All right. Well, good morning, I believe, still, everybody. Thank you so much for joining us. My name is Hamza Fodderwala. I'm a U.S. software analyst at Morgan Stanley, and I have the pleasure of hosting Kristian Talvitie from PTC as the Chief Financial Officer. Before I begin, just a brief programming note for important disclosures or Morgan Stanley disclosures, please see the Morgan Stanley Research disclosures website at www.morganstanley.com/researchdisclosures. With that, Kristian, thank you so much for joining us.
Well, Hamza, thanks for having us. And also, before we get started, I'll remind everybody that we have disclosures as well, and risk factors that are all outlined in our Qs and Ks and available on our website and the SEC website. And I would encourage everybody to go look at those risk factors. My legal counsel would be very angry if I didn't share that upfront.
Gotta get those disclosures out. So Kristian, maybe for investors who are, you know, newer to the PTC story, was wondering if you could provide a brief overview of the mission statement. You know, obviously, PTC is software for people who, you know, build and make things, you know, which there's, you know, a few software companies of. So just talk a little bit about that, and, you know, what the opportunity you see going forward.
Yeah. Great. So, you know, PTC is about $2 billion in top line, about 7,000 people. You know, we generated $587 million in free cash flow last year. We are a provider of technical software to companies to help them design, manufacture, and service their products. And you can think about, you know, that in a wide range of spectrums. Think about companies like John Deere or Volkswagen, Raytheon, or Trek Bicycles, right? All, all designed their products designed using using PTC software. So that, that's a, you know, it's a global company, obviously. About 35 years, coming up on 35 years as a as a standalone public company.
Yeah. Maybe just turning to the, you know, most recent performance, you know, you capped off a pretty good year despite the macro being soft. Can you talk about some of the product initiatives that really drove the solid year for you guys?
Yeah. So just as a reminder, we did top-line growth was approximately 25%, which included an acquisition of a company called ServiceMax that we did at the beginning of our second quarter. On an organic basis, we did about 13% growth in our fiscal 2023. We're on a September year-end in our fiscal 2023. It was a solid year. I'd say it was, you know, it's the macro environment's been challenging for sure. You know, from a net new ARR perspective, we actually were about flat with the prior year. I think 2022 was a much more robust macro environment.
You know, that said, still kind of flattish in terms of new ARR generation on the top line, driven by solid performance in some of our core products like CAD, computer-aided design, grew about 10%. You know, the market's been growing at a healthy, you know, we'll call it 7%-8%. We've been outpacing the market. I think we would probably argue that's largely because of a business model, which we can maybe get into later. Another solid contributor last year was our PLM business, which is product lifecycle management. And this is really allows for collaboration and configuration management of those CAD designs both within the engineering department and outside the engineering department.
We've also seen some, you know, we'll say other pockets of strength, one being ALM, which is application lifecycle management, which is really test and requirements management for software. And you see more and more software going into products, going into products these days, so that's becoming important for our customers and the complexity of the, you know, of their product portfolio. And even if you think about cars, makes and models, and you can have two of the same cars that have two different software configurations, kinda keeping track of all that, you know, is important for them, as well. And then, you know, lastly, I guess I would highlight... So that's part of the cross-sell.
I would highlight some of the cross-sell that we've also had with SLM, which is service lifecycle management. You know, that was a big part of the ServiceMax acquisition that we did. That's what they do, field service management for complex assets in the field. So we've been seeing some, you know, some early successes there. And then, you know, lastly, we also are in the early innings of transitioning from an on-premise subscription, already a subscription business model, to a SaaS delivery model. So it would still remain subscription, it'll just be a, you know, a SaaS delivery model.
So, you know, there have been a lot of different layers of kind of growth drivers that have been hitting at different times to help maintain the, maintain the top line growth that we've seen.
Yeah. Definitely wanna dig into that. Before we dig into some of those growth drivers, I think there's been a CEO transition at PTC. Can you tell us how that transition is going, and, you know, when Neil will take over as CEO?
Yeah, sure. So, there is, in fact, a CEO transition. The current CEO, Jim Heppelmann, has been CEO since about 2010. So he's been there for a long time. He's been a big driver of the strategy of the business and a lot of the evolution of the business, you know, over the past, you know, 15+ years that he's been with the company. And on our Q3 call, Jim announced that he's going to be retiring, and that the transition to Neil Barua, who actually was the CEO of ServiceMax, that we acquired earlier in the beginning of our Q2, is gonna take place effective February 14th, which is the date of our annual shareholder meeting.
