All right, we're going to get started here. Hi everyone, I'm Brett Klein from the Morgan Stanley Technology and Banking team. Thrilled to be on stage today with Neil Barua from PTC. Neil is fairly new CEO, and maybe we'll even start there. Neil, you joined PTC in the past couple of years through the acquisition of ServiceMax. It just recently took over, I think, in mid-February, full-time CEO. What are your initial observations of PTC coming on board, the company's opportunity, and where, where have you spent the past six months? I know there's a transition period with customers, employees, etc.
Yeah, great question. Thanks for having us, and happy to share the story of PTC, which I believe is one of the greatest companies I've been a part of and looking to make even greater. But look, at the highest level, I've actually heard this tagline within the company and our customers: the companies that the world relies on, those companies rely on PTC. And ultimately, as many of you know, PTC helps our customers, particularly industry manufacturers around the world, design, build, and service critical products around the world. And we've got a fascinating collection of product capabilities that, you know, help those customers, and so much more to do. And to that end, one of the things that is really exciting, like you asked, about the company is the core business, right?
What we call our CAD design tool called Creo is our flagship, and then Windchill, our PLM system. All the product data coming to life, configurability, etc., happens on those systems, and we're starting to see our customers really engage on it to become enterprise-wide. There's a lot of opportunity to make it even more prominent. A lot's happening on that that we should discuss.
Okay, great. And maybe just building on that, how do you see the market opportunity, a total addressable market for PTC, and all these important categories for some of the world's biggest, most well-known manufacturers?
Yeah, again, another insight coming into the company is the opportunity and where the most prominent, most reliable customer companies in the world are is actually still in the early part of transformation. And they're now accelerating their need for tools that PTC offers to change their business, whether it be faster cycle times to remain competitive, whether for compliance reasons, because they're releasing autonomous driving software over the air to make sure it actually works. Using our solutions is actually becoming critical. And quite frankly, they've just started the journey, which is why this is such an incredible opportunity, building on the momentum PTC has and continuing to accelerate it.
Very cool. I want to dig into the transformation that many of your customers, particularly on the software development side, are building goods, mechanical engineering in nature. Software development now is a fundamental part of building most goods. Let's look at vehicles, of course. How do you think about the application development opportunity, and where are you in that journey? It must be just the very early innings for your customers.
So this morning at 4:00 A.M. Pacific, I was on with one of the largest exec team of some of the one of the largest automakers in the world. And here's the epicenter of the issue. They're actually a Codebeamer customer. And, you know, we actually don't have their PLM system. We're working hard to get that. But their main issue is we have hardware, electronic, and software development that is happening within our company because we have software-defined vehicles. It has to happen at the same time with the same toolkit for traceability, but also faster cycle times to remain competitive versus those that are, you know, out there building these cars and vehicles. And so Windchill, in concert with Codebeamer, Codebeamer does everything that a software engineer needs to release test management. Windchill does all the configuration management of the hardware.
The two together are actually at the epicenter of what we call software eating the world.
Yeah.
That's actually happening in all these product companies, and they need Codebeamer working with Windchill to allow them to remain competitive. So incredible, you know, opportunity for us at PTC as we get this piece right.
It seems like many of these companies actually will have just as many, if not more, software developers, software engineers, as they will kind of I'll call traditional mechanical engineers. Is that the trend you're seeing across these companies? And maybe if you stick with automotive as a, you know, early adopter, that's obvious to all of us.
Yeah, from just a population size and opportunity for PTC, the software engineer group in this specific customer is seven times the size of mechanical engineers, at least, and they're growing it. But what's happening is outside the range of opportunity for PTC. It's that culturally, the two groups have got to work together.
Yeah.
They're having struggles doing that. The technology toolkit that PTC provides can actually enable these customers to actually have hardware, mechanical, electronic, and software actually work together organizationally and in development of their products. It's just last point here, that eight cups of coffee, and I'm super pumped about this opportunity for PTC, given we're already on second or third base on it, given the scale we've got. These companies need it to survive. Like, that's a great place to be at PTC.
Yeah.
When survival's necessary, which is raising the profile of our software to be enterprise-level at the same scale as ERP, CRM, etc. In fact, I think we're more important than those in many companies.
