PTC Inc. (PTC) Earnings Call Transcript & Summary

We're good. We're on? Okay. I guess it's going well. How about you, Neil?

Good. Long day.

Great to see everybody. Thank you for coming in to see us talk to Neil from PTC. Neil, thank you very much for being here. Many years now at the conference. I always enjoy this conversation. Let's just start out with the very basics for anyone in the room that's newer to the PTC story. What does PTC do for your customers? And what goals you're trying to solve for them?

Sure. Thanks for having us here at the conference. So PTC, global software company. Our software helps companies around the world, product companies, design manufacture, service the products that we rely upon. 5 verticals we're really deep into that we're innovating for and spending our 40 years of history moving forward. First is industrial manufacturers around the world; second, federal aerospace and defense manufacturers, 3 electronics and high-tech companies. our is medical technology companies and last is automotive.

Great. All very understandable physical goods in the world. Let's talk about the intelligent life cycle vision. I know you've been talking more about this. Frame what that is for investors and what you're trying to deliver for customers through this vision.

So this is really capturing a lot of our customers' attention and is the framework by which we've been indicating the momentum that we've been building over the last couple of quarters of demand capture. And what's happening is there's a realization and understanding for our customers and those new that we're acquiring that product data is actually the fundamental most important asset of product companies around the world. And all that product data actually resides and lives and gets breathed into life by software that's provided by a company like BTC. And so what we've been working with our customers on is let's supercharge your business. Let's make sure you are competitive by building with you an intelligent product life cycle. What does that encompass? First off, you need to build a product data foundation. You need a strong, consistent product data foundation built by our core solutions, our core mission-critical systems of record in CAD, PLM, ALM and SLM software solutions. So customers build a product data foundation with these best-in-class capabilities to give you a clear data structure. Then on top of it, we have this incredible technology called AI that needs to be put on top of this product data to supercharge the way in which you could actually understand your most critical asset, product data to actually be competitive. And that builds the intelligent product life cycle and it's capturing a lot of attention and excitement from our customer base and those new that we're acquiring.

That's really great. I'm going to skip ahead a little bit because you brought up AI and data here. Everyone at this conference and for several months now has been talking about AI disruption in software. But you have sort of real data advantage on behalf of your customers with this product data you have. So can you give us a sense how you and PTC view the future world with agents, LLMs and your positioning in that world?

Sure. We're like energized by our positioning with enabling AI to be of advantage to our customers. And we feel very advantaged that we have the secret sauce, the decoder ring to actually train AI to actually have real scalable outcomes for our customers. As an example, the beginning of a product actually happens with the design, right, a 3D model that happens on Creo on chip, which is the flagship CAD models in the business. The AI agents that we're training on that CAD model actually has a lot of complexity because of the 3D geometry and something called a kernel that drives really complex mathematical computations to understand how that 3D model actually persists in a deterministic way to get manufactured. We're highly advantaged. We're the only ones that understand how to and know how to train that CAD data model on that kernel and what happens to make a deterministic outcome of that AI agent. So our customers are coming to us after 18 months of experimentation of other solutions that they were looking at, whether it be their homegrown solutions and saying, we've realized PTC has the ability, has the capability and has the technology to actually build the AI agents with us to build the intelligence on top of this product -- intelligent product life cycle. So we feel really good about that. Lastly, you've seen, hopefully, our customers are giving us really good reviews around a continuous flow of innovation coming out of PTC, organic innovation that has not happened in many years with the transformations we've done, we're putting out AI-enabled solutions within the workflows of our mission-critical systems, the records across ALM, PLM, CAD and SLM.

It's interesting. You're not making widgets. You're making mission-critical automotive, airplanes, medical devices, just some of those verticals you mentioned. It seems like your customers are leaning into AI already and want to take advantage of AI capabilities. Where do you think the mindset is around these mission-critical products and they're willing -- your customers' willingness to adopt AI?

