we're trying to figure out cross-segment strategies. So think about doing sustainability. So if you want to make a difference in sustainability, you need coordinated projects across ALM, CAD, PLM, ServiceMax, so that you can have a suite of products that can work together can help our customers reduce their carbon footprint. Likewise, for AI, we can do individual AI projects, but it's much more interesting to do them, let's say, across and coordinated across the segments.

Interesting. So maybe we can talk about acquisition integration. So from your seat as the Chief Product Officer, what happens when PTC makes an acquisition? What are the initial steps? And how do you think about the process of integration?

So the first step is a boring one, which is we say, like, do no harm. When we bring them in, we want to make sure they feel comfortable in the company and a bunch of IP doesn't walk out the door. But the next thing is to try to figure out how we can put together some integrations that will technically justify a cross-sell. Because as I mentioned before, whenever we acquire something, we're acquiring it, so we can cross-sell it into the base. And so a good example is Codebeamer. When we bought Codebeamer, even during the do-no-harm phase, we built an integration with Winchell, based on a standard called OSLC, which enabled us to do it much more quickly than we would have had we not already been OSLC compliant on the Windchill side. And then the idea is, of course, in the field, it's figured out exactly how to cross-sell what sellers will have it in their bag. What's the value propositions, et cetera. But from a technical perspective, it's always -- like my job is to figure out a technical integration strategy that's going to drive a compelling reason for the customer to own it versus owning competing product in the same market.

Got you. And maybe we can just sort of talk about SLM portfolio integration in more detail. So the ServiceMax acquisition has done very well. And from our understanding, the goal was to integrate ServiceMax with Servigistics and you brought SLM portfolio in fiscal year '24. So how is this trending? And what's the initial feedback from customers? What can ServiceMax do that other competitive offerings are not able to?

Let me start at the end. So ServiceMax is the #1 field service management solution for asset-intensive equipment. And that's on its own. That's before we got it. But the integrations that we're doing, so if Servigistics -- let me just give you a 30-second primer on Servigistics. Servigistics is a purpose-built analytics engine to optimize spare parts stocking locations, so that you can have spare parts in places when you can meet SLAs to your customers. It combines that with actually having the minimum amount of spare parts inventory that you have globally. So the idea is reposition spare parts dynamically daily so that you can meet your commitments to customers while owning absolute minimum amount of spare parts inventory. So you can imagine with ServiceMax, an interesting integration is, as they go replace something on a field service call that, that information goes directly into the planning system. So that's the first, let's say, integration that we built with ServiceMax. And that's, let's say, service integration for service, and it doesn't matter if you want anything else from PTC other than service ServiceMax and Servigistics. And so there's a cross-sell opportunity there, although the Servigistics space is much, much smaller than the Windchill base. The bigger one is how do we integrate Windchill with ServiceMax. And so the first one was really just a signal to our customers, who's serious about was to be able to issue a problem report from ServiceMax to Windchill, so that we can have a better together story. And we can talk about more of our plans in the future to have to a -- let's say, 2-way flow of information. So think about engineering information, making it into ServiceMax to help to help service technicians have the right part at the right time, have the right instructions at the right time, improve their first-time fixed rate because they're working with accurate and up-to-date repair information and configuration-specific. So that's, let's say, forward flow of information from Windchill. And then problem reports one thing, but the other thing we're thinking about is if you look at repair history of certain kinds of products, across the entire ServiceMax space, you can start to bring that information back in engineering, so customers can make better next-generation products, so that they can understand the failure modes, what's going on with products in the field through service records.

Interesting. I guess, maybe perhaps I should have brought it up earlier, but GenAI, have you or are you planning to integrate GenAI capabilities into PLM and SLM?

Yes. So first, what we're after is trying to solve the problems that our customers have and I've always had with AI. We're not looking to actually get some kind of phony halo that we have ChatGPT for something useless. So when you think about -- if you think about engineering and engineering, we're trying to figure out how they can get products to market faster, how they can do it with less engineering hours, how they can do it with less parts and how they can have less quality problems. So that's what we're focused on in engineering. And frankly, the first stop there is parts rationalization. So if you think about parts rationalization, it's two levers there. One is, it lowers the cost of goods sold for the customer and their -- improved their return on assets because they're using the same parts. Second thing it does is it lowers cost of part quality because they have less chance of low quality because they're managing less parts. So that's the value of it. And the way we're using it for AI, so let's think about PLM for a minute. We actually use AI that we already have from Vuforia because we can train Vuforia AR to recognize parts in the real world by training it on CAD models. So if we can do that, we can also look at CAD models and identify like CAD models so that customers can figure out in their PLM database, how many duplicate parts do they have that they're managing it, we give them tools to rationalize that. Then as you move to ALM and you think some of those writing requirements, first of all, we can do ChatGPT for that, some of the writing requirements. We can predict the next requirement that they're going to write. We can also look in their requirements database to see if they have duplicate requirements [ if ] not respecifying new requirements that they already have, which also helped with parts rationalization. And then we're also using it as a quality assurance mechanism for requirements. Then in CAD, it's the same thing as PLM. We can watch you building a model and look at your PLM database and say, hey, you shouldn't build this model because you already have one. And on the other side, we can also, let's say, suggest the next feature for them to add or even automatically add it. So those are the things that we're working on in the engineering realm right now. Some of those are research, some of those are on their way to be productized. Then if you look at service, actually, the ServiceMax are -- folks are a little bit more ahead in terms of using GenAI to predict the kind of service that something would need. They're also looking at analyzing massive amounts of repair records to try to figure out quality issues, et cetera. And so again, we're trying to figure out how to use GenAI and all kinds of AI, but just to solve the kinds of problems that we see in engineering, I talked about a lot in service. It has to do with first time fixed rate and reduction of spare parts inventory and frankly, improving spare parts sales and contract performance.

Maybe in the remaining couple of minutes, just a couple of highlights. Maybe start with CAD, specifically Creo+, you announced cloud-based CAD offering almost a year ago. What have you learned from this process? And what has the feedback from customers been like?

Well, I think the biggest lesson that we learned, both with Creo+ and Windchill+ is actually some what the customer is buying. I think at first, we were kind of trying to push the SaaS narrative a little bit. And -- so now it's -- we think our industry is going to go there. We think there are signs that it's going to go there. A lot of our customers are getting ready to go there. But essentially, like I said, we're selling what they're buying. And so right now, Creo+, it's got differentiated features, which is interesting on top of, let's say, a lot of the administration starts to come to PTC. On Windchill+, we're starting to see differentiated features on Windchill+. We think it will start to -- the demand for that will start to increase over these next coming years. But for both of them, we see it it's a decade-long journey. And like I said, we're selling what they're eye on.

I think we're out of time, and you've been very generous with your time. Thanks so much.

Thank you.

Thank you.