PTC Inc. (PTC) Earnings Call Transcript & Summary

All right. Well, good morning, everybody. Thanks again for joining us today. Dan Jester, BMO Software Research here. And we're really pleased to have with us engineering and design software company, PTC. We have Kristian Talvitie, CFO, with us today. Kristian, thank you for joining.

Dan, thanks for having us.

So in terms of logistics today for all the folks on the line if you have any questions that you'd like me to ask Kristian, just shoot me an e-mail, and I'll do my best to get those answered for you. So I think to get started, Kristian, it'd be helpful maybe to start the conversation at a high level. Over the past year or so, you've been suggesting to investors that there's 5 kind of focus areas for growth in the company. And so what I want to do is just spend a moment on each one of those 5 drivers, get a sense of what you're seeing today and get your perspective on the business. So maybe we can start with PLM first. So when I first started looking at PTC a few years ago, a big part of the story at the time was the fact that your PLM business was growing faster than the overall industry. And so I know it's been a tough end market for a lot of your products over the past year or 2. But stepping back, kind of what are you seeing in PLM? Are you still growing faster than the market? What should we expect from that business?

Yes. Great question, Dan, and thanks. And just before we get -- before I start answering, my General Counsel would be very angry with me if I didn't remind everybody about our safe harbor language and language regarding forward-looking statements, which is available on our press releases and on our SEC filings on file with the SEC periodically, Forms 10-Q, Forms 10-K, there's risk factors and the safe harbor language. So I would encourage everybody to look at those. On to your question specifically about PLM, I think that our belief is that PTC is really well positioned with the suite of technologies that we currently have and are kind of in the sweet spot for many of our customers to help them drive digital transformation in the part of the enterprise that we serve. And for them, you need to step back and think about what are the dynamics that they're facing in their respective industries. And a lot of it boils down to getting new, more complicated products to market and complicated both with mechanical precision and/or incrementally more software in those products, getting those products to market faster and with high degrees of quality in as cost-effective a manner as possible. And so we believe that PTC is positioned right at the epicenter of that with really PLM being at the core. And just PLM quickly or product life cycle management, this is technology that PTC has had now for going on 25-plus years, invested in considerably over that time. And in the beginning, PLM was often referred to as PDM or product data management. And it was used primarily in engineering departments really as a vault for CAD files. It was check-in, checkout for CAD files. And again, over the last 25 years, that's evolved considerably. And now for some of our more forward-thinking customers, PLM is really becoming their system of record for product information. And they're leveraging their PLM system to not only collaborate within engineering departments but also outside engineering departments into, for example, quality or regulatory or manufacturing or even into service departments and cross disciplines within engineering, mechanical and software engineering. And so with PLM sitting as the system of record where all that data resides, it really creates an opportunity to help them not only speed up the throughput of their own product development cycles, but it also allows for them to do things like configuration management in their product portfolio. So trying to manage a complex product portfolio that has thousands -- tens of thousands of parts to be able to trim down to the extent possible, the amount of parts that they're having to carry, but also maximize the amount of customizable outcomes for their customers. And so that's really the -- I think, the long-term growth driver behind PLM, certainly for PTC and how we think about it.

So it sounds like it's been very durable in terms of the macro trends affecting it. Anything you'd call out in terms of changing in terms of competitive dynamics or how your product is being perceived by your customers or anything else you'd call out from that perspective?

There's a couple of primary competitors in the market, particularly for PLM, solid companies. I think that we get feedback that our software from a capability perspective is certainly up there in terms of comparisons to other alternatives that they have. The other thing that maybe just on a macro and bigger picture perspective, if we think about some of these disruptions that we've seen here over the past few years, and let's take, for example, COVID as one example. Well, certainly, there was some short-term business disruption. But at the same time, I think that also helped solidify in customers' minds really the need to invest in digital transformation, which is a journey, not really an outcome. And frankly, I think that we'll see how it plays out in the end, but some of the turmoil that we're experiencing now could have that same kind of impact in terms of just, again, solidifying in customers' minds why being as agile as possible, particularly in an environment like we're in today is a necessity for them. And so that's certainly one dynamic that we're watching.

