PTC Inc. (PTC) Earnings Call Transcript & Summary

Good afternoon everyone. Tyler Radke here. I co-head Citi's software research practice here at Citi. Welcome to day 2, the afternoon stretch of a bunch of great software companies leading off. We have our friends at PTC from up north in Boston. Happy to have the CEO, Neil Barua; and CFO, Kristian Talvitie. Gentlemen, thanks for making the trip. I know it's Q4. There's a lot of business you guys are closing this month. But Neil, I thought it would be great to start with you, somewhat new to the CEO role, but one of the top priorities, I think you had coming into that role was just to meet with as many customers as possible. So I thought it would be great just to get your impressions after traveling the globe, talking to customers. What were some of the most surprising takeaways as you met with customers about PTC?

Well, great to be here. Thank you, Tyler, and glad to make the trip down. First of all, PTC, global software company. We help our customers who build amazing products, design, build and maintain those products. And through the 40 years -- we actually celebrate 40 years at PTC this past May, in the 40 years, we've created a great relationship with many of them through our software suite that includes starting with CAD, which is computer-aided design. So all the cool designs of all the products happened on our software, and then PLM, very importantly to us is where all the designs actually are built into a very sophisticated recipe before they get manufactured. And then we've got a great suite of services on the services side that actually sees and feels and maintains all the things that happen to those products in the field. So in these conversations with these customers globally, and we spend a lot of time with customers and continue to do it and will always continue to do that as the CEO of this company. it's a -- 3 themes are coming up in 10 out of 10 conversations, which is, number one, product companies around the world need to speed up their way of doing business. Their business is getting more complex. It's got dynamics to it, whether it be geopolitical, whether it be policy driven, whether it be competitive driven from many companies around the world that are speeding up development. Our customers are coming to us and saying, what can you provide for us to speed up our [ organization ] to produce great products at a high quality, so we could exist for another 50 to 100 to 200 years. And that is uniformly across every customer and it's only accelerated despite the uncertainty that's out there in the world.

Got it. And I mean, you talked about CAD and PLM. Obviously, those are really broad categories, especially all the different products you touch. I mean, imagine some of this was just kind of educating customers on everything you could do for them in some of those situations.

It's interesting. We've been spending a lot of time now, Rob Dahdah, our new CRO, is really in this go-to-market transformation, making sure the messaging and the view of PTC is seen the way we know it to be seen, which is highly strategic at some of the most substantial companies of the world. NVIDIA is one that we announced in our earnings release and a press release around relationship where every single GPU in the world actually gets configured on Windchill, our PLM system. And raising that now to the senior levels, Jensen and his team are making them more PTC has resulted now in a partnership that we're beginning and is only going to accelerate. -- that we're doing across the board. And part of the theme of what we've done in go-to-market so far is really making the messaging around what outcomes are you getting from deploying these amazing software solutions that PTC has? What others in your industry vertical have done? What outcomes are they getting from using PTC? And we're raising that conversation up to the C-suite. And that's a great new motion that the company is doing at scale now and continue to move that forward as we get into next year.

Yes. And touching on that strategic positioning. I know you don't comment on market speculation, but I think on the last earnings call, you did talk about PTC being a strategic leader in the category and maybe not being surprising that others could be interested in that. But how do you just kind of think about that strategic positioning in the context of the broader market? And how are you thinking about the -- driving shareholder value from here?

Well, the first thing we think about from a strategic standpoint of why we feel so great about the position of PTC and the opportunity to continue to improve PTC is because at these great customers for the last 40 years, we're at the epicenter of their business. So all the ways in which products get designed, developed, built, maintain have been touching PTC's products and is only getting more so. And so if you think about strategically how critical we are in a software vertical that not a lot of players are in, and the depth and understanding and the relationships we've built with amazing products, there's no other company that's this strategic in an environment where product companies are just trying to stay alive to produce the amazing products that our kids, that our families use that we all use on a daily basis. So that strategic priority is so fundamental and such an inspiration for PTC to do what we're doing right now.

Right. And I guess translating that into your conversations with customers, you have made some changes to the go-to-market since you took over. I think you talked about verticalization and some other things. Just give a sense for those changes, where we are in those changes and how you're thinking about the tailwinds or the the benefits of those investments you've made as we head into FY '26?