Absolutely. I see that. Let's go back to the classic strong suits, CAD and PLM, where you started. Where is your customer base in terms of desiring and wanting to deploy CAD and PLM in the cloud? And can you talk about the breadth of deployment alternatives you offer for your customers?
So, you know, one of the things that we're differentiated versus some of our competitors is that we have an openness and an ability to be customer, think about the customer experience. And one of the things we have is a portfolio of not only on-premise solutions, which is going really well and it's showing real value, but also a SaaS solution, right, our Plus strategy, both on Creo Plus, Windchill Plus, which was our SaaS strategy, as well as the on-prem version. So my philosophy is we are there for our customers when they need us to be on their part of their journey. But fundamentally, what I'm most pressing the team on and energized about is the opportunity for PTC solutions to be so much more critical across the enterprise than just a CAD tool or a CAD data management tool.
It's enterprise-ready, and we're seeing it at our top customers already.
Okay, that's great. And then just thinking about some of the changes that your customers are starting to deploy more 3D models versus 2D in the traditional sense of CAD. How do you think about the growth opportunity around 3D models for PTC?
Yeah, many, you know, I was just in Japan, and they're still doing 2D drawings, as an example. And that new generation is forcing the shift to 3D modeling. And we have a view strategically at PTC where, because 3D models are generated in Creo, that 3D model and the reason why Windchill is a huge one, two, three focus of mine to make sure we really proliferate that across the enterprise is because that 3D model, when it moves into Windchill, actually has great value to all the different parts of the engineering group, including supply chain, including quality management, simulation, etc. And that 3D model is enabling that to have faster cycle times, less quality issues for our customers, by which they remain competitive. Huge differentiator.
Awesome. Let's hit on your former business, if you will, ServiceMax. You outlined the lifecycle of design, build, and service. How is ServiceMax doing within PTC, and what do you see as the cross-sell opportunity within the PTC customer base?
Yeah, one of the most important parts of ServiceMax as part of our SLM suite is it's actually a system of record. So, you know, Windchill is a system of record for product data. ServiceMax is a system of record for what happens to the assets in the field that are produced on Windchill or designed on Creo. And that integration, the relevancy to our digital thread to our customers, is very high because there's a real use case of service history of the assets being flowed back into Windchill and how an engineer can actually design a better product given some of the feedback loop that they're getting from the field. So ServiceMax is off to the races.
We've done all the heavy lifting of integration to make sure teams are aligned, compensation plans are aligned, to ensure we capture the opportunity of 3,000 like-minded PTC customers, that aren't ServiceMax customers, and really giving them that value. We've had some good success early on, and we continue to move that ball forward and feel like it's very strategically tied to the digital thread.
Awesome. I joked with you, Neil, before you got on stage last. I failed last toasting. I didn't mention AI till minute 25, so hitting on minute 12. AI is such an obvious in this world, whether it be in the design, in the service phase. You've been an early industrial AI provider with your ThingWorks business. How do you think about the AI opportunity in the real-world, industrial world?
We've had AI and ML deployed on many of our products over the last 5-10 years, right, which I could list out. That being said, we are spending a team and an effort around really building internal usage of it, as every company's looking at. So we've got threads there. But we've been spending a lot of time in Redmond and working with Microsoft, which is a great partner of ours, really thinking about how do we utilize some of their capabilities with the amazing data set that we have within Creo, Windchill, and ServiceMax. And in fact, you know, in ServiceMax and I don't necessarily like to promote these things until we know that we're making sustainable money on them. So we're working through the commercial models of these.
But we've been releasing AI, generative AI solutions for ServiceMax that takes all the service technician history and allows someone to actually query what is the right thing to actually bring as a part to that specific solution based on all the things that have happened to that equipment. So we're working through those. We're working it with Creo, Windchill, part reuse, as an example. So much parts get designed, and they get thrown away and put into a repository. We're thinking about how GenAI actually creates a more efficient model by which you don't have as much waste to a customer. So lot to do. My philosophy, team's philosophy, is until we know sustainable commercial models, I won't be pontificating about them up here on stage, but know that we're working through it aggressively, and we're ready for that next stage when it happens.
Okay, great. That sounds amazing. And we'll look forward to more updates in the future as your evolution continues around AI. Just again, sticking with key areas of the portfolio, I mentioned ThingWorks, but I'd just love a little bit of an update on ThingWorks and Vuforia and again, kind of thinking about the real-world deployment of PTC technologies. What is the, you know, customer uptake there, and what are the more recent trends you've been seeing?
