PTC Inc. (PTC) Earnings Call Transcript & Summary

All right. Thanks, everybody, for joining us. Kristian Talvitie from PTC, CFO. Thanks again for joining us. I think we've done this. I don't know how many years, many, many years. But even before when you were back at PTC, and then you left, and now you're back and so we're -- we go back quite a way. Well, here we go. All right. Well, let's get started. By the way, I will save some time at the end if there are questions from the group. And if Matt, you want to ask the question that nobody is asking to that you think is worth asking, that's fun, too. So...

Wait just before you get into the question. My General Counsel likes to listen to these, and I would be remiss, I would get scolded for not reminding everybody that there could be forward-looking statements and that there are risk factors and please refer to our SEC filings and our press releases and other materials to understand this.

Okay. You can update guidance today, is that what you're saying?

Just doing my corporate duty.

All right. So let's get into this. It feels like -- we've been talking about uneven macros for, I don't know what was does like a good macro for you? It feels like a long time ago, doesn't it? I don't know when the last...

'22 compared to '21, I think was a pretty good...

Okay. That was a good macros. Okay. And it feels like it's very intermittent. You guys continue to deliver solid double-digit growth and driven by sort of obviously PLM, the CAD and some of the newer stuff here. So maybe just level set us in terms of what you're seeing out there now and the business has been remarkably durable despite all the uncertainties out there. But just like what do you -- you guys just reported a week or so ago. So just refreshes, what are you seeing out there today? What are you excited about over the next 12 months as you enter into new fiscal year?

Yes, there's a lot packed in there. But I mean, I think from an overall macro standpoint, we've been pretty consistent in commenting that it remains -- it has been and remains kind of a sluggish selling environment. I don't -- we haven't seen that really change here in, I don't know, 8 quarters. And in the meantime, we do continue to see interest build as evidenced by pipeline growing over that period, which I think is positive. I think that the solutions that we have what I'm excited about and not just for the next 12 months, but even beyond, it seemed to be in a spot where the companies that we're serving are looking to make changes. They're looking to digitally transform their businesses to be able to leverage that core engineering information more broadly outside of engineering. And ultimately, what it boils down to for our customers is increasing their competitiveness in the markets that they compete in. And they are leaning on technologies that we're bringing to market to help them do that. And so that part is the exciting part. In the meantime, I guess I'd just follow on in terms of the business performance, I think that as you'll remember, and I was just talking to somebody earlier, the business from 2015 to 2020 went through a pretty important transition, changing the commercial model from a perpetual model to a subscription model, still largely on premises delivery, but subscription commercial model. And that has made a significant difference in how the business behaves in more turbulent times. It's much more stable, much more steady. We've been kind of fine-tuning of the commercial aspects of the business over the past few years as well, which continues to help and drive some of that stability in this kind of environment.

Yes. The other change, obviously, is Neil, from -- over the last year. You work with Jim, I worked with Jim for many, many years. As you reflect back on the last year, there's been a lot of change. What has positively surprised you about Neil and some of these decisions that he has made, because there's been a lot of go-to-market changes. There's been just general, I think, philosophy on the business. Talk about some of the most important things you think Neil has brought to the business.

Yes. I mean I think Neil comes very much with a customer-first mindset and he's been spending a lot of time out on the road with customers, with the 7,000-plus employees that we have around the world, trying to really make sure that he understands what the customer pain points are and trying to bring that back and assess whether or not we're organized as effectively as we could be in spending as effectively as we could be to really address some of those main pain points as he's hearing them from customers. And so I think you see that take shape in even the way that he talks about the business and he talks about 5 priorities and ALM and PLM and SLM and CAD. And obviously, then SaaS is a kind of foundational technology underpinning for delivery model change, but that's reflective of what he's hearing from the customer base. And so he's bringing that back, and he's trying to make sure that the business is focused on delivering those pieces. It's not to say that we're not actually still investing, for example, in Onshape and Arena, we call our Velocity business unit. They're doing okay. They serve kind of a different part of the market, and they've been performing okay for our retail business segment, for example, or even the IoT and AR stuff, those are still valuable technologies in an industrial setting, but he's just trying to make sure that they're all focused around delivering on the core. And so I think that's something that he's been bringing with the organization. We've seen it in a couple of moves that have been made, the IoT and kind of AR rebalancing that we talked about, which was really taking folks that we're working over here and actually putting them on to things where we thought we needed as Neil likes to say more wood behind the arrow. And the go-to-market realignment that we talked about on the call now, that's just another step really in that direction. It's around focus and focus and then driving execution.