So as you mentioned, I was announced as CEO about 2 years ago with a great transition with my predecessor, Jim. And as I mentioned on the first earnings call, it's my job and duty to turn over all the stones of the company and make sure are we appropriately doing the things we need to, to create great value for our customers and all the stakeholders. And one of the things early on that we saw in bringing in a lens that was very data-driven was around, we had significant, in our view, improvement levers on how we're operating our go-to-market machinery. And what we [indiscernible] with that was we need to do a number of things different. At the highest level, we felt a vertical approach would benefit us gaining more traction and attaining more wallet share of our great customers and those new by having that focus and desire. There's a number of levers underneath it that we're also pulling, but which also resulted in making sure I brought in the right leader, Rob Dahdah, who is actually here with us today here at the Citi Conference. Recruited him to come in, he joined early December, well aware of the playbook of how we're going to transform. And for the last 7, 8 months, he's been with the team hard at work, chipping away on the playbook to make sure that the transformation actually builds momentum, we make the tough decisions to position us for ultimately a North Star from a financial perspective is, let's start growing at new ARR. And that is fundamentally all the work that he's putting into place with the marketing leadership, all of us leaders to actually have a high-performing sales team that really takes advantage of this opportunity in front of us, Tyler. So good progress so far. It's a multiyear journey but I'm very pleased with the progress so far.

Yes. And I guess that's a good segue on the topic of growing net new ARR to bring in Kristian on the financials a little bit. But post the Liberation Day and a lot of the uncertainty, you did bring down your full year growth targets to the high single digits range. You did take the low end up after last quarter of kind of better execution and everything. Could you just walk us through what you're seeing in the demand environment maybe both from a macro perspective, but also some of these go-to-market changes that Neil was talking to and just kind of your confidence level and in hitting those targets?

Yes. Thanks, Tyler. So yes, you're right. We did bring down our full year guidance post Liberation Day. There was obviously a lot of turmoil, a lot of angst at the time. And some of you may recall, we had set a kind of low end that contemplated a macro situation that got potentially significantly worse from where it had been. There were conversations with customers, they were uncertain as to how they were going to proceed, [ not ] if they were going to proceed, but perhaps when and at what scale they were going to proceed, particularly early on in that quarter. And so we put a place what we thought was kind of a low end that contemplated things getting significantly worse. And then obviously, off of the Q3 results, which we felt were solid and the macro environment in general, I'd say, remaining stable, like we've been calling out now for the past 2 or 3 years almost that it's been a difficult macro or a challenging macro. And I wouldn't say that it's turned into a better macro, it just didn't turn into a worse macro. And given that dynamic, given the execution that we saw in Q3, the opportunity, the pipeline for Q4, we felt it was appropriate to take that kind of low-end scenario off the table. Now obviously, you still need to execute in Q4, but we feel the range that we have out there is appropriate, allows for some ongoing macro turmoil and frankly, allows for deal structuring, which for our larger deals can have an impact in any given quarter as to how much ARR actually starts in the quarter, whether the deal is a ramp deal or whatnot. And so those are probably the 2 bigger swing factors, what happens here with the macro and then the deal structuring between the high end and low end of the range and probably the larger of the 2 variables is the deal structuring aspect, which is difficult to always predict.

On the ramp versus kind of -- okay. Got it. And Obviously, it's early to talk about FY '26 at this point. But just as you look across the product portfolio and if we were to get accelerated growth on a net new ARR basis in '26. And again, absent some dramatic improvement in the macro environment, like what products or maybe segments from the go-to-market perspective do you think could drive that? Like what are you most excited about that you think kind of has that acceleration potential?

Yes, maybe back up to make sure we're level setting. The way we're approaching how we're operating is not by assuming the macro gets better. All these changes we're doing internally to make sure we're better suited for any macro environment. And it's been a bad macro environment for quite some time. We hit a another soft spot this year globally with the Liberation Day and that few months of pause. But all this work and heavy lift that we're doing, including the go-to-market transformation, the addition of a new Chief Product Officer to accelerate our product innovation within AI is around making sure we get our foundation much stronger in any kind of environment that we've got. By the way, if a macro improves, we'll just be benefited even more is the way we think about it. In terms of how we think about the excitement of as we enter next year and the years following, we really feel strongly about achieving our vision of what we're calling the intelligent product life cycle. And you'll hear this more from PTC, where ultimately, we have seen from our customers and heard loudly for them that having a product data foundation that engineering workflow occurs off of and that product data actually being utilized by the rest of the enterprise is our secret sauce at PTC. We do that extremely well with a lot of reliability and confidence. And as we stitch together the workflow, and the data workflows across our software solutions for our customers, we strongly believe that not only inspires customers to use Windchill more broadly and deploy Codebeamer ALM tool, which is -- coincides with what we think about PLM, but also allows them actually to take advantage of generative and agentic AI. And without PTC, without this product data foundation, you're pretty much [ SOL ] as a product company to actually achieve these outcomes to remain competitive in this, in this very interesting world that they all compete in. So we're most jazzed about that because we're starting on second base. We're getting the messaging right. We're making sure the product integrations work well. We're adding the agentic AI capabilities, generative AI capabilities so that when our customers are ready, we're giving up a wholly differentiated experience using PTC.