So I, I think I want to ground everyone that one of the main thrusts I've put into place in the last 2.5-3 weeks since I've formally become the CEO is, as part of the digital thread, how do we really focus and prioritize as a company on how do we allow our customers to proliferate product data across their enterprise, right? So I want to keep coming back to Windchill as a system of record for product data. Those technologies, like IoT and AR, the discipline I'm putting within the company is making sure everything that I'm spending money on within IoT and AR and others have got to allow first, first, threshold is, does it allow product data? Does it enable product data to actually traverse across the enterprise in a far more efficient, effective way that the customers see value on?
So, everything that we do in development for IoT or AR will have that benchmark toward it versus within just IoT or within just AR, if they were separate businesses, spending money to develop features that might not have real economic value, but you would if you were under just the IoT umbrella.
Sure.
That's a change for the company where I'm putting in the discipline around those being enabling technologies to the strategy versus being standalone, distinct technologies going forward.
Truly a digital thread.
Yeah.
weaving through the company.
I'm making the thread work.
I love it. Talk about how PTC is structured to go after customers across all these areas, different buying centers in large companies. What's the go-to-market model for PTC and any opportunities you see there for future change to build out, you know, globally, penetration?
So we've got a great sales team. We have a lot of experience in the sales team, a lot in their bag. And part of what I've been mentioning publicly around putting wood behind the most important ROI levers from a customer perspective until ultimately financial outcomes is around organizing the sales team around those. So what do I mean by this? As I'm talking about the PLM expansion, making Windchill the most important system within an enterprise beyond ERP and CRM, that creates a programmatic a need for a programmatic, scaled, consistent approach within the go-to-market team. And that's something where we've got in motion. I'm pressing on it hard. Much more to be done on that point.
But I believe the opportunity and the team believes the opportunity is there to actually build a framework around the go-to-market team that takes advantage of our experience but also focuses on the in the right areas with very clear and consistent messaging. That also means that all the other products that we have within the digital thread, that we don't dilute the customer conversation with anything off the truck that will hunt, right? So I'm focusing strategy first, priority next, building the sales model behind that. And that, that will require tweaks to the approach of the go-to-market team as well as the messaging that I think everyone's ready and able to do.
That's great. And how do partnerships play in both go-to-market but even delivering these technologies? You mentioned Redmond. I think of the simulation. You have some partnerships in that space. And then even in the industrial world with some of the large automation providers, how do you think about the partner opportunity and again, that driving lift and global growth for PTC?
Yeah, I think we'll be focused in on a few strategic partners, right, from an industrial partnership like Microsoft, like Ansys, which has been a good partner of ours and will continue to be a good partner of ours. I'm more focused on the global SIs, right?
Yeah.
Who have actively sold ERP and CRM systems since, you know, the beginning of time, so to speak. That needs to be the same case for Windchill. It needs to be the same case. And it's not currently where it needs to be from that perspective. It's an opportunity for us, and we're working very hard to build global SIs that have as much excitement, understanding of how to sell PLM because it's such value to their customers versus all the other systems that they've been selling. So we're spending more time on that than building out more industrial strategic partners at this current time.
That makes a lot of sense. And the SIs, if you think about some of those traditional areas of CRM or ERP or areas they've sold for their entire history, that they're very involved in digital transformation projects. And obviously, that is certainly a key fundamental theme of driving the PTC opportunity. Where are your customers in their digital transformation journey?
Every area is different. Like I said, I'll start with the most prominent. Automotive is going through so much survival necessity that this is just a must-have, right? But we're seeing it across medical devices, industrial manufacturing. And one of the big impetuses to make sure I summarize this is the software integration to hardware in every industry is causing this need to really understand what systems actually let product data breathe to allow cycle times to be faster. And when they're looking at ERP, PLM, MES systems, that's a great position for PTC because we have the best-in-class PLM system that allows customers to see this. So, every customer's in a different stage, but they're all headed towards the end state, which is you need and they need a very integrated model of how to create hardware and software development cycles at speed with scale.