The conversation always includes AI, and our customers are enthused by the progress we've made on real use cases of putting AI within an engineering framework that has really deterministic outcomes. So they're impressed by that. But what's happened is our customers are also the ones that have been around for 10, 50, 200, 500 years of existence. And they realize to make something work, you actually have to put the foundations in place. And that's why the intelligent product life cycle starts with building a product data foundation that's composed of putting modern tools like Windchill, our PLM system, flagship PLM system, into all the seats that actually in a company that develop products. And we're seeing that momentum in addition in parallel to the AI execution, actually caused the momentum that we've been talking about the last couple of quarters.

Very cool. It's a natural good pivot point to actually switch to go-to-market. Last quarter, you talked about turning the corner on your go-to-market transformation. Can you tell us a little bit more what you meant about turning that corner?

Two years ago, when I came in and became the CEO of the company, we prioritized the company back into the core fundamentals of what PTC is based on feedback we got from customers. That then translated into bringing in a whole new team that actually executed very difficult decisions organizationally, messaging, enablement and reconfigured how we interact with our customers in a vertical expertise manner. And in parallel, we also executed and have begun a revitalization of product and innovation at PTC. We brought in a new Chief Product Officer. He redesigned the product and R&D organization. You could see the release cycles now increasing. And when you put that all together, we're seeing that momentum show up in customers understanding clearly what does PTC do. They're looking at us now more strategically versus feature functionality of PLM. But like if we drive this intelligent product life cycle, we get outcomes in these verticals that other companies in the verticals are getting from PTC. So I want to get on this bus pretty quickly, start moving through that. That's showing up now on my energy level here because I'm super enthused about the progress we're making and the tough work we put to get here, but it's shown up in demand capture over the last 2 quarters. Customers are showing up with their checkbook saying, this is starting to work. To be clear, we have still continued work to make this durable, consistent and sustainable. But the difficult decisions we made organizationally, messaging, strategically are starting to now resonate in the marketplace. And that's a good place to be at right...

Absolutely. And I know this demand capture you've talked about, it's impacting ARR, but also deferred ARR. Can you talk us through the dynamic between those 2?

Yes. Deferred ARR is the component of the deal that remains as an obligation of the customer that's committed obligations when actually the technology is implemented, right? And so when we're winning these strategic deals, we're getting larger deferred ARR because when you consolidate a PLM estate, you not only get the homegrown systems that we've got to convert into a Windchill instance in this example, but also our competitive displacements across some divisions that we're using a competitor's PLM solution. That all has rigor towards how that gets implemented. And we have a precise way now with the go-to-market teams far more aligned than they ever were, customer success and the sales team to really implement when the customer needs the solution and do it methodically by which we actually get the activations and the utilization the way we want at our customer sites.

That's great. And you brought up competition. What is the competitive landscape like today? And particularly in your core PLM, CAD areas? What's new with the existing old guard competition that's out there for PTC?

I think putting the flag as the nerve center of the product data foundation being off of a PLM system is advantaging us, meaning this also includes Codebeamer, which is our ALM solution, but the 2 kind of -- they coexist in the product development cycle. that's a best-in-class solution. And it's really good also when it's a best-in-class solution when competitors are trying to force people to migrate onto a platform and you provide them a solution that is so than what they're trying to force the customer into. So like our openness, our approach of being customer first is resonating. And that's why we're seeing competitive displacements in PLM. We're seeing competitive displacements in ALM, and we're continuing on that front. Interestingly, in CAD, we have something called Onshape, which is the most modern CAD tool bar none. And we are seeing significant traction and acceleration of competitive displacements of other CAD tools out there that allows us not only to secure the CAD capabilities, but we're building an Onshape to Windchill connector that will also drive PLM growth. So strategy is starting to resonate, and we feel good about our place right now in the industry.

Very cool. And I got to ask about, I'll call it the ankle biters for lack of a better word, but anything in the AI native PLM CAD world, I don't even know if it's a thing. And you've talked about how long your customers has been around to really needing to trust a brand like PTC. Do you think about AI native start-ups at all? Do you see any out there? Or is it really PTC and some of the other more traditional competitors?

