PTC Inc. (PTC) Earnings Call Transcript & Summary

Good afternoon, everyone. Thanks for joining us today. My name is Patrick Baumann. I work with Steve Tusa on the electrical equipment, multi-industry and now industrial software team. We've been covering the space for a little bit over a year now. And we're pleased to have with us here today, PTC. And with me today is CEO, Neil Barua. And the format is going to be just a fireside chat, and then I'll open it up for questions for the last maybe 5 minutes or so.

So with that, for those of you in the audience that don't know PTC, maybe it would be helpful to give an overview of what PTC is, what you guys do, just the basics. I mean, I have sat in on some meetings where people are still asking some basic questions. So I think that will be helpful for everybody.

Sure. Thanks for having me, and happy to talk about PTC, which I believe is the best company in the world and looking forward to making sure everyone knows more about it. PTC as a company been around for some time, but we are the leaders in providing industrial software for companies that design, build and then service all the critical products that are out there in the world. And we've been doing it for a number of years, predominantly, I'll give you an example of how our software solutions work for our customers in the industrial manufacturing space, in particular. As an example, a wind turbine gets created and designed in our software solution called Creo. That 3D model design then goes into another one of our software solutions called Windchill, which is in the category of product life cycle management. All the components, the parts, the configurations, the recipe of that wind turbine is created and built on Windchill before it actually gets manufactured. After manufacturing, the wind turbine actually gets sent out to the field by which it actually operates. And in that scenario, the wind turbine gets serviced by something called ServiceMax, which allows our customer, the manufacturer of the wind turbine, to fix, maintain and repair that wind turbine. In addition to all of this, which is actually really interesting, and we'll get into it, is within the wind turbine, there's now software being embedded into the hardware, and we have something called our application life cycle management suite of services called Codebeamer that allows software to be embedded into the build-out of the product by which it gets manufactured and delivered to the field.

Super helpful. Maybe stepping back, I know -- so you've joined PTC maybe a year ago, took over as CEO earlier this year. What were some of the key learning so far, maybe in terms of your experience here, maybe some of the biggest surprises that you've seen since kind of coming to the company?

First of all, I'm very pleased by the set of capabilities that we've assembled at PTC currently. In particular, with the transformation that all of the customers that we, our partners with and that we're looking to are going through such transformation to keep competitive in this market space. Particularly with the product data element, the complexity of products, the embeddedness of software, the necessity to actually think about servicing those assets and the efficiencies of it are right now and for the last number of years, really hitting momentum by which companies need to transform. And we are very well placed to be the partner of choice for that actual transformation. So that's number one, from a positive surprise and an inspiration for all the things we could do at PTC. Second is around the business itself. And what we're doing since I took over back in February around really prioritizing the things that really matter and create most customer value. So as I mentioned, that begins the continued investment and reinforcement of our core systems, Creo on the CAD side, Windchill on the PLM side, Codebeamer on the ALM side and ServiceMax. And those actual product categories are the inspiration for a lot of our customers' conversations of needing to deploy those tools by which they can stay relevant in the market space. So we have a great portfolio at a critical juncture for our customers, and we're looking to execute across that strategy to build on the continued momentum of PTC.

Do you think, as you look at this portfolio that you have all the pieces that you need. So from this point forward, it's just about execution? Or do you think based on your initial views of the business, that there are things you got to add still from an acquisition perspective?

Right now, I feel great about the portfolio. We've assembled the set of capabilities that I believe are critical and at the right moment for our company's journey on this transformation. Today's job #1, 2 and 3 is execution of the strategy. The 5 priorities that I've laid out around PLM expansion, application life cycle, cross-sell of Codebeamer, ServiceMax, service life cycle management, alignment to all the core systems that we're doing. And underneath it, really think through a thoughtful process around the SaaS journey with our customers. All of that is execution related. And given the results of the business, which has been solid and the continued view of building on that momentum, right now, the team is focused on making sure we have continued and increased effectiveness across those core capabilities so that we can provide the best value to our customers.

Is there anything that you think from your background in PE -- well, clearly, there's overlap because you were head of ServiceMax, but anything from the PE perspective that you could bring to bear at PTC?

