PTC Inc. (PTC) Earnings Call Transcript & Summary

All right. Thanks, everyone, for joining us. My name is Sterling Auty. I'm Vice Chairman of Software Investment Banking here at Barclays. Really happy to have with us the team from PTC for our next session. We have both Neil Barua, who's Chief Executive Officer; and Rob Dahdah, who's Chief Revenue Officer. Guys, thanks for joining us.

Sure. Great to be here.

Really appreciate it. Maybe for -- the company has been around for a long time, but it's gone through changes. So for those that are a little bit newer to the story, maybe, Neil, can you kick off and just give us an overview of who PTC is and kind of what you're focused on?

Yes. Let me start with the way in which I like to talk about PTC is through the framework of how our -- what our customers do. And really importantly, at PTC, our customers are those that make the products that we all rely upon, whether it be a car, automobile, quantum computer, GPU, medical device, construction equipment. Those are the products they build. And what PTC does for almost all those categories of products, we provide the software that allows these customers to build, maintain, design and service these incredible products that the world relies upon. So that's what we fundamentally do as a business.

Love it. Love it. I'm big on addressing elephants in the room right away. You just announced a CFO transition. Can maybe give a little bit of context around it?

Yes. We announced that Jen DiRico will be joining PTC starting Jan 1 coming up this year. Kristian Talvitie, our CFO, is actually closing out the quarter with all of us and done a great job for the 7 years he's been here. I chose Jen and we're thrilled to bring her on board because as I've now turning into 2 years of being the CEO of PTC, built a really great team. And Rob Dahdah is here on stage with me, but many others on the leadership team that we've kind of put together and started to hit stride. And Jen brings this capability that we felt through a rigorous process in choosing her around how well she can align with the business leaders on all the great stuff that we've been doing with the business over the last couple of years and what we need to do over the next number of years. And that alignment from a great finance person, but in concert with all the amazing things that you'll hear about that Rob's team is doing and others are doing within the business is critical at this juncture of the company. Number two is just the way in which we communicate as team members is really important. I think Jen will be really positive there as well as from an internal perspective and an external perspective. So we're more than thrilled to have Jen join us and thank, obviously, Kristian, for all the foundation laying with him and his team that he's done for us to now take this company to the next level.

Do you feel that's kind of the last piece of the puzzle you've kind of made the changes that are necessary and can move from here?

Yes. I treat myself as the coach of the team, and I feel really good come this January, Jen joining that I'm feeling the best team as they work together to actually execute across this vision. And I feel good about now turning that into it continued building on the momentum that we saw at the tail end of the last year, to really take, again, this company to the next level.

Switching gears, we've seen a lot of change and evolution in your core end markets over the years. How would you kind of characterize where we are in that journey across CAD, PLM, et cetera?

I'll take CAD first off. CAD, for those of you that know most of all the designs of the world in a 3D model for all those products that I talked about happens in almost just a few solutions, one of which the market-leading solution that we have. And most of CAD has been around feature and functionality augments, whether it be model-based design, simulation-driven design and generative design has been like the core thesis of CAD over the last number of years. What's really exciting in CAD is the cloud-based capabilities that we bring to bear across PTC for our CAD tools. We have the only cloud-native CAD tool in the world at scale now called Onshape, which as I mentioned in the last earnings call, we've had the largest deal in the company's history of Onshape. And we see CAD being really important in the migration to the cloud with Onshape leading the charge. And then as we think about AI capabilities, which we'll talk about, how to put that within CAD. A little different for PLM. PLM is not only a movement to the cloud that we're seeing building momentum on, and we feel like that will continue over the next number of years. But PLM has become now seen as an enterprise solution that's necessary for these amazing companies to survive, to actually iterate on products faster with higher quality with greater and lower cost. PLM is now becoming that pivotal nerve center of our customers' solutions to be critical to how they actually interoperate in addition to what happens with cloud with that solution for people that collaborate on a real-time basis.

I think you've talked -- or at least in the market, there's a talk of kind of a PLM renaissance, if you will. It seems to me, especially in the age of AI. We take -- you mentioned kind of the data set that resides there for CAD and what you can do with it, but PLM brings a whole another layer of data capabilities into it to be able to leverage, I would imagine. So how do you kind of characterize, I guess, where we are in the PLM evolution? And is this going to be something that kind of reinvigorates the growth opportunity as you look at your customer set?

