Now, that said, those have been priorities of the business for a long time, PLM, ALM, SLM, CAD, and, you know, SaaS transition. So I think one of the bigger differences is really more in communication style. And so while we wanna make sure that we're continuously communicating those, it doesn't mean that we're not still investing in IoT, we're not still investing in AR, we're not still investing in Onshape. You know, the difference in communication style is when those get to be meaningful enough to be needle movers, we'll talk more about them. In the meantime, let's stay focused on the needle movers, and let's get the organization also rallied around the needle movers.
So that's been, you know, I think a positive aspect that Neil has brought to the board.
Yeah. And one of the changes that was announced most recently was sort of the, call it, elimination of the CRO role. Mike DiTullio moved on to sort of be an advisor to Neil, so maybe a flatter kind of reporting structure. Walk us through the changes there. Is it obviously Neil's been spending a lot of time on the road, meeting with customers? Is it he wants kind of more of a hands-on approach in terms of, you know, managing the sales force directly? Or just walk us through kind of the thoughts behind that change.
Yeah. So there's no doubt that Neil definitely likes to be close to customers, close to product, for sure. And again, for those of you who have followed the company for a long time, many of you will likely remember that predominantly during Jim's... even during Jim's tenure, you know, the organizational structure, as it were, we have regional heads of sales, for example, for North America, for Europe, for Asia, who all report to a global head of sales, who reported to the CEO. During the transition process and, you know, help make sure that we were having an orderly transition process, Mike stepped into the COO role, you know, which again, I think was helpful. And I think Neil would agree.
But now that he's been, you know, in the role, either as CEO-elect or CEO for, you know, for over a year now, you know, I think he wanted to flatten the structure again, because, you know, during Neil's initial tenure, you had that same structure: head of North America reports to head of global sales, who reports to a CRO, who then reports to a COO.
Right
... who then reports to the CEO. So there were, you know, there were a couple of incremental layers that were added, and so, you know, those layers have been eliminated, at least for now, and you know, technically, actually, Mike DiTullio is still COO until the end of this fiscal year, so for-
Got it
... you know, for the rest of this month, and then he'll serve as an advisor for-
Yeah
... some period to go.
Yeah. Gotcha. Shifting gears to what you're seeing out in the demand environment. At you know the last couple quarters we've seen you know more macro pressure across the space and you know it's in some ways it's not new right? Deal cycles have been elongated for a while but if you could just sort of compare and contrast what you're seeing at customers now versus the last two years and then you know any thoughts in terms of how you're thinking about the business heading into your fiscal year end?
Yeah. So, first of all, I'd say that the macro conditions have not been that favorable for going on about two years now.
Yeah.
Not the past couple quarters.
Right.
I'd probably chalk it up to the past eight quarters or so. It's a difficult selling environment. It has been. I think we've been consistent in that message. You know, to be honest with you, I think you can actually see it in our results as well, in our net new ARR. You know, assuming we land here somewhere in the range, or call it the midpoint of the range, it is gonna be largely flattish, you know, for the last three years. So, you know, I think that it should be indicative of what the, you know, what the selling environment is, you know, is like.
As far as, you know, heading into the quarter, yeah, I think, Tyler, you know as well as I know that like any good blue-blooded enterprise software company, last week of the quarter means a lot. So,
Right
... we'll see. We've got a good pipeline. You know, but as you say, deal cycles have been elongated. It's, you know, it's still a tough macro.
Right. Right. And one of the changes over the last couple quarters was just sort of taking down medium-term targets down to low double digits ARR growth, which I think, you know, many investors appreciated, just it's kind of more of a realistic view of what's going on in the macro environment. How do you sort of think about, you know, the sustainability of that double-digit growth? What are the levers for upside to that beyond just a macro improvement? Just walk us through sort of that decision and you know, sort of what you're assuming in those low double-digit targets.
Yeah. Again, I'd go back. Part of this is a style issue between you know, Neil and his predecessor in terms of communicating the targets for the business over a medium-term window. I think that the low double digits is in and around what we've done here pretty consistently for the past whatever five, six years. There has been a low of 10%, which was in 2020. There's been a high of 15%, and I'm also talking organic-
Mm-hmm
... constant currency numbers, so there's obviously-
Mm-hmm
... been bigger highs, if you take into account acquisitions, but on an organic constant currency basis, you know, a high of 15% in 2022, and the rest of it on balance works out into that kind of 12% range over the past five or six years. So I think we've, you know, demonstrated an ability to deliver at that kind of level, with some variation, you know, given some of the macro dependencies, or macro environment, I should say.