Okay. That's great. So let's move on to the next category, which is ALM and Codebeamer certainly feels like in the last kind of 18, 24 months that, that business has really taken off. And so just help us understand sort of what the drivers have been around the success of Codebeamer and kind of why now? And is this business still going to be an additive contributor to growth? Or help us sort of understand the dynamic that this could have financially in the PLM segment or however else you want to frame it because it's been a great opportunity over the last year or 2.

Yes. We -- thank you. We would agree. It has been a great opportunity and is on the forefront of many of our customers' minds for a couple of reasons. One, what Codebeamer does particularly well is requirements management, test management for their products. And what we're hearing more and more frequently from customers is that they actually really view kind of ALM and PLM together. Again, ALM is not necessarily a new concept, and there are certainly other ALM providers out there in the market. But historically, it had been more thought of as relating to software requirements and test. And now our customers are saying, well, but our products really aren't just hardware on one side and software on the other. It's really the whole package. And so we're taking a view -- and when I say we, I mean customers that ALM and PLM is really a combined platform because we want to be able to manage the requirements for the entire product in a system. And Codebeamer is positioned pretty well against some of the other competition. It's a more modern platform. It tends to operate with a more agile or in more agile frameworks as opposed to waterfall frameworks. And again, going back to the customers' needs of speed to market, agility, it's proven to be a pretty interesting opportunity for us. Codebeamer 3.0 was an important release and helped address some scalability concerns. But I think now with that out in the market, I think that helps continue to fuel the demand.

Okay. So if you could contextualize it in any way, is this sort of one of the fastest-growing products in the portfolio today? Or how should we think about the potential contribution here relative to others in any way?

It is a faster-growing component of the portfolio. And I think that there's significant opportunity to see continued expansion of ALM and cross-sell into the base. And interestingly, in certain cases, we've been able to get into customers that we haven't been able to get into before with a CAD or PLM first view, but now we're actually getting into these companies with an ALM first motion because, again, Codebeamer is a little bit of a standout in the ALM space. So that's helpful. Who knows if that leads to anything longer term, but it's certainly easier once you have a foothold in a business to be able to get them to look at your broader product portfolio as well.

Okay. That's great. So maybe just moving along to field service management, ServiceMax and what you're seeing there. I think you bought the business a few years ago. I think things have maybe slowed down a little bit for you there. I think maybe some of that is macro, maybe a lot of it is macro, but sort of maybe bring us up to speed in terms of what we're seeing in that part of the portfolio today.

Yes. Again, another great question. I think that we're still of the mindset that the strategic fit of ALM, PLM, SLM is the right answer for many of our customers being able to, again, share product data out with their field service technicians for complex assets that live out in the field, but also to be able to share information from the field organization back into the product development organization, where if there's a more systematic or more common failure that, that company happens to be seeing out in the field with XYZ product that it can be addressed where it needs to be addressed, which is in ultimately the design, right? And so that logic, I think, still holds true. And yes, you are correct that a lot of the ServiceMax implementations or enterprise implementations, they're larger implementations, not immune to a softer or more volatile macro environment. But again, for many of our customers, their service organizations are, in fact, profit centers for them, and they're obviously an important aspect for customer service and brand reputation and so on. And so for them to be able to improve the quality of the service that they're providing in a cost-effective manner is an interesting value proposition for them. But again, kind of larger scale enterprise deals in the macro we've seen here has been challenged.

Okay. Is there any other sort of limiting factors we should consider? I mean, have you done all of the sort of back-end integration that you need to do in order for sort of the forward-thinking customers who want to put this digital thread together that they can actually execute upon it? Or are there other things that you feel like you need to do in the organization to sort of really help them get to that full optimization of what they would be able to do if they were able to sign this deal and deploy it?

