PTC Inc. ($PTC)

Great. Hello, everyone. Welcome to JPMorgan [indiscernible] TMC Conference. My name is Alexei Gogolev, Head of Vertical SaaS team here at JPMorgan. And today, I'm delighted to be hosting PTC management. We've got Neil Barua, company CEO; and Jen DiRico, CFO of PTC; and Neil [indiscernible] intelligence in the product life cycle and state.

When you describe the intelligent product life cycle, what does the target enterprise architecture look like in practice? And what are the most common customer missteps on that journey?

Sure. Thanks for having us. Maybe taking a step back around what PTC does in relation to the intelligent product life cycle. The companies we serve, our customers, they build the most amazing products in the world. Our solutions, our software solutions are fundamental to the entire product life cycle of those products, whether it be design, engineer, configure, make and service those products. And so we sell and have a set of solutions across CAD, PLM, ALM and SLM solutions to fulfill our customers' desire to really speed up and make their product life cycle effective so they can build and have great products that we all consume out in the world. The intelligent product life cycle is around making sure our customers actually adopt these technologies so that they could implement a way in which their products can be delivered in a higher quality in a faster manner to their customers. What does that mean? They deploy our CAD solutions, they deploy our PLM solutions, ALM solutions, SLM solutions by which all the engineering and product engineering workflows are as seamless as possible by which they could actually put intelligence on top of it. And so when we talk about intelligence, one of the themes we're seeing is this product data foundation encompass across all these product categories, need to be put into the framework that we have at PTC in order for intelligence and AI to actually work at scale. And that's fundamentally what the intelligent product life cycle vision is intending for our customers to adopt. You asked a question of where they are in this adoption, our end markets have not modernized their product data foundation as much as other end markets. And so AI is inspiring them even more so now to actually deploy Windchill across their entire engineering base that needs a PLM system like Windchill as an example, by which then they can apply AI. So they're in that journey where they're fundamentally to help them with the best-in-class solutions to put together that product data foundation by which it's the only way by which AI will actually work at scale for our customers.

That makes a lot of sense. And so you talked about data foundation as AI prerequisite. So what are the most useful metrics you used to show a customer that their product data foundation is improving? And also, how do those metrics translate into purchase decisions?

Yes. So our customers are dealing with a lot of complexity, for example, in the electronics and high-tech sector, where our customers who are the component and manufacturers of all the things that are being put into a data center, we actually enable all of that product engineering to be put onto our product data foundation. So our customers are dealing with, how do you accelerate a component, a cooling system to be placed into a data center. And their #1 issue is they can't actually get through their backlog. They can't deliver faster. They can't innovate fast enough. And so what we're seeing from our customers is how do you speed up with this product data foundation from design to actually build to maintain the speed by which they can deliver these products to the world that is urgently meeting this build-out that we're seeing within -- in particular, the data center build-out. The metrics that they look at is speed to market, quality, defects in order to make sure that this happens as fast as possible. And those are the components by which when they measure AI productivity, when they measure PLM adoption, they are the things that they're looking at is how can I speed up my delivery to my customer base because every segment that we serve across geographies is dealing with this strain of delivering faster with higher quality. One last point is not only electronics and high tech that are fundamental to the data center transition and delivery, but another example is federal aerospace and defense. we're very strong for the last number of decades at PTC of providing modern solutions to that segment. And that's an area that across federal, aerospace and defense, whether we're putting things up in space or we're dealing with geopolitical elements that require countries to protect themselves, they're actually using modern technologies like our product data foundation to speed up their ability to do things for their customers and their citizens across the world. So those are the themes that we're seeing that's causing customers to come to us to say, please build a product data foundation with you. And then we're showing them the AI embedded releases that allow them to elevate that intelligence on top of that data foundation.

Yes. That makes sense. So what are a few internal KPIs you view as the most reliable indicators that the transformation that management has been conducting is durable? And where are remaining gaps?

