PTC Inc. (PTC) Earnings Call Transcript & Summary

Yes. Yes. And I guess going back to maybe some of the internal stuff you're doing with AI, like what are some of the big tools that you're using within the product and engineering organization and like are there specific processes that maybe you could talk about that have seen the biggest ROI or productivity gains?

Yes. I mean, I guess, the measurements have been vague to be used [indiscernible] just so far. But you see very, very interesting things happening. So at PTC, the way things work from a product manager, a product manager is market-facing and then we have something called the technical product manager. Converts that into things that R&D folks can work on. Now all of a sudden, because the product manager can use Claude to do [ infertotype ], a lot of those things streamline the communication with the developers and starts to make us think like, oh, okay, can we now collapse that role into a single role and take a bunch of time out of the process. And it seems like that's happening right now in pockets, and I talked about that before as trying to, let's say, institutionalize that or make it more of a durable process. That's happening -- a lot is happening on cogeneration and code, let's say, quality assurance. The other thing that we're seeing a huge impact is response to customer issues. When we get into really, really complicated customer issues and really sophisticated IT environments, we now can solve something in technical support that will take hours versus what sometimes we take a month to troubleshoot. So we're seeing improvements all along the life cycle. And right now, we're seeing everything through these keyholes. And what we're trying to do is, let's say, make it uniform across the process to get, let's say, rising tide to life all boats.

Right, right. I wanted to ask you, as we've just seen a lot of lines over the last week with some of the frontier models -- Astra release some other kind of AI-focused CAD models coming out in the market. How would you sort of characterize what is coming -- what's been released, what is coming and -- is this an opportunity? Or is there an opportunity to partner with them? Or how would you just sort of distinguish what the Frontier is building that some investors are viewing kind of encroaching on your space versus kind of the reality of when you're speaking to customers?

Sure. I mean from our perspective, we're excited about the developments of large language models and CAD. Fundamentally, if you think about just the mathematics of CAD, it's like deterministic and it's complicated to, let's say, resolve mathematics on edges and surfaces and things like that. Those are all, let's say, mathematics. And we don't think that training on large amounts of data of CAD models is going to work. What we do think is that what LLM are really good at is generating code. And what we can do is we can use code to generate CAD models. And so rather than text to CAD, and I'll tell you some other reasons why I think that won't work, we're saying text to code to CAD. And if you can go to next and you can see a presentation by the Onshape folks about feature script and doing designs in Onshape with that same motion, code to text to CAD. So the code creates, let's say, API calls that uses normal end-user motions to create a CAD model, which will let you automatically produce a CAD model, but it also will produce a CAD model that an end user can adjust. We also think that there's a lot more to CAD than just getting a shape as quickly as possible. You also have to consider what we're building it for our own factories. We're building it because we want to incorporate these suppliers. And so for us, we think the future of text to CAD isn't text to CAD. We think it's text to code to CAD. And I think for the CAD industry, not just PTC, it creates an opportunity because why would anybody want to try to recreate the complicated mathematics that the leaders in CAD have figured out over the last 40 years rather than just figuring out how to leverage it and drive those models. Furthermore, on our internal research, doing engineering isn't just CAD, doing engineering is engineering. And so you need to do all other kinds of things like understand the environment that it's going to be in, understand the reliability requirements, manufacturability, et cetera, et cetera. We think large language models can help with that as well. Our research is proving that out. But what it also does is produce a lot of other data that you'll need for compliance, regulatory explainability reasons of why you came up with the design. So we think that text to code to CAD also creates a data management opportunity for things like ALM and PLM.

Yes. No, that's an interesting way of framing it. As we think about some of the core products, maybe stepping back from the AI conversation for a moment, as we look at your CAD and PLM franchises. They've obviously been dominant franchises out there in the tenure that you've been at PTC. I think you guys have, at least based on my remembrance over the last few years, have called out kind of more competitive wins and replacements. And I know some of your competitors in that space have struggled maybe distracted with other M&A. Can you just frame for us how you see the market share, competitive dynamics within CAD and PLM and does a CAD or PLM migration, does that happen a little faster now because of some of these AI tools that can assist with that migration?

Yes. I mean -- so yes, we haven't first to answer the last part of it. We haven't seen AI magically help convert CAD from CATIA to Creo or vice versa, we haven't seen that. Although if that did happen, it would fundamentally change the market, I think. But from our perspective, we have 2 CAD systems. We have Creo and we have Onshape and our goal there is to take a disproportionate of shifting seats there. Folks who are coming off CATIA are coming off of SolidWorks, which seem to be the most vulnerable. So to win a disproportionate amount of those -- of course, Onshape is a displacement business 100% practically. So that's -- and we're after that. And we have some success both with CAD and with Creo there. On the PLM side, displacements do happen. And it's when companies are reevaluating their PLM choice, either by [indiscernible] their first PLM system in the early 2000s, and they realize like, okay, the system itself is antiquated or their implementation is flawed? And they want to build this digital foundation and they decide, okay, we're going to go out for bid. I mean, we want a deal at a large medical device manufacturer a couple of quarters ago that went through that. And we're seeing the rumblings of this happening as people evaluate their digital transformation. And some of it actually comes on the heels of the SAP/4 HANA migration that when they're looking at that, looking at consolidating, let's say, all of their ERPs down from multiple ERPs to 1, they're starting to say, okay, well, another big part of our data estate here is PLM [indiscernible] on, and we'd like to consolidate that down to one. And so we're seeing some real opportunity there. That's from the displacement standpoint. For PLM, anyway, the biggest part of the growth opportunity is expansion actually.