Yes. So I think there has been a considerable amount of work done into the connection between, for example, PLM and SLM, PLM and ALM and we'll continue to strengthen that connectivity as well over time. I think another interesting point that comes up in a lot of customer conversations, certainly more recently over the past 6, 12 months is, hey, tell us about AI. Tell us about your AI strategy. How can that actually help us? And as I think you know, we actually released here recently our kind of first AI agents into actually ServiceMax. That was the first part. And so those are now GA. Again, it's relatively recent. So we've got a lot of customers that are kicking the tires. But in terms of immediate demand this quarter, I don't know that we'll necessarily see that, but we're certainly getting interest on that front as well. And then I would say that we also have efforts underway for Codebeamer, which I think the market is aware of and for Windchill to get agents in those parts of the of the portfolio as well. And I think we'll see that probably closer to the kind of the turn of the calendar year is when we would see the kind of ALM, PLM agents being released and then more broadly beyond that, I think that's kind of within those various technology platforms. And then from there, I think the next step would be kind of cross technology platforms, agents that can work across SLM, PLM, ALM and then ultimately also connect with other systems that customers are using, whether it's an ERP system or an MES system and so on.

No, that's really helpful. And I was going to ask a little bit about AI later, but maybe this feels like the time to bring it up in terms of your customers' sort of pull in terms of how they want you to provide some of these services. I guess how have the conversations changed over the past few quarters? Have we really seen a broadening of the aperture and sort of many more customers are now really sort of interested embracing forward thinking? Or is this going to be the type of opportunity in which PTC needs to push and say, "Hey, we have all these cool new technologies, you should really try them out." Like how is that dynamic evolving?

Yes. It is becoming -- I think if Rob, our new CRO, were here with me, I think he would say he can barely get through a single customer meeting without having the customer actually asking, "Hey, what's your AI strategy? What does that look like for us?" And so that's certainly a positive dynamic that we're not trying to push some newfangled technology on them that they're not necessarily interested in. But it's certainly being talked about within our customers, probably across multiple of their software landscapes, whether it's engineering or other parts of the organization as well. So yes, a fair amount of interest there.

That's great. So let's maybe move on to CAD. So last quarter, if I remember correctly, I think your CAD business on an ARR basis grew about 8%, which it's the slowest in a long time. And obviously, it's not immune from the macro perspectives, which everyone on this call has heard you and others talk about. But I guess maybe just stepping back, like what's the growth algorithm in CAD from your perspective to where we sit today? I think for the other parts of the business, I think people understand the market, the opportunity to grow maybe in excess of that potentially because of the product area. Is that the same dynamic in CAD? Or how should we be considering the algorithm there?

Yes, really interesting question. I think that on the one hand, the CAD market is one of the more mature markets that we operate in, right? There's kind of 4 of us that really make up the vast majority of the CAD market today. We don't, by and large, see a ton of competitive displacements. It happens every once in a while, but it is -- and there's reason to celebrate it when it does. But I wouldn't say that we necessarily see an increasing trend of that in the broader market. I think where that's slightly different for PTC is with Onshape, which is really the industry's only native SaaS CAD application and the growth that we're seeing there, and again, albeit it's a smaller part of the portfolio relative to other parts of the portfolio, but the growth that we're seeing there really is largely coming from competitive displacements, which is an interesting dynamic. And we'll see how that continues to play out here over the coming years. But that's kind of where I think the state of the CAD market is.

Okay. And then just, I guess, on this last point, SaaS, right, you just brought up Onshape, clearly interesting and it's come up in conversation as well. You've had Windchill+ out for a few years now, Creo+ out for a little bit. Maybe what's the lay of the land in terms of SaaS adoption from your customers? And how should we be expecting that to progress?