And so that's when that transition's gonna officially take place. In the meantime, Neil and Jim have been spending a lot of time together over the, you know, since the announcement was made, and continue to do so, visiting customers, visiting employees, visiting other stakeholders like, you know, investors. Neil's actually out in California right now, at a couple other investor events, as well. And so I think that it's actually going really smoothly. You know, Neil is digging in. Jim is doing a great job at transitioning the business, and you know, I don't really foresee any major hiccups coming into February 14th.
Great. So let's talk about the many growth drivers that you have going on. So ARR is still growing solidly double digits. You talked about, you know, the business model transition with the move to SaaS. I believe there's a billion-dollar opportunity or sort of a maintenance base that you see moving to SaaS over time. About 70% of that, I believe is convertible, so, you know, $700 million opportunity over some timeframe. Can you talk a little bit about that, what you're seeing from your customers in terms of the movement of SaaS, and what particular use cases, you know, fit well for a SaaS delivery model?
Yeah. Well, there's a lot to unpack in there.
Yeah.
So, you know, again, I guess I'd refer people to our Q4 or even Q3 earnings call materials. You'll see in there a couple slides that talk about the layers of top-line growth and layers of bottom-line growth that we've been executing on, really, you know, for the past decade. And it, you know, it builds on a solid foundation of CAD and a steady market there, augmented by PLM, getting into things like on the CAD side. We acquired a company called Onshape, which is really the CAD industry's only native SaaS CAD SaaS application. So that has been again, small numbers, but it has been a growth driver.
We're seeing some momentum there, which is nice. We talked about ALM. We talked about SLM. You know, we also help our customers deploy IoT or Internet of Things and augmented reality technology into an industrial setting to help improve worker productivity or help improve asset efficiency, you know, in a plant. So there are a number of different vectors of growth, in addition to which you also mentioned this SaaS transition. And there is a point I'd actually like to clarify, because, as I said, we've moved to subscription, so when you said maintenance-based, that still implies kind of perpetual maintenance. We've really... We went through the, what some people like to call the valley of death.
I always tried to brand that Paradise Valley, and Jim never really went for that. But, went through that valley of death, the cash flow valley of death, when we moved from a perpetual business model to a on-premise subscription business model. Now, as we think about the opportunity to move the on-premise base to SaaS, you know, I think you sized those numbers up about right, about a $700 million opportunity, you know, probably over the next decade or so. I think it'll be,
You know, we, we've kind of painted a picture of an S curve of adoption, where it's slower in the beginning, and then it kind of picks up some momentum in the middle of the transition phase, and then, you know, then the last mile is always, you know, always the hardest as well. So, you know, we're still in the early phase of that S curve, but I think that, you know, it should be a reasonable tailwind to growth, I think, for us. Obviously, the main driver is the functionality of the software, right? Which is what you were really calling out. The delivery of it is helpful, but-...
People are going to pick the software they want first, and then how it gets delivered secondarily. But there are, of course, inherent benefits to SaaS, which include better collaboration, you know, security, et cetera. So I, you know, I think, from our perspective, we do believe that this part of the software space, the technical software space, is eventually going to move to SaaS. It's just a question of how long that takes.
Makes sense. And pardon me for the language mistake there. So the other thing you talked about was some of the new product initiatives. You talked about PLM. Can you dig into the idea of why PLM is expanding within the organization outside of just, you know, core engineering?
Yeah. So you probably need to, you know, get into the time machine a little bit and go back to the beginning of, you know, the beginning of PLM. And what it really was in the beginning was a vault, if you will, for CAD data. You had engineers that were using CAD to design, make designs, and then they needed to store it somewhere, and it went into kind of PDM, and that allowed for rudimentary, we'll call it, collaboration, you know, within design teams and within the engineering department. And then, if you think, if you, you know, fast-forward over the past 20 or so years, those capabilities have expanded tremendously.
And products have gotten more complex, partially because the software is much more capable and actually allows customers to do more things, which creates more need for the software, which is a, you know, an interesting virtuous cycle. But you know, now we're seeing leading customers really thinking about their PLM system as the system of record for their product design data, for product DNA, and figuring out how to leverage that more broadly throughout an organization. So it isn't just about collaboration within an engineering department. It's also about configuration management for, you know, complex products, which can be very complex to manage, but very useful for them in addressing the needs of their end customers. And that's really just within...