Yes. I think PLM is hitting clearly the renaissance that it deserves, and we're leading that charge and making sure everyone knows about the capabilities of PLM. And if you're continuously hearing us as a team talk about the intelligent product life cycle, where we enable our customers to build a strong product daily foundation. Fundamentally, we believe customers that have the best ability to work with their product data in a meaningful manner wins. And we're pivotal to that actually occurring. PLM is, as I mentioned, the nerve center of a product company, right? It is where everything comes together from design to configuration to manufacturability to actually servicing actually happens at a PLM system. And most of the world, which is the amazing opportunity we got ahead of us, doesn't actually have these advanced capabilities yet. We obviously are the market leader in PLM. We have a lot of PLM users that are using across personas. But when we look at a customer, most personas within the product development organization, manufacturing engineering, quality engineering, supply chain engineering have siloed homegrown tools. And that's the opportunity to put something as robust as Windchill, our core PLM system or Arena or other PLM on cloud system to actually put all of that structured data in a contextual way by which customers can supercharge it with technology that we're advancing in with AI.

Are you seeing -- go ahead.

I was just going to say that in addition, so that whole -- everything that Neil just said is now we've gotten together as a company and looked at how we can elevate our message because that PLM value now is expanded beyond just that department. And that is a value to the whole company. And as you heard Neil say earlier, we make -- we -- the best companies in the world are designed and managed on our platform, but they were designed in the engineering department versus the C-suite knowing what value we bring. And now with this advanced capability with the combination of ALM, we have a whole new talk track that we can bring to the C-suite, creates extra value and is a great expansion value for them and for us.

Are you seeing particular industries moving first? So in other words, who are the early movers to really kind of capitalize on that trend?

We had a banner Q4 in terms of demand capture. And we mentioned that on the earnings call. And the flavor of those deals are actually interesting multiproduct adoption within the customer base, but also all different industries. So whether it be med tech, we saw a huge PLM displacement win that we got in Q4 with a large global med tech firm that finally said, we need to have this integrated ServiceMax solution to Windchill to create faster throughput of our product data to engineer things more in a robust manner.

We saw that.

We saw interestingly a Tier 1 automotive supplier, which if you read the headlines, you say, why is a Tier 1 automotive supplier driving this amount of investment to create product data foundation using PTC. The reason is they're also now thinking about how do they remain competitive? And they've understood that the only way you remain competitive is how do you harness the value of your IP, which is product data, and that ultimately comes back to PTC. Industrial manufacturers, same thing, right? They're all progressing and thinking about how do I stay relevant in this world of competitiveness with how the Chinese are manufacturing and developing things with how do we keep up with what if others are using AI to move faster. And that's causing this renaissance that we're talking about and the opportunity that we all are energized by for PTC to serve.

Makes sense. Rob mentioned ALM as well. I mean PTC was an early mover in ALM years ago. Maybe for those that are not as familiar, kind of what is the ALM opportunity? And where are you in the journey?

I'll start. ALM is application life cycle management. So software engineers, which has now become a very prominent part of the companies that build great products because as we all know, software is now becoming a critical component of how we relate to products that are hardware mechanical in nature. And the integration of those 2 are important in terms of speed by which development could actually be manufactured, right? So what our tool Codebeamer is the tool that we have in ALM does is it actually aggregates all the software requirements, test cases, traceability for anything developed in software that needs to be integrated with a mechanical part of a product. It's a huge differentiator for us because the integration of Windchill and Codebeamer is something the market just doesn't have. We're the only ones that do it at that type of scale with that type of capability. And we believe a world that is continuing to add more software emphasis to hardware products to have faster throughput is a fundamental driver of people, as we mentioned on the Q4 call, the largest Codebeamer deal in the history of the company is because of this tailwind that we're seeing with customers needing to adopt these solutions.

So it has its own growth momentum, but it also has some pull-through because in situations where we're in there and there's a different PLM now, they're looking at because of the Codebeamer play, they're looking at what it means to adopt our PLM. And that's been not easy to do, have those replacements. So it's been meaningful for the customer because there's benefits to having that integrated solution and there's obviously benefits to us.

So an example is we just press released Garrett Automotive, which does all the turbochargers of the world is like pretty much what Garrett does. They chose us. They were an Onshape customer. They chose us for Windchill+, our SaaS solution and Codebeamer. And the reason of an incumbent and off of like a very competitive process. And the core differentiator was the integration of Onshape into Windchill, but a major one was they as a customer need to add software capabilities and Codebeamer integrated with Windchill was the core differentiator against every other PLM system regardless of economics, that capability is a very strong impetus for the movement towards us.