Let me start on the front end and then Jen, our CFO, can give some indication of some of the things we're looking at from a numerical perspective. But -- taking a step back from the 2 years I became CEO to now, a lot of hard work of the teams. We've undertaken a refocus of the company and a focus on the core priorities that are now the buildup of the product data foundation. So the things that customers really value to build this product data foundation to put intelligence on it, we really focused the company on that 2 years ago. That was underpinned by making sure the go-to-market engine can adequately do this in a way that actually creates the durable, sustainable reacceleration of growth, which has been our North Star. That also was augmented by product innovation and product transformation, where we are now releasing at a much faster cadence than we ever have as a company since the beginning of Windchill as an example. That is also relating to this year, us putting out -- you'll hear the announcement in a few weeks at PTC Next, our first product release kind of conference that we have in Chicago, our first organically built product that we've had at PTC in decades, right? And there's another 1 right behind it the next quarter. And so that product innovation has been there. You've also seen us get focused on our portfolio by divesting of assets that were not affecting the intelligent product life cycle. So all that work is now showing up in what Jen will talk about the metrics that we look at. So a lot of heavy lift. I'm proud of the team's progress so far. And that's why we're getting confident about what's happening at PTC currently.

So from a metrics perspective, a couple of things we look at is just the leading indicators around close rates, stronger pipeline we've talked about. Even this past quarter, I shared that the pipeline is made up of more strategic, larger deals than ever before. We also take a look at -- we've hired some new reps in the last 12 months and how they're performing versus prior cohorts. And what we're seeing is they're more productive than previous cohorts, which shows that we're doing a good job in terms of hiring the right people and enablement. And then we're seeing strong renewal rates as well. All that, in addition to -- we've talked a lot about deferred ARR and why that matters in terms of providing additional visibility for us as it relates to contracting with customers over the long term and making sure that we're doing the best things for both PTC and the customer as it relates to extending the lifetime value of a customer.

And I do have a question about deferred ARR. But before we go into that, why do you think our ramp deals and longer term more common now? And what are the implications for ARR linearity?

Can I take the front end Jen, you could add. One of the things to create sustainable, durable reacceleration of growth is running the business to do that. And that doesn't come from doing deals to just maximize a quarter. It comes from maximizing, as Jen mentioned, the long-term value of the customer. And the discipline that the new team has put in with the focus that we have is around capturing as much of the customer opportunity as possible regardless of the time line when that's coming to hitting our ARR. It's contracted, so it's not a wishful thinking. It's things that are appropriate for the customer based on their implementation cycle. It also is very relevant when we're displacing competitors, displacing homegrown tools because there is more deployment energy that's needed in a time line to put in place this mission-critical system of record and action that we're putting into place. And so we'd rather and what we're doing in these strategic deals is make sure we capture the entirety of the customer opportunity, work with them on a multiyear journey to build and have their users adopt our solutions versus doing deals just to maximize a quarter because we want to build this durable reacceleration in growth for multiple years, not just 1 year. And that's the framework by which culturally and all the metrics that we're putting underneath the go-to-market team is enabling for these deals to actually come to bear.

Yes.

And then in terms of ARR linearity and any additional thoughts on what are the implications from these deal structures and ramps?

Yes, sure. So in terms of -- first, it gives us a lot more visibility, right? And what we're saying historically, what we saw was we were actually, in some instances, sacrificing price to be able to get the ARR upfront. And what this does is actually give us much more visibility. It allows the customer to ramp into the deal to truly use the licenses and not have any shelf ware. And so that gives us a lot more predictability over the long run, right? It's a better overall economics for PTC and also the customer can -- like Neil said, it's very thoughtful and planned and -- but also at the same time, contractually obligated, right? And so ultimately, that's kind of, I think, the benefit of the deferred ARR while also really making sure that we're continuing to accelerate our demand capture and work with the customers for the long term.

Okay. And in terms of deferred, Jen, so what are the operational mechanisms that reduce slippage risk on deferred ARR? And where can timing still move even when contractually committed?

So these are all very -- all contractually committed, as you've said. And so at this point, we have no plans to renegotiate these contracts. It's one of the reasons we take a long time with the customer, both on our end and theirs to make sure that they feel like they can absorb these licenses in the right period of time, but there's no plans to renegotiate or anything like that at this point.

And one other piece that's important is when we did the go-to-market transformation, we align the customer success team, the implementation team with the sellers in the field. That didn't happen before the go-to-market transformation. So there was a dislocation from the seller to actually what the implementation look like. They're now combined and they have the same accountabilities. So that was step number one. Number 2 was because of our refocus back into our core priorities, the core platforms and CAD, PLM, ALM and SLM, we invested into those platforms versus getting enamored with another acquisition. And what that meant for our customers was there was better feature upgrades, there was more stability in the platforms by which when they went to implementation, they didn't have to wait for -- you didn't deliver on the release, so now we can't implement. So we've gotten better across the board across all the transformation we've done to ensure that we don't need to renegotiate these deals.

