PTC Inc. — 2024 Q2
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to PTC's 2024 Second Quarter Conference Call. [Operator Instructions]
Good afternoon. Thank you, John, and welcome to PTC's Fiscal 2024 Second Quarter Conference Call. On the call today are Neil Barua, Chief Executive Officer; and Kristian Talvitie, Chief Financial Officer. Today's conference call is being broadcast live through an audio webcast, and a replay of the call will be available later today at www.ptc.com.
Thanks, Matt. I'm proud of what the PTC team accomplished during our second fiscal quarter. We again delivered solid results, which Kristian will take you through in detail. This quarter continues to demonstrate that PTC is on the right track and that our portfolio of products is resonating with customers. Before going into more detail about our strategy and discussing some proof points from the quarter, I'd like to address our mid-term targets, which we have updated today.
number one, PLM, which has driven primarily by our Windchill product; number two, ALM, which is driven by our Codebeamer product; number three, SLM, which is primarily driven by ServiceMax; number four, CAD, which is driven primarily by Creo; and lastly, number five, our continued focus on SaaS.
Thanks, Neil. Hello, everyone. Starting off with Slide 8. PTC, again, delivered solid financial results in terms of both ARR and free cash flow in a challenging selling environment. As you know, we believe ARR and free cash flow are the most important metrics to assess the performance of our business.
[Operator Instructions] Your first question comes from the line of Nay Soe Naing from Berenberg.
Maybe if you could start with the update in your mid-term ARR growth outlook, please. Maybe break it down a little bit more in terms of -- obviously, you had reiterated your mid-teens growth outlook as recently as last quarter, it's only been probably 2 months or so now. So what's changed in those 2 months? And also, if you may, could you reference it back to the growth building blocks that you have provided in your previous earnings pack as well, please?
Yes. Thanks for the question. I'll start with the first one and Kristian could add.
Yes. I mean the only other thing that I would say is that every time we talk about mid-teens, we had to caveat the status of the economy and so on. So I think this is just cleaner way to do it.
Sorry, I literally just got disconnected and I got reconnected just now, but I'll just read the transcript afterwards. But I didn't catch any of the answers, unfortunately.
They were the best answers we've ever given.
I'm sure. So I'll eagerly wait for the transcript to come up.
The next question comes from the line of Daniel Jester from BMO Capital Markets.
Maybe on the balance sheet, you made great progress deleveraging well in advance of your leverage target that you want to hit by the end of the year. I guess, one, why not today sort of move forward with the reassessment of the capital deployment strategy. And maybe two, Neil, maybe you have any comments about how you view inorganic growth as the driver of longer-term opportunity?
It's Kristian. Thanks, Dan. So I think your question is around why are we not starting buybacks sooner? I guess that's maybe the gist of it. And I mean, I think I'll just try to hit it this way. Listen, we still have $2 billion-plus in debt outstanding. Interest rate environment is still not favorable. The rate on the revolving credit facility we have is almost 7%. And after today's comments by the Fed, it doesn't look like those are going to get any better anytime soon. We've got a couple of quarters left to get through the year here, and we'll revaluate.
And on the M&A piece, we've clearly done a number of M&A deals over the history of PTC. That continues to be something that we'll always look at as opportunities to accelerate the strategy of the business. However, given my assessment of the business, currently, I like the areas -- the focus areas that we are aligned towards as a company to execute across organically those priorities is extremely effectively over the next number of quarters and years.
The next question comes from the line of Ken Wong from Oppenheimer & Co.
Great. This one is for you, Kristian. On the medium-term growth, I guess, we roughly estimate that maybe $100 million is coming out of ARR, yet you guys are still able to meet free cash flow targets. I guess, should we assume you guys have that same level of confidence in hitting those targets as you did previously?
Yes is the short answer.
All right. Fair enough. And then for you, Neil, in terms of best practices that you're trying to implement here, I guess maybe this kind of piggybacks on what I just asked Kristian, but like what do you -- what should we expect in terms of driving that incremental operating leverage?
As you know, Ken, we've been doing a nice job. The team has been doing a nice job for many years, driving greater effectiveness within the business. But I'm focused on the stones that I'm turning is making sure within the business around how we interact with our customers, the go-to-market motions from a direct and indirect standpoint are done as effectively as we can with the best practices that are out there, but also an assessment of what's the best thing for our customers and internally here at PTC.
[Operator Instructions] Your next question comes from the line of Andrew Obin from Bank of America.
So you mentioned on the call that the selling environment has been sluggish. Has this bottomed out? And any view on what needs to happen for a macro uplift in the software environment? And also for an industrial guy, if you can point out which verticals are particularly weak, I would imagine maybe life sciences, ag, machinery, but just any color there.