So you mentioned that you're the only one in market at that scale, but companies obviously are producing this capability. So if they're not using you, kind of how are they doing it?

It's almost -- it's a bit disconcerning is the answer, which is we're giving these incredible people doing incredible things for these products our families rely upon with really antiquated tools. And an example is Codebeamer. We mentioned our largest deal. Customers are using Excel spreadsheets to do requirements management for software development. Like it's -- by the way, in PLM, manufacturing engineers, quality engineers are using manual processes, paper and pen in some cases to actually think about how do you actually provide feedback loops so that there's traceability of products. And so that's like such a great energy inspiration for the company around let's give them the best tools. And in order to give them the best tools, you have to choose PTC in our humble opinion, and they are doing so.

So let's maybe round out the -- we've hit all the major pillars, except for SLM. Let's talk about something near and dear to your heart. Kind of what's the strategic fit? And where are we in kind of manifesting that opportunity that was seen through the original acquisition?

The vision that we have and everything that we do is centered around how to like execute across that vision faster and better. And the intelligent product life cycle is a core tenet of how do you actually put as much data into this product data foundation to make as rich as possible, contextual as possible for customers to like build products faster, more reliably at a better cost structure. Service data, interestingly, an input into the design process or into the configuration management process is very critical. It's a very rich source of data around what actually happens to the product after it gets manufactured. And so strategically, ServiceMax actually makes the product data foundation even stronger. It's a core differentiator versus our competitors. As we apply then AI, as we apply agents to interrogate this data, we believe it's a huge differentiator for the business. And we're continuing to plot forward around that promise. And ultimately, as Rob said, the work he's been doing around raising the visibility of PTC, telling the C-suite that in order to adopt and get these values, you need to think across systems. Having that viewpoint is very important to accelerate the ServiceMax promise when the company bought the company I was at, to accelerate that, that actually messaging needs to resonate and the product development road map needs to coincide which it is.

Users are happy to hear that the number of times that being out in the field and they're going through a maintenance process going, what were the engineers thinking when they position this, I have to remove this, this and this, just to get access to. So it's great to hear. Maybe along those lines, where are those kind of lighthouse accounts that have kind of deployed across the whole intelligent product life cycle? And is there -- are you at that point? Or is it still a little bit early to be able to point to them to go to your other customers and say, "Hey, here's the real-world benefits that this customer is seeing because of adopting the whole intelligent product life cycle?

Yes. I mean we have multiple accounts in each -- as you know, part of this transformation that occurred in the go-to-market play here was we organized by industry. So we could start to have much stronger use cases and stories around what happens by industry. So in every one, we have a pretty good version of that. But even in the best ones, if you think -- one I want to name, I can't because we just filled in the last gap of it this past quarter, and we're preparing to make an announcement around that, but it's in the med tech space. It's a significant player. Even in the places where they've made that first step and they see the value, they still have some organizational change to go through also. So this is not -- even where the customer, the C-suite sees the value, we've got work to do in terms of the data migration and how we move the teams to even actually begin to interact with the solution. So it's the beginning of the journey for sure, but we have some great initial traction on this. And when you start to layer in more strength in the AI use cases on top of that IPL, I think you're going to start to see bigger and wider announcements from us in some of these real lighthouse accounts.

I want to hit one more topic, and then I want to give the audience an opportunity to ask questions as well. AI, just you sprinkled it in some of your answers already, but maybe put a fine point on articulating where are you deploying AI for not only the internal use case to improve just the way you're running PTC, but also where -- what's the strategy in terms of the deployment and delivery of AI throughout the product set to drive benefits for your customers?

We've been hard at work on this one, and you saw a number of releases earlier this week, we announced that Arena, which is our cloud-based PLM system, very advanced AI capability. ServiceMax has had very advanced AI capabilities. They're really progressed on the agent structure as well within ServiceMax. You're going to see Codebeamer AI, Windchill AI come up here very shortly this year and then a continued release of all the things we're learning around those capabilities. I will say that the cloud -- native cloud products that we have in ServiceMax, Onshape, which is another place where we've released a number of AI embedded capabilities, they're moving at pace, Arena included because you could iterate fast with the release cycles. We're going to do the same with Windchill+ and Codebeamer+ and Creo+, but we see embedded AI as one capability that our customers are like coming at us at a lot of rigor around give us these use cases generating AI. As an example, Codebeamer, where test cases are created. Codebeamer AI will automate those test cases, the requirements, and it's massive value in terms of time loss on actually having those capabilities. So there will be an assist in an advise capability of AI that we're doing in ServiceMax's capabilities. They're autonomizing. They're making autonomous functions of workflows using agents, that will also be the theme that we think about doing as a framework with a semantic layer and ontology layer across the domain expertise we have across CAD, PLM, ALM and SLM.