Excellent. I'm going to shift gears. A lot of companies are being asked, of course, about the macro environment. You sell to many of the world's biggest manufacturers that are out there. What's your read-through or what are you hearing, spending time with customers, on their focuses on the macro environment?
You know, I from a competitiveness standpoint, again, good for PTC. When I don't read The Economist or The Journal, when I talk to just customers, which I have been a lot, I feel really good about the environment because for PTC, because their point of view and again, I'll reference this customer this morning, one of the largest makers in the world, they have to reduce R&D spend by, call it, $500 million a year, right? You can't do that by just throwing out bodies, right, sorry to be crass about it. You have to do it with changing process, using technology. And that's causing this critical nature of deploying tools like PTC has. As a side note too, same with service revenue, right?
Yeah.
We won a very prominent deal in Q1 with one of the largest industrial manufacturing companies in the world. That fun fact, for eight years at ServiceMax, we were trying to win on our own, but only by being part of PTC. Now that they said, "Now you have a permanent home. We can now give a mission-critical application to all of you. We're in deployment." And the reason why they bought us is because ServiceMax is and they're a PTC customer. They've realized that product revenue is, it's cyclical.
Yes.
Service revenue is very recurring. They're putting all the tools to make sure that when a product's in the field, how do I upsell? How do I think about warranty? How do I think about my entitlements? You need digital tools. ServiceMax has advantage there. Where I'm going with this is, from a macro perspective, there's pressures. From a competitiveness efficiency, which macro is causing, you need change to happen. We're at the epicenter of that. That's the opportunity that's so exciting here at PTC.
That's a really amazing story because your PTC's technology is actually fundamentally changing that manufacturer's business model.
Yeah.
How they work with customers, making it more recurring. How do you see that opportunity? That I hadn't thought about that angle.
Yeah. I mean, we've been seeing it at ServiceMax since before the acquisition. And, and within PTC, right, we have a great parts management, supply chain tool. We have a number of IoT, AR service solutions that are there. What I'll say is that these are the, the, the great thing about macro kind of pressures for our customer base is they can't remain still. Status quo does not work. And that's causing this reason for the digital transformation. And those piece parts, including an aged workforce, once, one thing I didn't talk about is, like, across this base of customers that we have, the most prominent companies that build everything that we all rely upon, our children rely upon our parents, they have aging workforces. And they're thinking about the next gen. And that next gen needs digital tools or else they don't even know how to operate, right?
And so that's, again, the themes that we're seeing. Much work to be done, but that's the really interesting thing happening within PTC. That's, quite frankly, different than even years past.
That's absolutely amazing and a great update. Maybe, you know, taking over as CEO, how are you thinking about, you know, the classic question here, but the trade-off between the growth opportunity ahead for PTC, which sounds amazing, and then doing so profitably?
So credit to the team before me, and the existing leadership team here too, is this, this transformation around creating a subscription business, right, with our ARR focus versus perpetual business. That real tough journey creates a really nice visibility into how myself and the leadership team with Christian think about resource allocation. And so, you know, we have nice visibility around that. We look at leading metrics towards ARR, like bookings, churn, in-quarter starts, etc., ramps. And that visibility is very strong to us, which allows us to think about where do we allocate resources? Where do we put more wood behind which arrows? Where do we take others off of? And still stay focused on delivering our free cash flow targets without taking away from the growth opportunities.
So to summarize, the way I look at it is we have several parts of our portfolio that allow for the proliferation of product data across the enterprise. At the highest level, that's what we're aiming to do at scale with consistency. Within the framework of all our spend, we have very fungible R&D resources, right? And so we could really think about if an AR solution does not create product data being proliferated, I can move those AR resources and have them work on Windchill, as an example, or Codebeamer. And so this allows this toolkit of not trading off growth for the sake of profitability and being able to manage the toggles within it. And I feel good about that based on what I've learned over the last 12 months.
That's awesome. I'm going to hit pause here and see if there's any questions in the audience. We have 10+ minutes to go. Any questions out there for Neil? All right. Get them ready. I'll check in more. Don't worry. So I'll check in again with the audience. Just a bit of a tactical update, I guess. But I do remember I was on stage last year with Jim here, and I made a plug for LiveWorx, your annual event. And it's actually gone biannual now.
Yep.
So plug for LiveWorx 2025. But what was the thinking behind that? It's such a well-known industry event. Obviously, it's your customer event. But what's driving the change there?