You know, it enables them to think about platform strategies, you know, for the products that they're building, which helps them reduce cost, but provide more customizable products for their customers, right? So that's within the engineering department. And then you start thinking about, well, how could we take that product DNA and really leverage it more broadly? Wouldn't it be great if we could use that information to help inform quality departments or manufacturing supply chain departments for the procurement of parts, for the assembly of the products? And ultimately, how do we leverage that information into the service department of those customers?
Because generally, what happens is, you design a product, you manufacture it, you sell it, and then it's, it's lost to the OEM. And you know, where we're going with the ServiceMax acquisition and the SLM strategy, is really about creating that closed loop. You can now, if you were to think about a VIN number, if you will, for a product, you know what it was supposed to look like when it was designed. You know what it looked like when it was manufactured. Historically, when it's gone out into the field, you've lost all record of what's happened to that product through various service applications. And a lot of the customers we have, have products that have 20-, 30-, 40-year lifespans.
So for them to actually be able to track that information and share that back, all the way back into engineering, you know, to help improve the overall quality of the product and the service to the customer, you know, that's how advanced customers are really thinking about the opportunity to leverage PLM as a system of record and leverage it to drive digital transformation in the part of the enterprise that we serve, which is the, you know, kind of design-centric, design, manufacture, service-centric part of the organization.
Got it. One point of follow-up on that, and I want to open up to the audience for questions. There's been different vendors that have tried to go after that space from sort of the ERP, enterprise resource planning, angle. Can you talk a little bit about the importance of having an integrated CAD and PLM, you know, strategy in order to address some of the use cases you talked about?
Yeah, sure. That's a—it's a really good question, and I think for those that have, you know, watched the industry evolve over time, the CAD vendors have largely remained the same, right? There's a handful, three, four of them, that have been around, really since the, you know, late 1980s. And then PLM, which, you know, started evolving really in the late 1990s, early 2000s. There have been various players who have either tried to go standalone or tried to go to the ERP route. And if you were to look at the PLM market today, and this is just one guy's observation, but it seems that the PLM platforms that have the most market presence today are the ones that are owned by companies that have that CAD backbone.
Which makes sense, because that's where all that product DNA is, is really created, and that's what's being managed, configured, you know, leveraged, and shared all in, all in that PLM system. So if you're, if you're missing that, that beginning piece, I think it, it makes it difficult.
Any questions from the audience? We have one over here. Oh.
Thank you. Just wondering, how do you manage to differentiate yourself from a customer perspective? Usually, what is your pitch, and how do you convince the customer to transform to you? Usually, mainly if it's, like, a system of record, kind of a pitch, because it's so sensitive in terms of information and stuff.
Yeah, it's really a journey with customers. They're all at different stages on that journey, different stages of maturity. So for us, it's really trying to meet them where they are on that journey, help them understand what other companies, you know, what other companies are doing, right? That we obviously can help share some examples of how they're thinking about leveraging the technology. Then, you know, just moving the ball up the field. There isn't... I wouldn't say, at least I haven't seen it yet. We'll see. Maybe I'll eat my words. But I haven't seen anybody come out yet and say: "Hey, I want to buy this digital thread platform, the whole thing, soup to nuts.
You know, you generally start out and evolve, and as the organization matures and evolves, you then add incremental capabilities.
Thank you.
One over here.
A quick question regarding your past partnership with Rockwell. They are now out. What did you learn from it, and how do you want to take those maybe smaller partnerships going forward, or just being fully independent regarding those industrial partners?
Yeah. So great question. Thank you. And maybe I'll just a quick recap. Back in, I think it was probably 2018-ish or so, Rockwell entered into a partnership with PTC. There were actually two different and distinct parts of this agreement. One was a commercial arrangement, where Rockwell is a reseller of PTC technology at the time. That arrangement also came with some contractual minimum commitments of how much volume they were going to sell. And at the same time also exclusivity for certain accounts or regions again tied with those minimums. I'll come back to that in a second. Separately, there was a share purchase agreement whereby Rockwell had taken a 9% stake in PTC. As far...
And then now let's fast-forward to last year, our fiscal 2023. Rockwell has now unwound the share purchase agreement. They've sold their position. However, that is separate and distinct from the commercial agreement, and Rockwell actually still remains a reseller of PTC. They're actually one of our larger resellers. Although over the past 5 years, you know, the commercial terms have changed. You know, we've gotten out of minimum commitments and exclusivity in that way. But they're still a reseller of PTC technology, and, you know, they're building out their own software footprint, and I think we'll continue to augment that with PTC technology. And so from that perspective, I think the commercial arrangement is going okay.