We think about everything that's happening around AI like every other company is doing right now. What we feel is a strong advantage is this customer feedback to us versus our own bias is within PLM or CAD or ALM, this is, again, going back to product data is the IP, is the competitive differentiation for these companies, bar none. That is their most valuable asset. It's sitting on Windchill, right? Us enabling innovation for AI-enabled workflows driven an agent frameworks that are built by PTC, understanding the data models well and delivering to customers for use cases that they need. There's no reason with all the security, governance, access controls that we've already built into our mission-critical system records for them to think about a third party doing this. So we feel really good about our positioning, and we see a lot of people actually energized to join PTC saying, wow, like everyone could do agents, but we don't have a data set that actually we could train these agents on PTC, you have that technology. So we're actually attracting really interesting talent coming in the business.

Very cool. You mentioned earlier, Codebeamer and Windchill. Let's unpack that a little bit more. I think the first time we met, you told me that the most automotive companies have more software engineers on staff than mechanical engineers. Can you talk about the integration between Codebeamer and Windchill and what you're really seeing in the combination of digital and physical product?

Sure. One of the things interesting is automotive in some other industries or some other competitors could be seen as Achilles' heel. For us, what's interesting is our exposure to automotive is through Codebeamer, right? And Codebeamer is an ability for automotive companies to actually be relevant with software-defined vehicles and have actually software be part of the mechanical and electronic components of the car. So Codebeamer is a real strong driver of our growth and is being readily adopted by all of a significant portion of the automotive OEMs, and now it's perking down to the Tier 1, Tier 2 suppliers because of traceability. When we add Windchill to the component, what's occurring, this theme of software-defined everything, software is becoming in every industry becoming a more critical part of the hardware, mechanical part of the product, right? And Codebeamer does an incredible job mapping to the variances that are happening in mechanical and hardware changes to make sure that products are being developed with the same clock speed of software development as it would in the mechanical and hardware side. We're very advantaged there because Codebeamer works in an agile framework versus competitive solutions. And then when you layer upon the strength of configuration of hardware mechanical components in Windchill, it's a home run. You will see increasingly number of releases coming up on continued integration tightness between the 2, and you will see agent frameworks and agent capabilities that will actually map towards these 2 systems actually working more and more closely together. It's what our customers want.

Very cool. Last year, you announced an interesting portfolio rationalization, I'll call it, but divested ThingWorx and Kepware. Can you talk about the rationale behind that to sell those businesses? And maybe frame for us the kind of your view on the portfolio going forward?

Sure. Look, right now, the way we see it, as we've been mentioning, we're building momentum. We feel good about the hard lift and it now showing up. We just got to continue to make that consistent. We like the environment that we're operating, and we like the transformation our customers are looking at us for. We like our AI road map and the real value it's providing to customers. So we feel good about the current portfolio. We are close. I think we denoted that April 1 or earlier, we'll be closing the transaction of ThingWorx and Kepware, and we're on track for that time line. What I'll say is the rationale and the really strong thing that's happening as feedback to us is customers are coming to us in all these conversations saying, this is great. You're talking about the product data foundation, the engineering product data and how we can unleash it across the enterprise, you're building innovation towards that. You're getting deeper into the domain. You're building AI use cases on top of those core systems of records. And you're not taking our eye off the ball and talking about the fragmented factory floor, right, which, by the way, the new owners of the business will have a far greater focus on that. They'll have capabilities on it, and they'll better serve the customers in that area. And we now have freed up our clarity to the customers, clarity internally to go deliver on the promise of the intelligent product life cycle. And that singular focus across that strategy is super helpful to a company that's been around for 40 years that is pushing and accelerating at the pace we are right now.

That's really helpful and really allows you to focus your R&D organization on what really matters for customers and that you can deliver for them. How do you think about future M&A as an enhancement to your own organic development?

We're constantly looking at tuck-in acquisitions. We've done a few since I joined the company and...

Then joined through an acquisition.