I'll start, Kristian, you could add. I don't see right now any change in the selling environment. It's been tough going for at least 6 quarters now here at PTC. That didn't change in Q2 despite having solid results. So the team continues to deliver despite a challenging selling environment. We look at every metric, GDP, PMI, you name it. We have not seen a change yet given some maybe positivity, they have not turned into a trend.
No, I think that's right.
And any specific verticals that just stand out as being particularly weak within certain industries?
From our perspective, we are -- I feel good about the key industry verticals that you know we play in, Andrew, doing well. Some are doing better than others. I'd say, all are going through digital transformation in a very serious manner. So we feel good about our position in those verticals. It's a question of the largest deals in those verticals. How much can we actually execute and close within a certain quarter.
[Operator Instructions] The next question comes from the line of Saket Kalia from Barclays.
Okay. Great. Neil, I'll keep it to one, just maybe for you. When you joined, I think one of the things that was really interesting that you talked about was just being more discerning about resource allocation. And maybe very specifically putting more wood behind the arrow for PLM, while maybe managing other areas like IoT and AR. And you correct me there if I'm wrong. But maybe the question is, what's the next step in that evolution. And as you think about sort of that investment in PLM, what are the areas that you want to bolster the most inside that business? Does that make sense?
Yes. Great question, Saket. And just -- I want to make sure I make this point again. We did say and I did say put wood behind more -- wood behind the arrows that matter the most for customer value.
Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities.
Neil, your comments just now an answer to Saket's question, I think touched on an important point about the portfolio, where cross-selling necessarily has the corollary of increasingly integrating products across the portfolio. So more closely coupling the products rather than loosely coupling the products. So over time, what do you think that might mean in terms of, let's say, the regularity of the business.
Yes. Great question. Thank you for asking, Jay. It is a journey. And as a reminder, we've done a really nice job, and it will continue to have open integrations in the environment. We're not a closed system. And when a customer looks at us, they could see best-of-breed PLM, best-of-breed CAD, best-of-breed SLM, best-of-breed ALM, and we believe we have all of them, right? But the customer can choose from that and feel okay for the interoperability with other systems that they may choose for ALM, SLM, PLM or CAD. So that will be the philosophy we continue to have.
In the meantime, for, let's say, the remainder of this year or early next year, how would you describe your pipeline of large deals that might have, as you saw in Q2, significantly pronounced 606 effects? Incremental, obviously, in the case of Q2, apparently in Europe, especially. So is there any way to predict the 606 effects and fold that into guidance?
If there was a way to predict the 606 effects, Jay, trust me, we'd be happy to share it with you.
Understood.
The answer is we can't do that, Jay.
Okay. Noted.
I will say, though, that the pipeline of large deals, we feel good about. It's healthy and sales team, all of us are focused on closing them. The timing of those always top, as I mentioned, but we have a really nice pipeline that's been growing on those large-sized deals across the world, quite frankly. So we feel good about what we're entering in the second half year.
And Jay, not trying to be snarky about the 606 thing. I mean you will remember that the main drivers are the kind of contract and there's the upfront contracts and there's the ratable contracts, the term length of the contract. So those are probably the 2 main drivers. Term length we can try and incent customers to move in a certain direction. But ultimately, they're going to make the right decision for them. And that includes both on new and renewal -- new and renewal transactions.
[Operator Instructions] The next question comes from the line of Stephen Tusa from JPMorgan.
So the net new ARR has been up nicely the last couple of quarters. You have it guided, I guess, down just year-over-year. You can kind of like cut these numbers any way you want. But any -- is that a reflection of the macro you were talking about? And then when does this now $10 million of deferred go live? Are you expecting that in the 3Q or the 4Q?
So let's start the -- I guess, we'll go in reverse order. The $10 million of deferred is also split probably pretty evenly between Q3 and Q4. The other $10 million, let's just be clear, those are still contractual commitments that will -- that have just moved to a future period, right? So they haven't gone away. They've just gotten larger and moved to a future period.
And then just one last one on the -- in the appendix, you had in the last presentation, I believe, guided for like cash taxes in '25 and '26. I think it was -- that wasn't in the appendix this time around. Anything moving around on that cash tax guide for the next couple of years?
No, not specifically. I think we were just trying to again, tighten up the disclosures. And it was -- to be honest, it was a little weird. We were giving points on certain line items and not other line items. And so we just tidied up the more detailed disclosures to fiscal '24. And otherwise, we remain on target for the other -- for '25 and '26. But there is...
Sorry, one more just to get Neil involved. Is there a dynamic here where your customers are evaluating their IT budgets in regard to AI and that's slowing these pipelines from closing because they've obviously been faced with a different kind of choice that seems like a bit generational in nature. And so is that something you're seeing as far as these extended close rates that there's potentially a bit of reallocation into these new technologies?