Okay. And Jen, you also talked about Q4 step-up expectation. As you guide to the step up in new -- net new ARR, what are the 2 most important drivers? Maybe things like conversion of deferred ARR versus incremental demand capture?

Sure. So when we think about Q4, right, one of the things I said was based on the deferred ARR we have in Q4 compared to -- and then if you look at our performance in Q4 of '25, if the team performs exactly the same way, there is -- we have the ability to -- it's not really as much of a step-up as before, right? If you look at the H2 of '25 versus H2 of '26, the incremental is about $7 million, and I've already shared in the last quarter around the impact of deferred ARR being 3x more than what we saw before. And so the reason I shared that was to give confidence that while it looks like there's a big step up in Q4, we have visibility where we didn't have it last quarter -- in Q4 of '25.

Okay. That makes sense. Neil, so you've called out larger cross-product strategic deals what has to be true in field execution and enablement to make that deal profile much more repeatable going forward.

Yes. So part of the go-to-market transformation was around reorienting our go-to-market teams around verticals. And that has been a huge benefit to our cross product conversations because our conversations now in any of the verticals that we're in is not about buy a PLM system, buy code beamer. It is about how do you transform your business, how do you actually accelerate time to market, how do you improve quality of our products. When we capture that intention -- by the way, also how do you leverage AI? And when our customers ask us, well, how do we do that? We refer them to customer that is doing that within that vertical that has been using PTC and is evolving faster than a competitor. That then relates back into, well, how do I actually enact that similar to a competitor of mine or someone that I look up to in the industry. And that gets into, well, to do that, you need Windchill deployed. By the way, you should add code beamer because you want mechanical and software configuration management done together and it creates an energy around you need to do more with PTC and you can do more with PTC because others in your verticals are doing that, and they're seeing the benefit. And they're speaking prominently at our executive exchanges, our customer advisory Boards with none of which existed by the way, 18 months ago, to incite people to say this is how you should move forward to your business as well. So that's helping a lot in terms of the enablement and the communication, the visibility to our customer base.

Okay. So you talked a lot about the system of record connectivity. So as you deepen connectivity between the great products, you talked about Creo, Windchill, Code Beamer, Onshape, what are the next integrations that matter most to unlock some tangible customer outcomes?

So taking a step back, those integrations are fundamental to what customers want right now and for the next few years. Just for those that don't follow the industry, those connections across those systems and our competitors aren't that good. And so our view is that by doing it better, where a CAD model can move into PLM to a software engineer and configuration management, those are areas that have looked good on PowerPoint slides for 10, 15 years. But when you talk to our customers, hasn't worked as well as what they wanted. So we put the investment back into that. You saw an announcement that we made about Onshape to Windchill connector. Customers have been asking that for 2 to 3 years. We actually made it happen now with the new team, and we've gotten beta, and we're delivering in GA this summer. Those are fundamental to the customer on having that modern product data foundation. Our mid-term to long-term point of view is the intelligence layer that we're building by which the agents of our AI-enabled workflows actually can interact with each other is actually the next step of how engineering data and workflows get integrated and dispersed across the enterprise. And we're super enthused about how that looks like over the mid- to long term.

Perfect. Neil, I wanted to ask about the other 2 products, Windchill Plus and Creo Plus. So what are the most common triggers that drive a customer to choose those 2 versus remaining on-prem? And what's the biggest remaining adoption blocker?

Sure. So one of the things we've said for the last couple of years when we did a bit of a step back around expectation on Windchill Plus adoption, which is playing out extremely well that we did that is that customers that are adopting Windchill Plus are actually experiencing it better in terms of the implementation process when they get to the endpoint and deploy it and talk to their users, it's a better environment by which they're running their product data through that system. . That's happened and is happening. And we're very successful right now in terms of Windchill plus deployments. It's getting better. We put some investment to [indiscernible] what it needs to be. We continue to invest in it. Our pipeline is growing. So we see active acceleration of Windchill Plus. What causes the customer to deploy that solution is, number one, who else is doing it. So that referencing is important. So it's a snowball effect from just a credibility standpoint. Two is, if a customer has migrated their SAP to S/4HANA and then finished the ERP implementation to the cloud, most likely they come back and talk about PLM in the cloud, which is Windchill. And so one factor we watch, which several companies have had a long implementation process with SAP, but many of them are getting to the end stages of the S/4HANA upgrade. That creates an impetus also for Windchill plus to be considered and to be deployed to make their full stack modern on a SaaS platform. Those are the 2 that are happening that we're seeing the excitement around Windchill Plus now.