I joined through an acquisition that was a little larger of an acquisition, but the ones that we're looking at is more tuck-in related, where Pure Variants was an excellent acquisition where we brought technology that was very unique that actually builds bridges, this Codebeamer to Windchill variant management, an excellent part of the portfolio that accelerated the ability to deliver what we just talked about. We are looking at others that are -- we did IQL, a very smaller company. There are several others that could potentially accelerate it. We're staying disciplined on a few fronts. Number one is it has to be relevant to the strategy that we've got. It can't take us off and go to another shiny toy because there's enough demand right now and enough energy on the current strategy. So that's point one. Two is you can't disrupt the organizational dynamics that we're building. I have a refreshed team where the camaraderie starting to build, the alignment is starting to build, the way we're talking about the business is being consistent. I will not sacrifice that culture changing, adding new people that don't fit in within that framework. But we're looking at it. We constantly are thinking about how do we accelerate the intelligent product life cycle for our customers. But they will be tuck-ins at best.

Okay. Very helpful. And maybe I should have asked first beyond digging into M&A. Let's take a step back, capital allocation as a whole, very cash-generative business today. How should investors think about how management and the Board will view the relative of investing in organic growth, return of capital to shareholders, again, and relative to M&A. I think you've already addressed M&A. But how do you think about broader capital allocation for PTC?

First off, like we've got a new CFO, and she's been doing a bang-up job. The team really is acclimated to her and the organizations really like the refreshed way in which she communicates and interacts with the organization. So I'm pleased. It's still early days, but there's -- the proof points are very positive. And the reason why I bring that up is it's a new set of eyes that's looking at like what's the ROI look like? Like how are we operating? Are we efficient? Are we making the business suffer? And I'll say, in general, Jen and I are at the spot where the framework of 50% of ARR growth will be kind of OpEx related in terms of the increment is a good continued framework as we think about the opportunities as we think about multiyear ARR growth trajectories, et cetera. And one of the reasons why we feel good about that currently is because the new leadership is actually as much as the prior leadership did, we're continuing on this theme of reallocation of like what's the most best use of resource allocation. And Jon Stevenson, our Chief Product Officer, is doing a bang-up job. As an example, spending time on releases that are maintenance releases on a product just because we've done it for the last 20 years, doesn't work anymore, right? And so Jon is bringing a new view of that. He's bringing in tools to accelerate development processes. Rob and CK are doing the same thing. And Jen DiRico is here, and she's looking at G&A to do the same thing. And so we feel good about the current contract. I think it's important to stay disciplined right now. Jen and I shared this, by the way, the entire leadership team, stay disciplined because we see us rising right now and delivering what matters. And if we get too ahead of ourselves, that doesn't result in the right ROI and creates a different culture of the company. And I think by being this discipline has been helping us. Lastly, I'll say on the capital allocation piece, one of the differences that Jen has brought to bear is we're going to get proceeds from this divestiture. And her approach, which she told the Board and first convinced me was like, look, this like the stock price is way too low. Like we're going to be out there and like we're going to use the proceeds, and we're going to do it in a way that's aggressive. And so that will be themes of which we look at. But from a cost structure perspective, we feel good so far. We continue to think about reallocation, and we'll continue to think about what's the best for our customers. But right now, we're good in the framework.

Great. I'm going to hit one question on top line and then one on kind of profitability. But on the top line angle, we've talked about the positioning and how it's resonating with customers. But maybe at even higher level, like how does the macro landscape look for your customers? How is the pipeline trending implementation times? Are things moving faster today? Are things slowed down because of uncertainties out there in the world? And then is there any difference by geo or vertical? I know I just asked 5 questions.