And just a quick follow-on to that, and then we'll go to the audience. Investors are trying to really get a good understanding as you deploy that AI capability, how much of that is just competitive differentiation to extend the durability of your current growth profile? How much of that maybe changes some of the business model and creates an incremental monetization opportunity with your customers?

We're testing it all out. Right now, our view is, at least for the near term, is this creates a necessary competitive differentiation, right, for our product set. we're testing out utilizations. We're testing out token-based with ServiceMax and others where consumption-based models to think about like what the upside looks like. We believe over time, there will be a hybrid of those. We're all learning, right, and we're staying abreast of it. But the good news about PTC is we are working hand in hand. Our customers are coming to us saying, we've tried all these other solutions. We POC these others, foundational models, others that are trying to use your data or PLM and CAD data, they have not been able to give us good outcomes. And we realize that you have the domain expertise of what happens with 3D geometry in a CAD tool. We want to build it together with you. Same thing with PLM, same thing with ALM. And so we feel compelled about that going forward.

Let me see any questions from the audience? Well, let's talk a little bit about -- it's always been my thought, if we look at the early days, deploying a design tool in the cloud was tough because of latency. My friends that are design engineers, just that fractional delay would drive them nuts. But we've seen performance get better. But more importantly, with the layering on of AI, it would feel like the shift to the cloud might finally see an acceleration of shift as it's the perfect place given where compute is to be able to sit there and say, "Hey, if I can use an AI design tool setting the parameters, et cetera, where I can just set it focus on something, come back, see the results and iterate that way. It seems like it's the perfect setup for it. So it feels like the technology is finally starting to come together to drive that evolution more to the cloud. Are you seeing that in reality yet? And kind of where are we in that journey?

Yes. I mean I think from the perspective of the functionality coming even in the past 12 months coming a long way, I would say definitely, that's happening. The AI play that you mentioned is, of course, very real. We have AI available to all of our customers, whether they're on-prem or in the cloud. But in the cloud, they get faster releases and they get access to it 4 times a year versus once a year. One of the main challenges -- so there is no latency issue, by the way. The main challenge is the customizations that have been built over the many years at the customer on-prem and that they now have to have their own organizational change to bring that in. And in some cases, we can make the customizations part of the standard product because they're good global enhancements. But in some of these larger ones where they have 80 customizations, and we're only willing to put 30 into the product. And they still, by the way, very much want to remove all the customizations because they believe it slows them down, they still have to go through that process. And that's not just, hey, we decided to do it today. They got to get a lot of other people and they have to make sure they don't impact or disrupt their own engineering output process. So the challenge actually isn't the solution itself. And there is definitely a draw around the AI possibilities. What we're working through in addition to continuing to enhance the product and the UI and all the speed and the features is how do we help them come along faster and sort of wean them off of those with organizational change and just understanding what the impacts are when they get to the other side.

So the good news on this to add to Rob's point is that we've always since we started, right? I've always said it's an inevitably we'll get most of this base to the cloud. That's still our point of view. By the way, we invested into that. What we've also been consistent in saying is that these deployments need to start getting easier and in repeat mode, right, so that the market sees this, and we have the confidence and the infrastructure built to actually do that. So we're working through making it easier over the course of this year, next year as we're getting more at-bats, which we have been getting a lot more at-bats. And then adding AI is actually a very nice tailwind to really accelerating that potentially.

I also want to -- Rob, I want to shift and spend a quick minute. About a year ago, I think you went through a little bit more of a kind of go-to-market transformation. Give us an update. Where are you in that journey? Do you feel comfortable with that the changes that have been made have settled in? Are there further tweaks that are necessary?