Okay. Maybe this is a question for Jen. So on a typical on-prem to SaaS uplift, how much is true value or usage expansion versus packaging and pricing? And what are you doing to ensure uplift remains durable?

Sure. So if I take a step back, one of the reasons customers are looking to go to a Windchill Plus or conversion is to get the benefits of SaaS, right? And we all know what those are. But in the realm of modernizing your product data foundation, being able to take advantage of AI, there the conversation is really starting to shift. Now I think we are -- like Neil said, we're meeting the customer where they are. We're not forcing the conversions, but it's certainly something that we're hearing more and more in our customer conversations. Very tactically, from an uplift perspective, we see around 2% or so -- [ 2% to 2.5% ] of overall pricing uplift. But for us, it's about making sure that the customer can take advantage of the full AI capabilities beyond the same instance overall. Would you add anything?

I'd just say that the philosophy that we have at PTC is clearly, there's ways in which you could force a customer to do anything and feel good about it for a short period of time. We're here because we've been around for 40 years, and we want to be around for another 100 years. And by doing things that are right for the customer and showing them the value relates to why they won't renegotiate, why it's actually going to get adopted, why they expand, why they use more out of us. And that's our approach with SaaS currently.

Okay. And Neil, as you build common AI infrastructure, so agents can operate across product data and workflows, what are the hardest technical problems? And what is the phased road map to make this real?

Yes. This is almost ubiquitous across our end markets, which is the most exciting part of the next number of years ahead, which is we are fundamentally such strong believers of AI being something that really accelerates our customers' workflows. That said, we have to make sure the contextual data is organized well, which, in most cases, is not on this mission-critical engineering data, the context of the data to train an AI agent and the outcomes of those AI agents need to be perfect. They can't be what it is for a salesperson or a finance person where it's like, hey, this is pretty good. It has to be perfect in the engineering world. And so all that work, the training on 3D models, the understanding of our parametric models, the design intent, the configuration models, the governance, the security, the identity access and all the interactions across that engineering data across the enterprise needs to be understood first and foremost, by the AI agent trained appropriately with that deep domain expertise before it could actually do something at scale. So the big thing that we're seeing from our customers, again, the reason for our -- in the last 90 days, inflection also of our confidence level, not only because of the internal work we've done to be ready for this moment, but the moment is here where there's a realization after all these science projects of AI, where we need to make it work and they're coming back to trusted partners that actually fundamentally understand how the software in their core systems actually interoperate by which we could create AI agents that are the most productive and also efficient from a cost structure standpoint. And so all those frameworks need to be put in place. Before AI agents are ubiquitously transform a company. And the good news is our end markets are very thoughtful customers. They're not fly by the seat of their pants and they will be methodical about their deployment of this. And that's the reason why they've been around for 100, 200, 300 years. And our goal is to make sure that they're here for another 40 years.

How about -- how are you thinking about packaging AI capabilities inside each system of record? And also what milestones would indicate AI is moving from feature to actually material revenue driver?

Yes. So taking a step back, I want to make sure we continue to portray that AI is exposing to our customers the necessity to modernize their product data foundation, whether it's to simplify their tech stack by moving to Windchill Plus, consolidating their instances in ALM to Code Beamer, all those things are fundamental to be clear, on the impetus of AI. What's really good is we've been doubling our release rate of AI embedded workflows into our core system record, which are productivity step changes in Windchill, AI users -- Windchill users or Creo users or Onshape users as an example or ServiceMax, those are illuminating to our customers the power of what AI could do in a POC level to get to scale implementation and outputs that our customers want, they then realize they need to modernize their product data foundation. So it's a flywheel that's caused by our AI releases, they see the value of what can happen when you train a model on our data on their stack and it causes them to get their house in order to make sure that they could scale it. So that -- that's the theme we're seeing. You're going to continue to see there's a really strong Creo AI release coming out next week. There's another one coming out in October. There's a number of them that are coming off of the other core systems and we're showing an illuminating to the world, all the things you could do with this incredible technology that, quite frankly, we have the unfair advantage of training the AI agents because we understand fundamentally how our products are built and how to train those models.

And then I can add on the pricing side. Yes, on the pricing side of things, we -- from a AI automation -- excuse me, assistance, rather. So we have some products that are built into the price. And then there are some products that we're saying, it's a seat-based plus usage. A good example of that is Windchill Plus -- or Windchill parts rationalization, right? And so we are meeting the customer they are, but there is -- we know that over the course of the time, there's going to be certain features that are just need to be baked into the functionality and some that we can go and charge more on usage, et cetera. And so I would say customers are receiving that well for us, and we're going to continue to meet them we're there.