No, it's great questions, and I've been in the field a lot of recent. I was just in Japan last week, and it's a theme that actually -- we operate in the major theaters around the world for 40 years, and we have a lot of depth of capabilities and experience with these customers. We're seeing a few themes that are of tailwinds here. Local for local, right? Reshoring, whether it be here in the United States, but in Japan, they're building up an immense renaissance of the industrial base for a lot of different reasons. And that plays to our strong suit, right? It was a very well-attended kind of week that we spent a lot of time thinking about how do we modernize what has been a pretty legacy stack within the Japanese kind of industrial base using the intelligent product life cycle. And so we feel very advantaged by the local for local kind of what's happened as a result of the geopolitics on helping PTC. Within the European defense space and aerospace, like there's a revitalization of how do we stay competitive and how do we actually fulfill our obligations to NATO, et cetera, that's causing us to have conversation with customers that says, we need to modernize. We need to like get this product data foundation in place and then put AI on top of it. So we're seeing good themes around that. And again, in automotive, we're very singularly focused on software engineering. That's a real good tailwind on continued companies building their inference there. Across geographies, I'd say that North America is an area where we see an immense amount of demand and backlog, predominantly for those that don't know, we are at the epicenter of the build-out of data centers, meaning our customers are, whether it's the Cummins of the world, the JCIs, like you go down the Schneider Electrics of the world. They are very strong PTC customers, Caterpillars. And they're dealing with immense demand, right, in backlog. And we're helping them modernize their infrastructure so they can be nimble, adding intelligence to it. But I'd say that the demand, the uncertainty of the tariff situation is not allowing the customers in North America just to go at the pace the demand is requiring them. So I'm optimistic that as we get more clarity, hopefully, around the tariff situation, it will unlock a next leg for the North American manufacturers. And I'm optimistic calmer minds will prevail and people think about already what has been great things added to the manufacturing within North America, including the OBBB, the tax bill has been a huge benefit to manufacturers, the permitting process. It's all moving in the right manner. We just need the tariff uncertainty kind of put behind us.

Yes. A lot of tailwinds clearly and tariff uncertainty will be one thing to get behind us will be very beneficial, it sounds. I was going to go to the bottom line. You talked a bit about this already, but maybe to ask a very specific question on profitability. How are you using AI? I don't know if you want to give some examples, but AI internally to automate, to create more efficiency for you all. You talked a lot about it from a product strategy for your customers. How are you all using AI tools?

Our engineering group is really accelerating on this. Like it's just really good maturing tools that from a code development perspective and quality is like it's becoming a very important part of how we're talking about the innovation speed. Jon Stevenson likes to say, I've come back here to make sure PTC runs at the speed of a startup. The AI capabilities really allow us to actually leapfrog that versus what's been happening over the last number of decades. So that's a benefit. Customer support, huge value of like we've implemented very strong AI capabilities and customer support. I'd say, generally speaking, across the other functions, sales and marketing, we've implemented, we use it. We're still sorting through the ROI of those capabilities. And then obviously, in G&A, Jen's coming in and just got a bunch of new ideas of how to use AI to make that more of an efficient, effective kind of model. So yes, we're all of the above. But similar to our customers, we're making sure it scales. We're making sure there's ROI, and we're making sure there's real use cases because right now, we're busy. We got customers coming to us wanting us to deliver. I don't want the company distracted with too many test experimentations. but within R&D and product, for sure, this is a good capability right now that's matured that is scaling.

Amazing. Let me pause here. We got 5 minutes to go or so. Any questions in the audience for Neil? Sure. We have a mic hold on one second coming down.

Yes. Just I guess, on the CAD side, you mentioned Onshape, Creo, the kind of transformation towards a more cloud-based product on the Onshape side. Can you just give us a feel on product completeness on Onshape, where does that stand versus on the Creo side? Any kind of feel of adoption rate on Onshape versus Creo, like installed base sizes would be helpful. And also, I guess, the first leg on getting Onshape in the market. You often have to win with the universities, right? You have to get into the students that have to learn the tools. Anything around that would be very interesting.