Yes. So if we just step back for a second and remember that PTC's business has a blend of some kind of native SaaS properties like Onshape, which we just mentioned, like Arena, like ServiceMax -- and then there are other parts of the portfolio where we can sell either on-prem or in a SaaS environment, such as you mentioned Windchill+, such as Creo+, Codebeamer plus as well. I think ultimately, we are of the belief that this part of the software universe, the technical software cohort of service providers is ultimately going to move to SaaS as well. Like many other parts of the software space, I think it ultimately comes down to it's -- frankly, it's just a better delivery model for software. And we continue to see interest, in particular, out of those 3 kind of plus categories that I mentioned, it's really Windchill+ is probably the first and foremost. It's still early days in terms of that SaaS transition for us or SaaS migration for us. But we lead new sales engagements with a SaaS-first mentality and then we'll work with our customers on what their plans are in terms of migrating to SaaS over time. And there's a few different variables that come into play, how customized their environment might be because it's not just necessarily the technology, but there's process change that they need to go through and OCM, organizational change management that they need to go through as well as the technology migration and moving from a highly customized on-prem environment to a SaaS environment requires decustomizing to a certain degree, which is what ultimately creates the that need for the OCM to happen. And so again, we don't -- we're not in the business of kind of forcing the decisions on our customers, but we certainly want to work with them. And when they're ready to move, we want to be there to help support them and educate along the way as to why it ultimately is -- should be a lower TCO and again, better experience for their users and better outcomes once they've made that decision.

Okay. That's great. Well, that's sort of the high-level lay of the land. So let's maybe take a little bit more of a sharper focus on what's going on today. So last quarter, you updated your full year ARR growth outlook to 7% to 9% this year. And I think a lot of people understand, I think you did a really good job outlining on your call at that time kind of what drove that decision. So the questions that we've been getting have been about, well, what can get PTC back to that low double-digit growth algorithm, which they had aspired to. So if you think about where we sit today and how we can get to that sort of better outcome, what are the key variables that you're sort of considering or that you would have us consider to get an improvement on the growth side over time?

Yes. Again, thanks for that question. I think it's a good one. And really some of the things that we've been talking about even on this call, but I think what we would say is we've got 3 kind of broad pillars of areas of focus. One is the go-to-market changes that we're making, and we can come back and talk about those. The other is some of the product-specific changes that we're making, and we touched on some of those, whether it's SaaS or AI or other releases. And then the last is this, we'll call it, commercial optimization pillar as well that we've been actually working on for a number of years and think that there's continued runway there. And really, each of those and all of them in concert, the intention of those is to actually get us back to driving net new ARR growth. As you'll remember, our net new ARR has been pretty well flattish for the last 3 years. This year, at the midpoint of our guidance, it's down, but for reasons that I think we're all aware of. But again, the intent of each of those individually and collectively is to get us back to net new ARR growth even in a choppier macro. And we've been in a difficult -- we've used different words over the past 10 quarters or so, whether it's choppy or challenging sales environment or difficult macro, it all comes together really to mean the same thing, which is difficult macro, and it's been for different reasons over the past couple of years as well. And so even in an ongoing challenging macro environment, our hope is that these things will still get us back to net new ARR growth. Obviously, an improved macro environment would be helpful as well. But even absent that, we're trying to control what we can control in order to drive that outcome.

And can you just remind everyone on the sales front, what are the sort of the key endeavors that you're and sort of the new sales leader, what are they pushing for? And over what pace of time do you expect some of those changes to sort of bear fruit?

Yes, sure. First of all, I would say we talk about go-to-market changes because it isn't really just sales changes. It's really go-to-market, which incorporates both the marketing effort as well as the customer success and technical teams that are all helping with the sales effort and helping customers get the implementation right and get value out of their implementation on an ongoing basis. So that's what we mean by go-to-market changes that we've been making. And first, I guess, I would probably delineate between the direct side of the business and the channel side of the business. As you know, our channel accounts for about 1/4 of the business today. And we believe there's opportunity for continued growth there. And frankly, on a net new ARR basis, the channel has been flat for a number of years as well. So Rob has also recently hired a new channel leader for us who's really hit the ground running and I think is working with the partner ecosystem to try and figure out what we need to do together in order to drive growth in that part of the business. And then a lot of the other changes that we've talked about, i.e., verticalization and kind of coverage management, that has been really more on the direct side of the business. And the intent with the verticalization is really to, again, harmonize marketing, the sales effort and the customer success and technical resources around our customers so that we show up with the right folks who understand the industry that they serve, understand how other companies that look like them are thinking about their challenges, understand some of the variables that go into how you might think about implementing some of these changes and in what order and what kind of configuration and what kind of roadblocks you might come up against and how to best come up with a solution for that individual customer. But really speaking, their language more specifically.