Yes. And then you touched on ALM a little bit, but I would love to ask you about Codebeamer, which I think has been one of the stronger growth areas and particularly in the automotive space and it's clearly getting a modern vehicle today, the complexity of the electronics software is orders of magnitude larger than just a few years ago. So -- how do you -- how would you kind of characterize where we are in the Codebeamer adoption cycle? How -- what does your share look like internationally versus the U.S.?

The biggest share we have in Codebeamer in Europe and mainly because that's where they were founded. And we have good presence in automotive because that's what they're focused on. And so we're at BMW and VW and TMC and Mazda and we're also in Tier 1 suppliers like Schaeffler and ZF, et cetera. So in automotive, we're going to continue to go there and one of the interesting things is, we're winning with Codebeamer in places that PTC has never been before. So Renault cars, for example, is a co-beamer. Mazda is a Codebeamer customer, not really a customer of any other. So there's opportunity to cross-sell the rest of PTC in there. So automotive is still an expansion opportunity for us. The automotive supply chain is still an expansion opportunity for us. The next industries that we seem to have some traction are is in safety and compliance critical industries because of the strong traceability in Codebeamer. So think medical device, FA&D, anything that rolls. And so those are good opportunities for us. Of course, there's a big opportunity here in the U.S. with cross-sell into the Windchill base of Codebeamer and so I would say the first tranche of Codebeamer was to go into the customers that Codebeamer had landed and expanded. That's what we said at BMW. The second one was to try to win new automotive customers in places where we can like in Japan. And now the big thing is cross-sell into the Windchill base with this idea of we call integrated product engineering, so connected requirements management with PLM.

I see. Okay. And then maybe touching on ServiceMax, I think that business has faced some challenges with some elevated churn maybe seems to be turning the quarter a little bit. What -- I guess, what -- what were some of the challenges you've seen with [indiscernible] and like what's kind of the biggest opportunities going forward?

Yes. I think -- so I'll start with the challenges that we have for and maybe you can talk about the opportunities. I think some of the challenges that we saw in that business was -- as we've discussed before, we did some -- we did have elevated churn over kind of a 2-year period as some of the contracts that came up for renewal ultimately needed to be downsized in terms of seat counts and things like that. And we kind of -- we have been going through this go-to-market transformation for the last 2 years with our customers on really meeting the customers where they are and really trying to listen and understand to what their needs are across our product portfolio. And part of that did, in turn, come from some churn upon renewal. We do feel like we are through the bulk of that and the vast majority of that kind of elevated churn. We do anticipate ServiceMax to still be dilutive to growth. But we're excited about some of the opportunities with ServiceMax, AI and others, and then you can kind of talk about those opportunities there.

Yes. I mean, I think ServiceMax AI in the installed base is a really good opportunity. The team is really accelerating road map there. And then we just have to figure out the cross-sell into the Windchill base. really. That's the thing that we haven't yet quite figured out in this idea of Orbit and has maintained bill of materials is it attracting to our customers.

Yes. Okay. That makes sense. As you think about just kind of the dynamics. Maybe this is a question for Mike, but on the way that you're approaching customers from a contracting perspective, right, there were some changes with this move to CPP and new sales leadership, I've seen new leadership with the company CEO and CFO over the last few years. I guess there's maybe 2 questions. Like one, can you just unpack the financial implications of that move to CPP, how investors should be thinking about that layering into growth? And then maybe the second more strategic question for Kevin is just the way that you're engaging -- the go-to-market team is engaging with PTC customers? Like how is that enabling you to get in and have more conversations from -- and basically showcase all the things that you're doing on the product side.

Yes. So the changes that we made from a perspective was we had a process called NTEA, not to exceed 8%, which was essentially a negotiation with the client, AON renewal on what the pricing uplift could potentially be at renewal. We typically drove roughly 1% to 2% annual pricing uplift on renewal in those negotiation processes. We've shifted over -- we did an evaluation of kind of our overall pricing out there in the market, and we felt -- we felt comfortable with shifting to a process that we call CPP, customer price protection, which is a baked in realized pricing uplift annually of 3% to 4% into our contracts. This shift will -- our contracts on average are -- the majority of our contracts are 3 years in nature. So this shift really went in full force in Q2 of '26. We started doing it with some clients as early as last year, but at full force, Q2 of '26. It will take years essentially for that to fully flow through the entirety of our client base. But so far, we've seen pretty reasonable success in terms of being able to kind of get customers comfortable with this type of pricing model moving forward? And then maybe you can talk about some of the motions that we've seen overall as you said.

Yes. I mean the big thing that I get involved in is expansion and expansion to do this, this data foundation we're talking about. And I often get involved in value conversations with customers and with our go-to-market team. And customers always put value into a few categories when they're talking to us. One is engineering productivity, One is cost of goods sold and the other one is usually cost of poor quality. And oftentimes, we're talking to the engineering folks and they're trying to center the value of a PLM system on engineering productivity or amount of engineering hours. And the conversation will have them. And we say, okay, well, how much do you spend on product development overall as a percentage of revenue? And our whole installed base will fall in a range somewhere between 2% and 7%. Then we say, okay, how much do you spend in cost of goods sold? In the range there is usually like 45% to 65%. So the whole idea is let's focus your value case on getting after a metric that you can have a huge impact in the company versus trying to say, okay, great, our engineering productivity has improved by 10%, not a solid notice. But if you can make an impact on cost of goods sold or cost of poor quality, makes a huge, huge impact. And so that -- those kinds of conversations are driving expansion into things outside of engineering related to PLM and ALM and other things.

Okay. Great. Well, it looks like we're right at time. This is an awesome discussion. Kevin, thanks so much for joining us, Mike as well, and appreciate everyone attending the session, and we'll wrap it up there. Thank you very much.

Thank you.