Sure. Great question. So I would say we're not going to talk about the user base, but I'll say it's one of the fastest growing, if not the fastest-growing products we've got in the company right now. Codebeamer and Onshape are like really on fire. The reason for it is because it's matured enough by which companies like Garmin, companies like Garrett, the sophisticated multiproduct needing collaborative solutions, Onshape team has done a nice job scaling, right? And they've created the right element by which all of Garmin's products are being designed on Onshape as an example, a big statement of strength. Different than Creo, Creo does a remarkable job at large assemblies. So very complex, large heavy industry design. Creo is extremely good at. And Onshape over time could be, but that's not where their focus is. In fact, Onshape's focus right now, we're knocking out of the park on robotics as an example, with Onshape. Most of the physical AI world is being designed on Onshape and several new introductions and announcements are forthcoming in the next number of weeks. we're seeing strength there. So just from a perspective of where the market is, we're seeing that kind of both boats rise from a perspective of different markets, adding AI that's enabled into both of them, which we're spending a lot of time on, and we're seeing good value on it.

I'll come back to the audience, but the Onshape question triggered one for me just on your other Plus offerings, your SaaS initiatives. Can you tell us what you're seeing with Windchill+, Creo+ and the willingness of these more mature, sometimes around 50- or 100-year manufacturing companies willing to adopt the Plus series, your cloud offerings?

So every one of the new deals that we're winning, meaning from a competitive displacement is going on Windchill+. So it's a real strong product capability that's winning against our competitive solutions. Other competitors -- this is Windchill+. We feel very good versus 2 years ago, I think I told the market like, hold on a second, like this will take some time until we get our sea legs. I don't want to put myself ahead in the company saying Windchill+ is where you should spend your time thinking about where the value uplift is. Two years later, we have matured, and we have far more transformations under our belt. We are deep into multiple very complex implementations right now. And we're continuing to invest into Windchill+. So we see real value in the continuation of Windchill+. We also, to be clear, for those new to PTC, continue to see on-premise Windchill expand seats, right? So different than other industries, our industries have not given modern tools to product development teams. we're allowing that to happen. And then we're converting them to SaaS. In some cases, we're converting them early on. So we see that value. In terms of the CAD kind of cloud versus on-prem, for very complex assemblies, Creo on-prem is completely the right approach. And our AI actually strategy has been building plug-in technology that works on-premise as well as SaaS. So we have an advantage of like AI helping both sides of the customer. And then we've got the best cloud, most modern CAD platform in the world that this gentleman asked about in Onshape. So we've got 2 vectors that customers can choose from. Lastly, Onshape, different than prior regimes is actually create integration points of Windchill, right? It's a big change. It was a religious change within PTC. And the new team said, we're going to do right for the customers. That's going to unlock a lot more value also from Onshape, downstream into PLM, ALM over time. You saw that with the Garrett, the customer win that we talked about. That is fundamental to like how we displace a major competitor there with that strategy. And we'll continue to do that.

Absolutely. Time for one more from the audience. Do we have one more question for Neil? We crushed it all. a general one, you kind of, I don't know, I'm just going to summarize everything we've talked about, a lot to be excited about. What are the 2 to 3 most exciting things for you as CEO? No target this year, next year? What are you really pumped about with PTC?

We've been putting in the hard work. This has not been an easy couple of years since I took over the role. But doing the right things and making the tough calls on people, strategy, the focus on the customer, revitalizing the culture towards these things. I think that -- and as we're developing our AI capabilities on the intelligence of the product life cycle, it just feels good to have put the hard work and starting to see the momentum build. And when you see the organizations across the world speaking the same way and customers repeating back what we've told them, things are starting to click. And we've said that happened in the last few quarters, work cut out for us. We still have a lot of work ahead of us. But I'm a big student of when shifts happened in momentum from an organization standpoint, and I could see it happening. And that just gives me pure joy and inspiration to push even harder right now because, one, our customer base needs it and the people at PTC and the generations before that gave us this opportunity deserve for this company to be the preeminent enterprise software company in the world. I strongly believe that we have that place to be that company. So those are the 2 things that keeps us going.

Amazing. I want to thank Neil for being here. It's always one of my most fun interviews. I always enjoy having you on stage. Thank you, Neil.

Thanks. Appreciate you having us.

And good stuff for PTC.

Thank you. Thank you, everybody.