Absolutely not. And the reason why I say it was such firmness is because in our segment of the market, there is plenty of POC-ing and experimentation and conversations. And what I will say is we're involved in those, right, on a fair number of them. Because while I'm not coming out promoting this on calls like my other peers, we are building and working through a number of ideas around practical use cases for copilots. We've actually put out, like I mentioned last earnings call, a beta for GenAI solution for service that we're getting good feedback on.
[Operator Instructions] Your next question comes from the line of Blair Abernethy from Rosenblatt Securities.
Neil, just one more on the product side, Onshape, CAD, Arena PLM, that's SaaS part of the business, how is adoption going there and growth rates in those businesses? How are they faring this year? And then secondly, as you look to deemphasize some of the other areas, AR and IoT as an example, would that be something you would consider spinning off at some point?
So on Onshape and Arena, I want to be clear. Those are very important parts of our business. I'm not talking to them on a call like this up until a question is asked. Because the 5 focus areas drive the greatest amount of customer value and ultimately, economic value for us currently.
The next question comes from the line of Matt Hedberg from RBC Capital Markets.
We've spent a lot of time in the past, it feels like several years talking about above-average PLM growth, but seeing CAD continued to grow double digits is really impressive. I guess when you think about -- obviously, macros remain still a bit uneven, but like what are the core drivers there beyond just SaaS, which Creo+ is still early. I guess what I'm trying to get is like this above pure growth rate. How do we explain it? Because it's a question that we often get from folks and it feels like you guys continue to outperform on that line item.
So I'll start, and Kristian, if you want to add anything. The -- you're right. We are happy with what we're seeing in terms of our CAD growth rate. And I believe, given my work on this and talking to customers, it's because we have a really great product in Creo. And subsequent to that, we have a growing, very small business in Onshape, right?
Yes. And then, of course, in addition, I know everybody knows this, but the model, we've talked about that before the subscription model, the sales model that we have or contracting model also adds to that growth rate.
Appreciate it, guys. Well done.
The next question comes from the line of Joshua Tilton from Wolfe Research.
This is Arsenije Matovic on for Joshua Tilton. Just a quick question on indirect performance versus direct channel. I think indirect was diluted from growth, about 2 points on a tougher comp. I guess, what's your expectations for the performance of the channel throughout the year? Are they facing any macro headwinds that direct channel isn't facing? And then one brief follow-up.
Yes. I've been spending much more time with the channel had out there in Europe with some of our bigger ones next week. What I'll say is, we're -- and under my leadership, we're really making sure the channel is operating with the same sort of energy and focus as the direct side, which, as you could see, we've been delivering solid results on.
The next question comes from the line of Adam Borg from Stifel.
Awesome. Maybe for Neil. Obviously, it's great to hear the strategy around the 5 focus areas. And just maybe drilling into the fifth area of SaaS. Maybe just an update on how Creo+, the Windchill+ are resonating. Obviously, we've talked about this being a decade-long journey. But maybe just give us an update on how these conversations are going and how we should think about that in the coming years.
Sure. Great question. It is a priority. We continue to build momentum there. We have not slowed down in terms of our approach, our customer conversations and our intensity to make sure we work through all the automation and back-office elements to make the experience really great. We're working through a number of conversions where we're learning a lot and making sure we continue to sharpen our sword, so to speak, to make sure the next conversion happens more seamlessly.
Next question comes from the line of Joe Vruwink from Baird.
Neil, just going back to the big deals in PLM, this is something we're hearing more regularly as well, particularly, it seems like it comes up as part of enterprise ERP decisions. But also, the feedback seems to be more recently that customers just need to end up spending more time studying what PLM can do and the studying process and I think appreciating the workloads that matter, it just contributes to longer sales cycles.
Yes. So we have a broad portfolio, not just large PLM expansion deals or displacements to be clear, right? And there's some parts of the portfolio are faster cycle, close rates, some are longer. Very large deals, to your point, like PLM deals take a while given some of the closing dynamics that we mentioned.
Ladies and gentlemen, this concludes our Q&A session. I would like to turn the call over back to Neil for closing remarks.
Thank you, everyone, for joining us today. Here's what's ahead specific to investor conferences. May 14, Kevin Wrenn, our CPO, will attend the Bank of America Industrials Conference in New York; May 20, KT and I will be at the JPMorgan Conference in Boston; Early June, KT will attend the Baird Conference on the 4th and the Wolfe Conference on the 5th in New York City. On June 4, I'll attend the Stifel Conference in Boston. PTC will also join 2 virtual conferences this quarter, KT at the BMO Conference on June 11, and Steve Dertien, our CTO, will attend the Rosenblatt Conference on June 12.
Thanks, everyone.
This concludes today's conference call. Thank you for your participation. You may now disconnect.