You know, and I think that with the product portfolio that we have, you know, the focus that you know Neil continues to drive into the organization, the market opportunity as we see it before us with PLM, with ALM, with SLM, you know, CAD is obviously a mainstay. You know, I think that the opportunity to continue to deliver at those levels, it remains.
Mm-hmm.
We have, you know, additional levers to continue to try to think about our own performance. We'll say, you know, commercial optimization, for example. You know, I think a good example might be, you know, churn, which in 2019 was in and around 8.5%. You know, we've cut that, you know, almost in half over the past four years or so. Me, personally, I think there's room for continued improvement, albeit it will not be at that, you know, same pace going forward. But I think we have, you know, other opportunities, in and around, we'll say, commercial optimization, to continue to also help drive, you know, help drive, ARR growth.
Yeah. And despite all the, you know, challenging macro time period, I mean, the free cash flow has been very resilient. You know, you've been able to maintain that, if not raise that pretty much every quarter. Can you just talk about the levers that you have and what you're able to do to offset some of these, you know, macro headwinds and shortfalls on the top line?
Yeah. So, it's a great question. Thank you. And again, for those of you that don't know, the business that well, just a kind of a brief, infomercial. You know, the way that we look at the business, is really on a cash basis, and it's because of, the revenue recognition as it applies to PTC. Revenue doesn't really equate to cash collections or cash generation. And so there can be a lot of variability in revenue, and therefore, any derivative off of revenue, whether it's margins or EPS, that could make the company look like it's doing better or worse than it should be, in any given period. I've done a, I know Peter loves these.
I've done a teach-in, if you will, on this subject in our Q4 fiscal 2022 earnings call. If anybody's interested, I would refer you to that. But so we really do think about the business on a cash basis, cash generation in and then cash expenditures, expenditures out. And because essentially all of our software is on a subscription basis, and we bill annually, we have some additional modest twenty-some-odd million of perpetual license and about $120 million of services.
Mm-hmm.
... the perpetual license will continue to get smaller. Again, the vast majority of our cash inflows are all paid annually and on an expense basis when we think about it. You know, I think about it really also all in terms of subscriptions. Not only the subscriptions that we have to run the business, whether it's Workday or Salesforce or Oracle, or other tools that we use to run the business that are also all subscriptions, whether it's rent for facilities that we have. And without being too crass, it's also the employee base. Like, once we hire somebody, they get a paycheck, you know, regularly. It's like a subscription. So we've evolved the budgeting process to really think more about the longer term and what it is that we can sustainably invest in.
The biggest change has been if we went back, whatever, five years, and I'll just use round numbers to make the point. If we had a guidance range of 10%-15%, we had a plan that was somewhere in and around the high end. We'd give out budgets at the high-end range, and then if we were progressing through a difficult macro, and it looked like we weren't gonna hit that end of the range, then we'd have to go through a whole exercise internally to put reqs on hold or, you know, reduce headcount and reduce other spending, which, to be honest with you, from the inside of a company is very distracting. It stops with any kind of positive momentum. You're working on negative things, not positive things.
You know, you can still get the same outcome. What we've done instead is we've altered that process, and now, using those same numbers, we would say, "Great, we'll start the year with budgets assuming the low end," and we'll have a prioritized list of things. Assuming that it's going better, we would be putting incremental investment. So, you know, that has helped us make sure that we're investing in line with what the current business environment actually tolerates. And I would stress the point that what we're really talking about and toggling about is incremental investment, right?
We have a base of spend that we already do, and now we're really just talking about how much incrementally we wanna invest, and then where we want to invest it in the business.
Yeah, that's helpful framing, and I think, you know, sort of helps show the consistency on cash flow. I think, you know, given the quarterly guidance, not a lot of other companies are able to do that. Wanted to talk a little bit about the growth areas of the business, and you sort of laid out the five things that Neil is focused on. You know, a couple of them, I would say we didn't hear as much about, you know, years past, things like ALM, even SLM. So I wanted to talk a little bit about Codebeamer and some of the trends going on in that space.
What has made that acquisition so successful, and where are you seeing the biggest growth opportunities for that product?
Yeah. So I mean, ultimately, I think it boils down to market demand and the evolving needs of our customers, and maybe even more importantly, the evolving needs of our customers' customers. To use a maybe simplistic example, if you were to look at, you know, an automobile that's produced today versus one that was produced five years ago, let alone ten years ago, the amount of software in what have traditionally been, you know, hardware products across. You know, you can look at auto, whatever else, pick your example, but the amount of software that's going into these products is increasing significantly, and has been and is expected to continue to increase, you know, over the next few years. Which also means...