Okay. So another sort of topic that comes up a bit is about the efficiency of the business. And you've been sort of very transparent with all of us that you want to grow your expense base at a significant discount to what you're growing the top line. And when you're growing ARR double digits, it gave you maybe some more wiggle room to hit that aspiration. In an environment in which we're more constrained on the growth side, can you still tune your operating expense growth to the same level of precision? Or do you -- are there things that you need to invest in kind of independent of the cycle that maybe break apart that relationship between your top line growth rate and how much you want to grow your operating expenses?

Yes. Really, really good question. And I think just for starters, what I would say is I would think about that algorithm over a multiyear period. It doesn't necessarily apply to any one specific fiscal year. But if you were to go back and look at the last, whatever, 3, 4 years for PTC, I think that you would find that on average, that's held true whether or not in any 1 year it was a little higher or a little lower, which is really based more on the budgeting process and what we think is acute for the year that we're in. And then I think back to this question about if we're in a high single-digit environment, for example, do we think that we could continue to drive that kind of expense growth? And I think my short answer would be, I think we do because it depends on where you're going to invest. And if I just think about the P&L and think about the different major investment areas, you've got COGS, which growth in COGS is primarily driven by SaaS delivery. So it has more to do with how much SaaS we're selling than any kind of specific investments that we're making into that particular line item. Now obviously, a big component of it is also our professional services organization, but that has been flat and we haven't had an ambition to really try to grow that, but instead rather leverage the broader partner ecosystem. So if I think about the COGS line item, that would be the major driver there. It's an outcome, not necessarily a proactive investment. And then if you move down to sales and marketing, R&D, G&A, there, I think it actually also becomes a matter of prioritization, meaning I think we have room to continue to stretch the G&A efficiencies even as we scale the business, and we talked about AI earlier, we're looking at that not only for customer use cases, but how we leverage that internally. And so I think what you would see is relatively minimal investment in G&A. And I think if you went back and looked over the last, whatever, 2, 3, 4 years, you would see that, that actually has held true. There is some increase because of -- it's primarily merit increases, for example, and there have been a couple of smaller acquisitions that bring some temporary G&A that then get worked out over time as we absorb those businesses. But largely, it's been pretty consistent. And then on the sales and marketing line, I think I would think about it is if it's still a difficult macro and we're not really seeing that kind of net new ARR growth on the horizon, the first question for me would be, well, is now the right time to be investing incrementally in sales and marketing because if in this environment, we've added 100 more salespeople, is that really going to drive a different outcome. We'd have to have that discussion, and we'd think about it. But I think if you went again back and looked at the last 2, 3, 4 years, you would see that sales and marketing, the investment there has also been relatively consistent through the -- certainly for the last 2 or 3 years, which then leaves kind of R&D which is where a lot of our investment has actually gone over the past few years. And I think over the past 5 years, we've actually doubled our R&D expense in terms of a run rate basis from 4 or 5 years ago to where it is today. And I generally don't think that investing in R&D in a difficult macro is going to drive incremental sales this quarter, this year, but it certainly sets us up better for the future and also provides solid support for our customers, which, again, translates into the high renewal rates that we've seen. And so those are good areas for us to be investing in as well. And now again, it isn't a blanket investment in any of those areas. We want to look at where the need is. We want to look at spend that we have today in the current run rate and can we continue to optimize that? Can we move people around into parts of the organization where we are seeing more growth and more opportunity.

Okay. Well, we are at time. So we're going to have to stop the conversation there. But Kristian, really appreciate the dialogue and your time today. So thank you very much.

Thanks, Dan. Thanks, everybody, for listening and appreciate the support. And if there's any follow-up questions, I think you all know how to reach either me or Matt Shimao, please feel free to reach out. Thanks, Dan.

Thanks, everyone.