You know, I've got a philosophy with the team where we shouldn't begin up on stage, whether it be LiveWorx or an Investor Day, without something really new to talk about, right? I don't want to waste your time, my time, or my team's time away from the things that are necessary to run the business. And so one of the philosophies we have is let's make LiveWorx really big with, like, new product introductions and make it really relevant. And it historically has been very relevant, to be clear, but really punctuate it and by giving time to the teams, number one. Number two is let's do things that are smaller and regional. I've got a view of, like, intimate kind of settings, sometimes create a lot better dialogue with customers. And one real value we have at PTC is we have great customers.
But the second you put them with another customer, it's like this great exchange of things that could benefit PTC. And so we want to create smaller group settings where that sort of dialogue is transparent that happens. And we'll test that out over the course of this year and then do something big with LiveWorx with a lot more to talk about then.
That's very cool. It actually take advantage of your happy customers to help make new happy customers actually be an extension of the sales motion.
Yep.
In many ways.
Yep.
Just as we kind of tick through the recent earnings and updates you had, again, maybe big picture, we've hit on the SaaS migration, but I think you all described it as a 10-year-plus journey. How are you thinking about locking arms with customers on that journey? I think there's a very much partnership-led approach that you offer on-prem, term, true cloud. So how do you think about that transition to SaaS and enabling your customers over this 10-year journey you're on?
So, we're on the path of SaaS. Well, I'm not taking the foot off the accelerator there. What I think that the approach I'm taking moving forward with the team is making sure that we are doing, like you said, in partnership with our customers. And right now, we are in deep throes with our customers that are moving to our Windchill Plus or Creo Plus platform. And we're learning a lot. And we have some happy customers. And we're getting feedback. And we're building that into our next releases of our product. Like, we're releasing a new Windchill Plus, in the next month and a half, which takes into account some of the customizations that our customers have. So we've learned a lot about what customizations happen in such a heavy tool like Windchill.
And we've made sure that we adequately think about that as we put out a new release so that customers don't need to change their workflows just because we've architected the tool in a different manner, right? So we're thinking through that. This is the reason why I'm saying it's going to be a 10-year journey. Could be earlier. Damn might break earlier. But I'm not in any rush to rush SaaS across our customer base. And partly because it's the right thing to do. Working with the customers is always the right way to do because we learn a lot. They learn a lot. You build a partnership. But two, we've got such a great base of core businesses that have growth that we've been showing consistently, have so much opportunity going forward. And Windchill, forget about the Plus strategy.
Like, as far as the eye can see, I see Windchill programmatically continue to step up the momentum that we've been seeing there. And that, that allows me to have the luxury of making sure we get the SaaS evolution in the right manner by which we have happy customers that end up spending more with us that want other products to be part of the solution versus just one. And that's the journey we're taking. And we're going to do it thoughtfully.
Okay. That's great. One, I guess off-script, but one that I'm sure you're well apt to answer is on the competitive landscape. Just two things we've been talking about today. One, digital thread from design through service. Other, you know, the unique elements of you've, you've hit on this Windchill and Codebeamer, you know, in customers working together and a necessity for them. You know, competitors don't necessarily do this in the same manner. Some don't have the application development tools. What's the latest on the competitive landscape? And have you seen win rates?
I take all our competitors very seriously. And it's a great space to be in because there's a few players that do this at scale. And what I feel like our advantage is, is clearly this ALM, PLM integration point. And the having such robust capabilities on both sides, I think, is second to none out there. And I think our customers are starting to see it. And we'll show it, you know, as the next few years evolve. The SLM piece, ServiceMax, it's a huge differentiator as you think about product data being proliferated. Like, there is no solution out there. Part of the reason why this industrial manufacturer chose ServiceMax not only to solidify their service revenue stream, but also because in our roadmap, we have service history being ported back to Windchill. And that allows for more sustainable, resilient design philosophies. And that's differentiated.
We're going to keep pressing on these differentiators that are real, that create customer value, and then we can make money on. Very important to us.
That's awesome. Let me open up. Any other or any questions from the audience now? Put your hand. We have a mic going down here. Hold on for the mic.