Yes. Thanks for an opportunity to talk about that. The team did a phenomenal job, I think, starting in January of creating this total shift to industry verticals. And so we went into 5 industry verticals from basically running as a pure horizontal across the industries we serve. And at the same time, we had a territory rebound. So we have some very significant accounts with multiyear relationships. And in some of those cases, we moved those accounts we tried to have as little of that type of disruption as possible, but we had to create more opportunity because it was just an imbalance where you have 20 accounts under one person. There's no way they could service those. I would say the team did a phenomenal job of not only accepting those changes, but really leaning into those changes because we did that over probably a 3-month period, January, February, March. Right when we got everyone kind of settled, okay, here's my accounts. I've reached out. We've had conversations. Liberation day hit right after that. And so it was a significant disruption, call it, in the conversation. It was also an opportunity, and they took full advantage of it. And so the quick answer is I think they handled it very well and they handled it with professionalism and now we're -- we never had instability actually because we delivered all the quarters along the way. And now we're set up very well for this next phase for actual elevated messaging by industry vertical, we can recruit into those verticals, get better talent. The talent that was great can now focus on the things that they're really good at. In addition to that, we put a lot of operational rigor in. We had our first global kickoff in 8 years in October within 2 weeks of ending one of our greatest fiscal bookings quarters that we've had ever. Within 2 weeks, we have had a global kickoff to which we actually invited all of the top partners. We never have done that before. We had 200 partners in the room. And they heard the message clear from us. There was no place that was off limit. They didn't have a separate partner track. They were in the room with us. When by the time all those folks went home, they had their comp plans, they had their territories, they had their incentives lined up for the year within 2 weeks of the best quarter we ever had. So there was -- I feel like they've accepted it well. I feel like we're in a very good position to tackle the new challenges and opportunities of the year versus dealing with the old self-inflicted ones.

That's great. So with that kind of in the rearview mirror, Neil, as CEO, how are you kind of prioritizing your strategic efforts? What are your strategic priorities from here moving forward?

We have a very clear vision. We've clarified the product portfolio. As you know, we've announced a divestiture of capabilities that are much better suited in other folks' hands so that we could 100% align on achieving for our customers an intelligent product life cycle vision. And all the work that we've been doing on go-to-market transformation, product innovation, AI embeddedness, the layer that will have agents interoperate across our core systems, in addition to making sure my team is given all the support as Jen comes into bear to build on the momentum that I could feel and sense with the existing team is going to be critical to our success. So this is a very fundamental year on a lot of tough decisions made over the last 2 years. This is a year of chop and wood. We have our direction. We have our North Star. We have our customers urgently needing us to be the best given the amazing things that are happening in the world right now. And this is the time when PTC is going to rise to the occasion. This is the stage of that journey that we're in.

I love to hear that. How does the macro backdrop play into that?

We have a philosophy as a leadership team is like we can't dictate what's going to happen in the macro. We could just keep doing what we're doing. And I do have a point of view, though, that despite the noise in the macro that this is causing a greater urgency, again, for our end markets who have not digitally transformed to stay relevant to actually think more materially about digitally transforming. And hence, why we feel energized about the opportunity in front of us.

And then how did that kind of build into the guidance that you gave? So wrapping the strategic and the macro, you gave some ranges out there. What was kind of the bottoms-up build there?

Yes. So assuming -- which we are assuming there's going to be a close of this transaction, we've got a 7.5% to 9.5% range on ARR. Let's say at the lower end, I just want to be very respectful of the fact that none of us really predicted anything that happened last year, if that happens again this year, I want to make sure I have an understanding of what that looks like at the lowest end, right, of the guidance. Two is like having a 10-plus year part of the business being divested, has taken a lot of work last year to even get to this point and from now to close to make sure like there's no disruption at all on accounts that we're working on that are commingled here, want to take that account. On the high end, continued, you could see Rob and his team have been hitting stride in Q4. As they continue to hit stride over the course of this year, that plus the macro not getting worse is actually allows us to feel good about as we think about the range of the year. Lastly, the structuring of these deals, right, whether it's a hiring quarter start or ramp deals can swing the numbers here from an in-year perspective. But our main thrust, maybe to summarize is this demand capture that we showed, and it was a really confidence inspiring for all of us at the company quarter, as that continues to formulate with the hard work the go-to-market leadership team has put into place, that's what we're focused in on because that's what the opportunity looks like. And at the same time, keeping the financial discipline that we've had for multiple years that we will continue moving forward and continue this great capital allocation strategy we put into place over the course of last year when I started to this year, and it will continue.

All right. With that, Neil, Rob, thank you so much. Really appreciate it.

Thank you.

Thank you.