I think we talked that night of your call. And it struck me that like the vertical oriented sales force makes so much sense to me. In fact, I was like, "I thought like why didn't we do this like 5 years ago, right?" Talk about like -- we both -- I'd like to focus on both the potential risks that you've assumed in guidance, but also like what got the benefits of that, because it just seems so logical right to an outside observer, but I almost took it for granted that you guys already were organized that way.

Yes. That's a great question. And I would say we chose the words go-to-market realignment pretty specifically. It's not just a sales realignment. And I think about it more as an evolution than a revolution, meaning you're right, just naturally over the years, I would tell you that the sales force -- the sales folks that we had kind of developed into pods. We had or have an automotive pod in Germany, FA&D pod in the U.S. But it was never a formal structure, and that's just the primary port a carrying rep, whose job is really to understand the customers, the markets that they're playing in, what their opportunities are, but they're not actually the technical experts that are then going to actually help the customer understand how Windchill or Codebeamer is actually going to help them from a technical perspective, let alone if they make a purchase decision, how it's going to get implemented and how they're going to deploy it across the enterprise. And so when we talk about go-to-market realignment, it's more of a formalization around even the sales reps, but also the entire supporting organization behind that. So the customer success organization, for example, and the presales and post-sales technical resources that we have to do what I just talked about and the marketing organization as well to get focused around these verticals, so that the automotive group is singularly focused on automotive, and they're getting automotive message and some marketing. And when an automotive customer wants to talk to some of the technical resources, they've dealt with primarily other automotive resources and can understand their problems and see how it's been deployed to other places and where areas, but they mean to watch out for, crop up and they're able to actually better help the customer. And then within that realignment as well, I would say there's also been a shifting of resources. We did some thinning out of management layers and also a reduction of we'll say, nontechnical resources, particularly on the CS side and are bolstering that back up, which our customers are asking for. And frankly, if you were a sales rep, you'd say I've been asking for this, too. So there's a lot of goodness, I think, that comes out of it and comes out of the structure and a more formalized approach. But that's why I also said it's more of a evolution than a revolution.

Yes. So I mean you outline some of the potential positives in this chain. When you thought about the year's guidance, how did you -- there's obviously room for disruption when this thing happen, how did you sort of handicap that when you thought about your full year ARR guidance?

Yes. I think that -- so there's potential for disruption when we're moving accounts and that is going to happen kind of around the fringes. So for example, I would say, just as a random example, a fictitious example somebody who was in the automotive pod, they may have been at PTC for 10 years, so they may have a handful of accounts, and most of them are automotive, but they may have picked up a med tech account or an industry account along the way years back. And so we want to put those into the right home and in that account transfer, there could be some disruption. We'll also do what we can to try to mitigate it, meaning that your 9 months deep into a Windchill campaign, we're not going to move that down. If you're 2 months into it, we probably will move it, but we'll also try to make sure that there's incentive for you to do that as quickly as possible, plus you're probably getting a couple of new accounts that we want you to build pipeline with, and you should be excited to do that with as well. So -- but that certainly creates some opportunity for disruption, and we try to be mindful of that as we thought about the guidance for the year.

So it sounds like, from what I'm hearing and what we talked about, when you guys reported is that you were thoughtful on the potential ARR disruption, but if there's stuff that's in flight, we're not going to touch that piece, and we'll let that piece going to close where it originated. And hopefully, that could mitigate some of that handoff risk for late-stage deals. That's great to hear. Maybe pivoting to some of the business lines. You guys have been growing PLM well above market growth rates for years now. It feels like you've been growing double digits for, I don't know, years. How durable is that? Because that some -- I mean you've had a lot of success with Windchill and obviously Windchill+ now. But talk about the durability of that growth. When you think about that multiyear CAGR of growth, how important, and how reliable is that double-digit growth within PLM?

Yes. Well, I mean, going back to the beginning comments, even around some of what Neil was hearing when he was out talking to customers and the pressures that they're facing in their own markets and the need to digitize their businesses. And digital transformation is a journey. It's not a destination. And it's not like you deploy it once across the entire organization. And then it's done, and you're gone, that's just not how companies really deploy it. They usually will start with 1 department and expand into another and then come back later and expand into another and all the while, we're investing pretty heavily to try to improve the product, improve UI/UX as well as improved integrations. So between Windchill and ServiceMax, for example, between Windchill and Codebeamer as another example. And so it can create this opportunity for additional need and additional use cases and additional value for the customers. So we think that the opportunity remains very interesting. I can't think of our customer, and I would, say tapped out in terms of opportunity.