Okay. Neil, as partner involvement expands, how do you maintain clean customer accountability, especially on the multiproduct life cycle transformations?

Sorry?

On the partner involvement, as it expands how do you maintain clean customer accountability?

Yes. We've -- Rob and I and [indiscernible] have been fundamentally always focused in on get your your house in order. Before you interact with other partners, we have to make sure our structure, our processes, our diligence, our accountabilities and the metrics we look at are adequately done in a way that we operate our business well because partners are just extension of all the hard work we're doing and some partners have been moving at the same pace as what our transformation looks like internally. But we have a lot of opportunity to get them in the same framework and the mindset, the messaging, the ability to go win new business like we've started to do in the same manner that we're directing our direct teams to do. But that only comes from the right set of data and metrics that we look at internally, which Rob, CK and now Jen and her team have been markedly improving so that we know how to run our business better and now we could align our partners in a much clearer fashion, understand the ROI, understand the economics beyond it, understand who's actually productive. -- just the same way we look at our internal go-to-market functions.

Okay. Makes sense. And Jen, you also talked a lot about operating model post some of those divestitures that the company recently done. So beyond focus, what changes operationally now that you have those 2 assets divested and what would minimal disruption look like during the transition period. I'm talking about go-to-market emphasis or maybe some investment priorities?

Sure. So I've been very impressed with the entire PTC operating team. This was a very complicated divestiture, and we've really seen very minimal disruption in our results, right? Of course, these are challenging operational complexities. But ultimately, we've been very proud of the results we've been able to maintain. As we think about overall capital allocation in terms of internally, this is a great example of being our ability to stay continually focused on delivering the intelligent product life cycle. You've seen the increased amount of releases from an AI perspective. So for me, it's about making sure that we're allocating our capital towards the highest and best uses, all the innovation that you've seen over the last year and as well what we're going to be launching at PTC Next in a couple of weeks is really a testament to that. And PTC has done a very good job over the course of the last long time, just continuing to be efficient but also reallocate capital where it makes sense. And the divestiture is just one of those examples of us being even more focused to be able to deliver on our vision.

What -- just to add to it because I'm very proud of the team around this and our advisers, all of our advisers said, this is the most complex divestiture that they've been involved in. And for 9 months, we spent blood, sweat and tears making sure that, that happened, right? And so that's behind us now. that 9 months of consumption, so much time and effort now unleashed on delivering on the intelligent product life cycle vision is also another step change of why we have the confidence on building on the momentum that we're already seeing despite that distraction for 9 months.

So divestiture now complete, you've defined TSA period. You have somewhat higher cash taxes coming next year. But how do you think about balancing buybacks some tuck-in M&As, maybe some incremental R&D investments? And what are the key guardrails you apply to those decisions?

Sure. First of all, our capital allocation philosophy hinges on kind of 3 pillars: organic investment back into the business, inorganic through M&A and share buybacks. And we evaluate all of those with the same type of hurdle rate. Right now, as you've heard me say on the call just a couple of weeks ago, we believe share buybacks given where the stock is right now and our conviction and our long-term ability to add value is the right place for us to spend our capital. But it doesn't preclude us from M&A. We're still continuing to invest in the business to ensure that we're not stifling innovation, right? And I think it's a very balanced approach, but I'd go back to, we believe in the long-term value of this company and where the stock price is, we believe share buybacks continue to be a very great return for us.

Okay. Perfect. Neil, maybe in the last minute or so, anything you want to leave investors with coming out of this meeting and the stay of meetings that you've had -- like anything that you feel investors should think about when they consider PTC?

Yes. First of all, I appreciate all the interest in PTC. This is a seminal time for PTC because the hard work and the patience all of you have had around can the company reaccelerate growth. We put in the blood, sweat and tears to get to this point. And we've got the internal foundation by which we are starting to see that inflection occur. We are also aided by the customer environment by which they're also needing to change and transform in a very different dynamic than even I saw a year ago. So those 2 things together, the proof will be in the results, but we feel confident on the hard work resulting in our North Star reacceleration of growth and durable sustainable acceleration continuing on by building a great business in partnership with our customers in the most seminal time that our industries have faced. And we're going to rise to the occasion. We have been, and it's a great time to look at PTC, and thank you for everyone's support on it.

Thank you very much, Neil. Thank you, Jen. Appreciate you being here.

Thank you.