I like to look at things in what really matters the most. And we've been saying it around putting wood behind the right arrows. And as a company, again, we are focusing on our core systems because they're absolutely critical for our companies -- our customers to adopt. They're what the customers are asking us to serve them with. And we'll make sure -- and we are already in earnest doing, putting the focus, attention and resources on the things that matter the most. And I think that discipline that we've already instituted, I mentioned, in the last earnings call, how we're thinking about IoT and AR being enabling technologies of these core systems is a reinforcement of making sure that we put the wood behind the right arrows, which are these core systems to make sure we take advantage of the market opportunity there. That's number one. Number 2 is on the way in which we simplify the business in terms of what matters the most. I think with the team's alignment here, aligning ourselves towards those 5 priorities, but then aligning the organization and the accountability and the discipline around that is something that's really important because it creates momentum, excitement within our customer base and an excitement within the employee base that we can continue to build on for the next number of years.

Helpful. Maybe stepping back and a lot of these presentations, you're going to get questions on the macro. So I want to give you kind of a macro question. In terms of the environment. And you're starting to see improvement in PMI indices in spots. How does that translate to your business? It didn't seem like you really saw a dramatic pullback in ARR growth with PMIs coming below 50. So how should we think about the correlation between your business and those macro indicators?

As you mentioned, the company has been performing in a bad economic environment for the last number of years. We believe we're decoupled from the PMIs. Just when I look at what's happening with the business, customer conversations, I rarely look at PMI. What I look at is what's happening in the pipeline, what's happening with customer conversations? And what I'll say is that the results are due to the fact that when I think about and talk to customers, as an example, last week in Europe, you will see that transformation, despite any PMI reading in companies, is critical to just remain competitive from a -- how do you accelerate new product introductions? How do you increase quality of the products that you deliver? Because competitively, the world is moving at pace and our customers, the largest of the industrial manufacturers of the world need digital tools to do that. And when I talk to CEOs, C-levels that I've been doing, they rarely talk about the macroeconomic conditions. They talk more about what do I need to do to make sure I'm relevant in the next 2, 3, 4, 5 years, based on what I'm seeing externally. That's what we've been focused on making sure we serve the tools by which they could actually remain competitive.

And then just along these lines, it's probably not even along these lines, but just kind of to refresh the recent update of like the midterm ARR targets and what -- what drove that decision? And I don't think it has any impact on the free cash flow outlook at all, basically. But maybe just a quick overview. You talked about it on the earnings call, but maybe it would be helpful for the audience just to provide just a quick overview of that.

Yes. It varies -- simply having a more measured view around ARR. I'm assuming that the environment that we reside in, which has not been great, continues. I'm hopeful, glass half full that it improves, but I'm not assuming that in the ARR guidance. Right now, I just want to keep focusing the team on our own execution, delivering customer value. And if things get better, where close rates and the largest of deals get better over time, then the actuals will show that, but I don't want to put that out there. I want to have a measured view of ARR guidance and keep executing on our internal plan.

Yes. No, we thought that made a ton of sense. I mean, it wasn't exactly your target to begin with. So having a fresh point of view is helpful, always. Maybe just turning over to PLM, which is a key product category for you guys, obviously. You've been talking a lot on recent earnings calls about PLM expansion. Maybe help the audience understand what exactly that means. What it does for companies? Just -- and then first, just kind of level set like what PLM is maybe will be helpful first.

Yes. So we're very proud of our momentum, heritage in product like life cycle management,, PLM. Again, our flagship offering being Windchill, we have a native cloud offering in PLM, also called Arena, but we're really focusing on Windchill given the potential of the aggregate dollar growth of that business. which is why it's the number 1 priority that I set forth for the company. What it does very simplistically is it creates the 3D design, again, built on Creo, it takes those and historically has been just a data vault for those design drives. It's now expanded in many of our cohort of customers and will do so over the next number of years because customers need to understand their product data seamlessly at every stage of that development. It can't be done in a sequential manner in terms of how a supply chain or a manufacturing engineer sees the changes that's happening in product configurations. So within PLM every constituent of an enterprise that works with product data can see that data, can see the changes happening to the configuration of the product, by which they can then think about the downstream impacts that in advance they could plan for. As an example, a design change happens on a part for this wind turbine in Windchill, you could see it. With Windchill now, the supply chain group can see which parts are being put into final design. By which they could take a look at, do we actually have the right vendor partner logistically to actually get that product on time by which we deliver to the customer that purchased that wind turbine. That creates the seamless way in which the product can move faster through to manufacturing. Without it, right, the opposite, which many companies don't have this value, which is why it's so important. Without it, it would only happen at the last stage of the process, up to and including when it's actually been asked to order the part, then only would the supply chain person say, hey, wait a second, we can't get it through the Red Sea, so redesign that wind turbine again. Takes months of rework to do that. What PLM does is it allows a company to compress that product development life cycle, keep it collaborative by which they could have faster net product introductions to the market and at a higher quality.