From the go-to-market change, are there any things that you guys are bringing from a cross-sell incentive -- to incentivize salespeople to even focus even more so now they're vertically oriented to sell Codebeamer than they were before. Is there anything unique with the cross-sell go-to-market motion this year that you think could benefit from the new go-to-market focus?

I think what you would find is that in different verticals certain of the, we'll call it, cross sellable products have more interest than others at any, we'll call it point in time. But right now, for example, Codebeamer in automotive is pretty interesting. And that group is sharing amongst themselves, gearing from those customers. And by the way, we're seeing that in other highly regulated industries, med tech, for example, and even AMD. And then in others, there's the opportunity, for example, ServiceMax and ServiceMax cross sell. And by the way, in the Industrial segment, that's an example there where we've seen some good cross-sell happening. So I think while there isn't an explicit, we'll call it, quota incentive to do that, there are natural tendencies that are pulling.

Yes. The -- thinking about PLM and just kind of your broad portfolio, you've been outgrowing peers pretty consistently, Dassault, in particular. And I'm curious, there's been some changes in the broader competitive landscape. Siemens is rumored, I don't know rumor, that's confirmed that they're buying Altair. They're in the process and Synopsys is trying to buy ANSYS or ANSYS. Does that change the competitive dynamic? I know you were a better partner with ANSYS. You were a good partner with ANSYS historically. I don't know...

Still are.

How -- was your partnership with Altair also, did you have one there?

No. We had the commercial relationship was really with ANSYS and still it's with ANSYS.

Does any of that change in the future? Hard to say?

Hard to say. I would struggle to understand why it would. I mean they have awesome product servicing in many cases, a lot of the same kinds of customers that we're servicing across the product development cycle. You need CAD and PLM unique simulation. And so in that sense, I'm not sure why.

Why that would change. Does Siemens become a more formidable competitor if they have Altair as a kind of more CAD, PLM competitor with sort of a tighter integrated simulation tool?

I guess it remains to be seen. But I mean, I guess, at the same time, I would look at there's another competitor in the market that has simulation as well as CAD and PLM. We seem to be doing pretty well against them and with the PLM offering that we have.

So not -- although there's been a bunch of moving pieces, you don't think it really changes the -- at this point, it's hard to say, but you don't see anything on the horizon where it's tied to, yes, keep an eye on this. Okay. What about CAD with Creo+, it seems like Windchill+ gets a lot of the attention. Talk about the success of Creo+ and what that could mean for that long-term growth algorithm?

Yes. I think Creo+ is still, we'll say, in very early innings. If I was to look for a proof point on whether there is interest for CAD, SaaS application. I would actually look at Onshape right now, which actually continues to have pretty good success. And by the way, those wins are all competitive takeaways from other competitors that are on-prem or even trying to move to a more hybrid model. And I would say, I think that's indicative of what we're seeing there moving upmarket, getting kind of larger customers. So clearly, there is interest in SaaS. Now as it relates to Creo+ or some of the other competitive products that are out there, that's a long path for customers to go down. I ultimately believe they will. It's a better delivery model than an on-prem delivery model. So it's going to happen. It's I think just a question of timing.

Yes. The other -- the idiosyncratic element that I really like about PTC is when you think about service maps and the cross-sell, how would you grade your performance on ServiceMax thus far, realizing it's still relatively early in the portfolio. It feels to me like there's a huge cross-sell opportunity. I know we sort of want to be balanced in when we think that could play out. But how would you grade the performance thus far of ServiceMax and kind of the integration efforts?

Sure. I would say, I think the integration, you can put it into many different buckets the without sounding disparaging, but some of the less value-add integration, back-office systems and everything that has actually gone smoothly. And then I would say some of the more important parts of the integration, I would put into the people part and bringing those people on board and getting them integrated into the broader ecosystem. I think that actually has gone really well. Obviously, Neil, the CEO was the CEO of ServiceMax, who's now CEO of PTC. There are other folks at different levels of the ServiceMax organization that have really embedded themselves within broader PTC, which I think is great. So that's with any software company, important asset is the people. And I think we've been doing a good job integrating there. And then lastly, I would put on the product front. And again, we have just completed integration with Windchill and ServiceMax. And I think there's more opportunity still on the product front. And then, of course, the go-to-market synergies, and that's really leveraging, if you will, the core PTC sales force and the core PTC customer base and getting ServiceMax opportunities in front of those customers. And we've seen some interesting success stories there as well. Neil would tell you there are customers that they've been knocking on the door for years, and they could never get in as kind of stand-alone ServiceMax, but now is probably the broader PTC, they've been able to get in. So I mean, all in all, I think it's still early innings. Unfortunately, just given the timing, the macro was not really cooperative. So I think there's still opportunity for continued improvement. But I think in general, it's gone well.