Hey, Neil. Maybe a bit of a question about the growth rates here. You've been able to sustain growth rates at the company that kind of far exceed the overall markets of CAD, PLM, etc. What's been the kind of key driver for that? And how sustainable is that, right? You're kind of compounding free cash flow at growth. And so just want to know the horizon by which you look at that through.
Yeah. We're really good. With sincerity, we have a differentiated product in our core. We, you know, from a Creo perspective, there are other, you know, design software capabilities out there, but we feel like we're very strong there. Windchill, if you look at the sustained growth rates, has been very strong. Part of the reason is because this whole philosophy around the enterprise nature of PLM and the openness of our customers to waking up to you needing PLM to be strong. So that's been there.
What I think you're going to see going forward is while that's been really good and credibility building, what I see inside the company is we could take it up a notch in terms of consistent programmatic approach by each customer cohort, by each geography, and really open up to the world the excitement that I'm feeling about PTC and the value I'm seeing from customers and let the whole world know about it because they should to remain relevant. That's how we're going to sustain this type of growth rate, in my view. Then you add the components of ALM integration, SLM integration, and then the flywheel starts working.
And then lastly, the cherry on top, as we get SaaS moving in the right manner with our customer base, that's another leg of the stool that I haven't even underwritten in terms of how I'm thinking about, you know, this over the course of this year, how we're looking at the growth rates of the business. So there's a lot of goodness that, again, comes down to execution, but we've got a lot of vectors to prove out that sustainable growth rate.
Any other audience questions? All right. A few more from me, Neil. Grab Neil and Matt after if you do. I didn't want to ask them in the room. But can you talk us through the framework for capital allocation and how you think about the cash on the balance sheet across internal investment and driving products, returning capital to shareholders, through buybacks, and then deploying capital for M&A?
Yeah. Right now, Christian and my philosophy is obviously this year is paying down debt. We'll continue on. As we think about and as we get to the end of this year, I am spending time thinking through with Christian, obviously in concert with the board, around what next year looks like because we're starting to, you know, we're generating a lot of cash and feel confident about, as I mentioned on the earnings call, confident around the predictability of our cash flow generation. And we need to think about, you know, we have a strategy around returning 50% back to shareholders. We're going to take a look at that. And, you know, I've said publicly, too, that right now, I believe we have the capabilities, within our company organically.
We have a lot of wood to chop internally to really keep solidifying the points that I made. We always will look at things that are tuck-ins and potential opportunities, not my priority at this current time, but in the context of looking at capital allocation, we'll take a look at what the cash generation looks like versus return to shareholders. And by the end of this year, we've paid down a decent amount of our debt. So more to be said on that. We're thinking through it.
Okay. Great. And maybe I'm going to keep this at a high level, of course, but you referred to where acquisitions are on the priority list a little bit lower today. What's the environment for acquisitions? Are you being called on a lot of things? Are there interesting opportunities that are out there that you see over the next 2-3 years without getting any deals, of course?
Yeah. Nonstop, right? There's a lot of point solutions out there that are looking to find a home. But we've got. I'm going to be disciplined on this. I'm going to be price disciplined. I'm going to be, most importantly, disciplined around what focus takes away from what we're driving internally because there's so much opportunity right now internally with how we're thinking about the portfolio, the putting wood behind which arrows that have the highest ROI. So I've got a high bar of distraction to the team. Yeah, but the universe of folks wanting to be part of a company like PTC, there's a lot of them right now. And I expect more to come.
Awesome. One final one for me. Feel free to riff on this in any direction you want to take it. You know, month in the seat, I, I guess, as CEO, obviously with the company longer, where do you see PTC in, I don't know, five, 10 years? No, no real time-bound in the future.
Yeah. I've been in customer conversations where at the most important companies in the world, and we are put into the same echelon of strategic importance as companies that are $100 billion minimum of market cap to $4 trillion or $3 trillion, whatever Microsoft is at. We absolutely should be in the same category as these folks, given the capabilities of this company, the importance, where our growth factors lie. You know, we are going to be more important than any of the big systems out there because our customers demand it, and we have the opportunity and the right to be there. So, we're taking this thing as big as can be because it's important to the world. And we really appreciate this opportunity on behalf of our customers. So a lot to do to get there.
But, the sky's the limit for this company, for sure.
Amazing. Yeah. I love the vision. Thank you for being here. Really appreciate the conversation. Thank you, everybody, for joining.
Thanks.