Got it. Got it. Okay. And maybe just thinking about the product segmentations that you'll break out. Starting on the PLM side, a lot of different great products in there. You talked about Windchill being used by NVIDIA and ServiceMax, where you kind of came into the company through. Like give us a sense of just what could be the biggest growth drivers within that bucket because we often get the question from investors, how to think about the growth of that going forward. And again, when you have various parts that are growing at different rates, at different stages of maturity curve, it's sometimes kind of difficult to get a consolidated number.

Sure. let me start with the beginning of how products actually come alive, which is with design and requirements, and that starts with our CAD tools, right? And Creo is our flagship clearly. It's the thing that we point investors to, to look at and we watch carefully how we innovate on that, how that growth rate occurs. We've also got something called Onshape, which is the born in the cloud CAD tool, which just caught fire and it's fantastic. And it's nothing I want you all to get excited for in models, but I believe from a mid- to long-term perspective, Onshape will be a critical growth driver of that data flow from design through the life cycle of this intelligent product life cycle. So that's the beginning of CAD. The more -- most interesting growth lever we see is around Windchill and Codebeamer. So Windchill is, again, the configuration engine of how products actually get put into a very sophisticated recipe before it gets manufactured. Windchill does that incredibly well. It's a flagship product. It's one of the most substantial parts of our financial framework. And it is the area we see the most opportunity for customers seeing the expansion of Windchill across their enterprise. So a level of seats that they have that has been predominantly doing CAD data management, they are now seeing if we expand PLM beyond that, we actually can move the product development process faster. So Windchill is like front and center, where we're putting resource allocation, incremental dollars to accelerate that, not only on-prem but SaaS, and we can talk about that in a little bit. And then Codebeamer is one of the most strategic capabilities we've got because it -- we have a view that software development in hardware and mechanical companies will become one of the same. Every CEO I'm talking to that runs a product company, they're dealing with how do I break the silos between the software engineers and the hardware and mechanical engineers. Codebeamer with Windchill allows a CEO and a C-suite to actually break those silos down and be able to move a product development process much faster using those 2 capabilities. So we see Codebeamer on its own being a growth lever, but in combination with Windchill being a real exciting part of our growth algorithm as we think going forward. And then lastly, ServiceMax remains strategically important. We'll talk about what happened this year, but it allows for PLM, again, to have a place by which service data can go back into the PLM system. Again, this reinforcing part of our vision that the product data foundation with the centerpiece being PLM is reinforced with everything that we're doing. Everything I didn't mention, by the way, all the other product categories you've heard for 40 years of PTC or 10 years or before my time are getting the resource allocation differently than the ones I talked about.

I see. So the -- everything is like IoT or other...

You name your word [ soup ] of all the other things, they're important to us. We measure them appropriately. We have different metrics and views of how we manage it. We think about resource allocation all the time on those fronts. But where an incremental dollar comes in is on those areas that I talked about.

So it's interesting to hear you really talk a lot about the kind of the incremental resource allocation, particularly on Windchill, right? I think that's been a product that's been around for a very long time for PTC. But like what are those -- what do those new users look like? Like where is this expanding to? And then is there something you're also seeing on the competitive front where maybe there's an opportunity for you to replace other PLM products?

I will say Windchill has been around for quite some time, as you noted, but the mojo of PLM and the consistency of PTC talking and innovating and releasing really amazing functionality in Windchill, including what we're going to release soon this year around Windchill AI, which is a generative AI solution on top of Windchill. We've accelerated that over the last 18 months. I notably came into this company and made that the centerpiece of how we think about the business going forward because of the strategic importance of that software solution. And so when we think about like the growing utilization of Windchill, a significant portion of our customers use Windchill as just a data repository for these 3D designs, right? So it organizes in a file system, so to speak. It's one capability. It's called PDM, which is not full PLM, and that's been Windchill for 20-plus years. A good portion of our customers have moved and said, you know what, Windchill we could use to now move those designs to a manufacturing engineer or to a supply chain engineer or a quality engineer in a real-time basis to see as the design changes, do I have to change all the other aspects of how to get this manufactured and produced appropriately? And when you get that excitement of Windchill and that use case to be seen as I now can have a faster throughput of a design process to the manufacturing floor using the full set of capabilities of Windchill, that's where we get the expansion of seats. Lastly, the Codebeamer piece is important because a product actually can't get manufactured without the software alignment there, right? And autonomous driving, one of the most prominent autonomous driving companies in the world use Codebeamer for all their release and requirements management, and that needs to get integrated when they actually build the car on a shop floor, right, at the same time. So that's another area of why we get inspired and why we're pushing on the incremental dollar in those 2 product sets.