I guess the question is it just seems so logical for a PTC Windchill customer to -- like it just seems like hand-in-glove in some regards. What -- if you're not using ServiceMax, what are these customers using from an SLM perspective?

A lot of them are using their homegrown systems, whether that's a system they've built themselves Excels Spreadsheets, sticky notes, we see a lot of that. There are a couple of competitive solutions out in the market. We will probably narrow down to one primary area, but that's kind of the market opportunity. And I also agree that a lot of these companies actually think about their service operations as actual profit centers for their business. And this is a way to really enhance both the customer experience, but also improve their service delivery and the profitability of their service delivery by investing in tools like ServiceMax. So I agree with you the long-term fit, I think, is great. And then ultimately being able to tie some of that service information back into Windchill and get that back into the core engineering departments, I think, is also a very good upside for it.

I'm going to ask another question and then we'll see if there's some form the group. Your confidence on free cash flow has always been high, just from a -- relative to other aspects of your guidance. Talk to us about -- and I know in the past you've said, like even at the low end of our ARR range, I feel comfortable with sort of the midpoint of the free cash flow. Is there any sort of like commentary like that, that you have this year of sort of that confidence? And I know there were some moving parts this year on free cash flow relative to last year. But any thoughts on the confidence level of free cash flow even though ARR can move around a little bit?

I still feel good about it. Yes. I mean in a odd way for folks who don't necessarily follow the company too closely because of ASC 606 and revenue recognition and our -- the vast majority of our software delivery still being on-prem. 606 actually kind of [ res havoc ] on the P&L, which renders it effectively useless as a management tool. And so what we've really migrated to is oddly as it sounds, is running the business on a cash basis and because it's all consistent cash inflows, all subscription-based cash inflows are primarily and most of the outflows are consistent subscription-like outflows, whether it's rent or salaries or any of the tools that we use. That ends up being how we look at the business. And as such, it's put a much greater focus for us on that. And we've fine-tuned many processes around that to mature that to make sure that we understand what's happening from a cash flow perspective, because that's how we manage the business. That's how we make incremental investment decisions, et cetera, et cetera. So it's actually worked out pretty well, I think.

That's right. Is there any from the group here.

Don't ask about my mustache.

This November, it's just top notch. It's generally wider.

Just a question on the ServiceMax Windshield integration that you mentioned. Is that something you think is that customers have been -- or prospective customers have been waiting for that could be a catalyst as we head into '25 and beyond?

I think it will be helpful. I think it will help bring to life for customers the digital thread concept, which is kind of our marketing message for leveraging that core engineering data out of engineering more broadly throughout the organization and then back from the organization into engineering, where if there is a problem, it can actually be solved at the source. So I think that, that will, for sure, help be a proof point for that digital thread onset for customers and an incremental positive.

We've got about 90 seconds left. Matt, is there -- no, doesn't have any. If we're sitting here this time next year, you guys end up growing 12%, 13%. What's the most likely reason for macro, I'm sure -- let's just hold macro constant. Is there something you'd say, a lot like this. I feel really good about like this could actually a lot better than what we're kind of thinking?

I mean there's various aspects of it, but I mean, I think that seeing some of the growth initiatives that we're trying to drive across the company, taking hold in this example, maybe early on, which should be the go-to-market transformation, which is really talking about the kind of the core direct business. We're also working with our channel partners to try and make sure that we're driving growth there and enabling growth there. So with those things start to take hold in, it would be -- a favorable macro would be a preferable backdrop, but those are the things that I think can continue to drive performance.

Is there any -- with this talk of tariffs now? Are your customers thinking about that, especially the ones that are outside the U.S.?

I think they're thinking about it, but I think it's all also still early days at this point, just talk. So I think everybody is still.

It's not. They're thinking about it, but they're not necessarily contemplated in their end markets. Excellent. Well, we're out of time, unfortunately. But Kristian from [indiscernible] RBC, thank you. And Matt, thank you for coming as well. Best of luck, guys.

Matt thanks for having us. Always appreciate the opportunity.