So the PLM product for you guys has been a really nice growth engine for the last few years. So do you see that continuing, accelerating as it expands? How would you describe the opportunity over the next few years for PLM?

PLM, Windchill, will be seen, is seen in many companies already, but will be seen universally as one of the, if not, the most important enterprise system in a product company. That is our mission, and we believe there's a real opportunity to do so given the dynamics of all the things our customers need to keep pace with in the world. They have great systems in ERP, CRM, et cetera, all great. We work alongside those systems because the authoritative source of truth of the product data has got to live in PLM. It does not live in ERP, does not live in CRM. And when companies think about how do I compress development cycles from 60 months to 30 months, they look through all the workflows that are occurring in their company, and they realize you cannot have manual swivel chair processes and product development processes to actually get to a 30-month development life cycle versus 60-month. You need a system and a software solution like PLM to do so. That's why we're so well positioned for it. And we're very enthusiastic as far as the eye can see around the potential of that business.

Maybe switching gears to SLM. We talked a little bit about ServiceMax. It would be helpful to tell everyone how companies use SLM first to begin with?

So SLM is service life cycle management. And one of the core areas of real strength we have in our SLM suite of solutions is called ServiceMax. We've got others like Servigistics that does parts management, a fantastic solution, but we're focused in on ServiceMax, given, again, the aggregate dollar growth potential of that business, relative to the other parts of the portfolio. ServiceMax is the software solution that lets companies maintain, repair and service long life cycle, high-value assets out in the field, right? Take the wind turbine or take an MRI machine. Technicians at some of the largest companies need to send those technicians to the work site and make sure those assets are having high uptime or being serviced in the right entitlement manner. That's what ServiceMax does. And we're enthusiastic about the correlation with the number of PTC customers that design and build high-value, long-life cycle assets on Creo and Windchill that now can leverage ServiceMax to actually service those assets. So one of the things that we're looking at is a two-pronged approach. Number 1 is making sure we cross-sell all those great PTC customers and make them also ServiceMax licenses at those technician license capabilities; and two, we're just putting out a release in July where the ServiceMax work order data. So everything that's happening to that wind turbine in the field is being organized in the ServiceMax platform. So we know every component, what's failing, what's working, what's being repaired, what's being maintained. We are now going to take that service record history, ported back into Windchill by part number. So that an engineer can see what's actually working within that wind turbine. What's failing? Why? How much does it cost us? By which they could redesign the part potentially or create different solutions by which they could charge their customers more for a more resilient wind turbine or in a different manner of actually producing the results that the customer was needing when they purchased the turbine? So that connection point unlocks the actual living, breathing digital thread to actually work within our customer base.

It makes a ton of sense. In terms of the cross-selling aspect, maybe just talk about traction of getting ServiceMax sold against legacy PTC customers. Last quarter, you talked about an elevator company that you were working with on their service business to help them improve kind of productivity of the business, et cetera. So maybe you can elaborate on that a little bit?

Yes. I think we're making solid progress in the cross-sell. We have much more to go. We have a very nice pipeline building and teams looking forward to 7 -- one 8-figure ServiceMax deal, which we had never get gotten in a stand-alone basis. to close out and continue to build momentum as we exit the year. But as an example, this elevator company, this is a company that for about 7 years at ServiceMax, during our time with GE and post-GE when we were owned by Silver Lake, we were trying to get to this company with no luck. They're a Creo and Windchill customer, and they bought into the vision of not only do they want best-in-class field service technician license and capabilities using ServiceMax, but very importantly, they want to use that ServiceMax data to make their design elevators better. The example I gave to you about it being ported back into Windchill and ultimately creates a better design. So that's a flavor of the conversations. And we're methodically going after this using a joint sales team approach, the right use case, the right value prop and building on success, which nothing is better than close to a 7-figure type deal to get salespeople excited they can make money by teaming up with their ServiceMax colleagues. So we're building on all threats to keep building on this momentum that we've currently got with ServiceMax. Much more to go.