Any other questions? Okay. So you recently came out with SaaS versions of your products with Creo+ and Windchill+ . Can you talk a little bit about the early feedback there? How big could that opportunity be, and when it starts to show up in financials?
Yeah. So let me think about this. I think about two years ago, we started talking about Windchill+, and over the course of last year. About a year ago, started talking about Creo+. Creo being the CAD platform, Windchill being the PLM platform. And this is actually really all, again, being driven by what we would say, you know, customer interest, customer demand. We, for Windchill, you know, in particular, as well as some of our other products, but for Windchill, you know, we actually had seen demand for what I would call kind of private cloud instances, which we had been selling to customers because that's kind of, that's what they wanted.
You know, ultimately with the other SaaS assets that we had acquired, including Onshape, including Arena, now, you know, ServiceMax. It actually just helped push us over the edge in terms of saying, "Okay, actually, that is where the market's going. That is what customers really want, really are looking for." So if we're gonna do that, you know, we don't wanna be in the business of hosting, you know, thousands of private cloud instances. And in fact, I think we in the market would be better off moving to a SaaS version of Windchill and then, you know, followed by Creo. So again, we're in the early innings.
Again, interest, I think, is solid from the market. I think we hear other competitors talking about SaaS as well, which I view as a good, you know, demand indicator, as well. And I guess the last piece to note is, we have some customers that are actually just probably never gonna move, never gonna move to a SaaS environment for a variety of reasons. They're designing, you know, whatever, nuclear weapons, that just... It's not gonna put it in the cloud. So, you know, we're gonna offer, on-prem and SaaS versions for a long time. So it's, it's the same code base.
It's how, when in fact, we're dealing with it on the back end, to drive, we'll call it the efficiencies of scale for us and the efficiencies of SaaS for our customers. So we think it's a good long-term tailwind for the business.
All right. Maybe last couple of questions. Just on the targets, you know, the business has gotten a lot more predictable in the last few years. How much variability is there to that year-end ARR number? Meaning, how much has to go right for you to hit the high end of that target, and what needs to go bad for you to get to the low end as well?
Yeah. So, you know, I think as we talked about earlier, last year, I told you, we did about the same amount of net new ARR as we did in fiscal 2022, so kind of flat net new ARR. This year, the midpoint of the guidance range, well, it does actually imply that there is some growth over kind of flat performance. There is some mechanical aspects to that, that include what we call deferred ARR. Some people would think about it as backlog, contractual commitments, where we know that customers are gonna be adding to their contracts over the course of next year.
And so when you normalize for those at the midpoint of the guidance range right now, we're essentially calling for, for basically also, flat ARR compared to last year, which would be compared to the year before, net new ARR. For it to get better than that, I would think that, you know, we would need to see one or more of these, growth vectors, really kick into a higher gear, you know, or perhaps the, you know, the macro economy in general, to get a little bit more favorable. Different ways to think about, you know, macro, whether you look at GDP, whether you look at, you know, PMIs as an indicator. You know, we look at a lot of-- we look at both of those, as well as other variables.
But, you know, for the macro to get a little bit better and, you know, that could take us above the midpoint, and obviously, below the midpoint would be continued erosion, if you will, in the macro environment, which I think could take us down to the lower end of that range.
Last quick question: ARR and free cash flow are the North Star metrics for any SaaS transition, including yours. You've talked about a billion-dollar free cash flow by fiscal 2026. Just your confidence level and visibility into that target.
Yeah. I think that we feel pretty good about the free cash flow target. And, you know, I would say that even even in a lower than targeted ARR range or top-line range, you know, we still feel good about the cash flow target, really because of how we manage the business, right? And just to oversimplify that, we just talked about the midpoint of the guidance range being flat net new ARR. If that's the case, it implies kind of flattish bookings growth, if you will. And if that's the case, like, why do we need to make more sales and marketing investment in order to sell the same amount that we had last year? And I would submit that we don't.
We don't need more investment in G&A. We may, of course, choose to invest in R&D, but that's not gonna help, you know, that's not gonna help sales this year. That's an investment in the future. And so, you know, it really is how we manage the business, and we think about weighing both long-term investments and, you know, when's the right time to start making investments in, for example, sales capacity. So I think there's a lot of levers for us to pull, you know, even if we don't. The macro doesn't support the mid-teens targets that we had, that we had talked about.
Great. Christian, thank you so much for your time, and thanks for everyone joining. Bye.
Thanks, everybody.