You know, and that's also driven by demand from their customers, what features they're looking for, et cetera, which means that these companies need to adapt, which means they're hiring a lot more software engineers, which means they need tools in order to do their jobs, and the toolsets are becoming more and more complicated in the sense that now you're combining, you know, software and hardware, and you really need to be able to trace requirements, for example, especially in highly regulated industries. You know, again, think auto, think med device, where if, God forbid, something should go wrong, you want to be able to isolate the problem as quickly as possible and get it addressed, let alone any other regulatory concerns these customers might have.
And so again, I think it's just the evolving product landscape for our customers that's driving the need.
Mm-hmm. Got it. Got it. And then ServiceMax is also another growth area. Obviously, that's very, very close to Neil's heart as the former CEO there. At the same time, you know, ServiceMax is a bigger ticket item, and I'd imagine one that is maybe a bit more cyclical, at least in terms of how customers are prioritizing those budget decisions. So can you sort of talk about where ServiceMax growth is now, and, um, you know, where could it ultimately go, should you execute and maybe macro cooperates?
Yeah. So A, there's no doubt that, you know, ServiceMax is also a, you know, it's an enterprise sale. It's not immune to the same-
Mm-hmm
... pressures that we're seeing across the enterprise space. You know, decisions being elongated, et cetera, et cetera. You know, that said, we've been seeing, you know, this year, more positive signs from cross-sell opportunities into the PTC base. You know, some of it actually has been really just ServiceMax being part of PTC. There's customers that they've been, when they were independent, trying to call on for a long time and haven't really been able to get in the door for a variety of reasons. You know, and perhaps because of their status and the unknown of where they might end up. But now that that's been solidified, you know, we've seen some of those opportunities advance.
Part of it is also just leveraging the PTC customer base as well. You know, we've seen positive signs there. You know, I think we're hopeful that as the conditions continue to evolve, we'll be able to capitalize on that opportunity. There's a lot of companies out there that think about their service operations as not only profit centers, but as a competitive advantage in their space, and yet they're using either very antiquated or disparate tools or sometimes, you know, homegrown systems, Excel spreadsheets. They're looking at ways at advancing their competitive position.
You know, for complex, long-lived assets that live in the field, ServiceMax is really a good solution for them. So, you know, I think we're hopeful that there's a lot of runway here.
Yeah. And as you think about those five growth drivers you referenced earlier, is there a way to sort of rank order, you know, the biggest contributors to your net new ARR? I mean, I imagine, you know, CAD and PLM, just given the scale of those businesses, are still gonna be the dominant drivers. But where are you sort of seeing the biggest pickup, or at least, as you look on the pipeline, where's kind of the strongest growth coming from in terms of these newer products?
Yeah, I mean, I don't know that we've broken it out really in that degree of specificity.
Specificity.
Thank you.
It's a tough one.
That is a tough word. In that level of detail-
Yeah
... about that. But, you know, I think you're right. You know, that dollar-wise, the PLM, the CAD businesses are the larger ones. SLM, which is more than just service. ServiceMax also includes Servigistics and, you know, Arbortext and as examples, is probably the next largest contributor, followed by, you know, followed by ALM.
Mm-hmm. Yeah, got it. And, I think the last bucket in those five was this SaaSification strategy, and, I wanted to spend a little bit of time there. So I think obviously the history, you know, there's been some acquisitions in the space, Onshape and Arena, back in sort of Jim's tenure. I got the impression, I think some investors got the impression when Neil came in, not that SaaS took a back seat, but he really leaned into the opportunities he saw around ServiceMax and Codebeamer. So maybe just talk about, like, is there any more hesitancy that you've observed from customers in terms of this SaaSification push, or is it still as big of a priority as it was maybe a year ago?
Yeah. So, you're right. Onshape, Arena were SaaS. ServiceMax, by the way, also, you know-
Yeah
... SaaS delivery model. And I think that just big picture, I actually think that the technical software space, like so many other parts of the software space, is ultimately gonna move to a SaaS delivery model. Primarily because in the end, it's a better delivery model for software. That said, it is a delivery model. And, you know, the more important piece is, what are you getting delivered? And so the real value is actually in the application. There's incremental value to be had from the delivery model. But what we're really focused on, and I think what Neil is really focused on, is making sure that we're delivering the real value to the customers.
And then, you know, you can have the ancillary discussion around how you want that delivered, whether it's on-prem, you know, or via a SaaS delivery model. And again, a lot of these migrations are complicated. They're, you know, you could have a PLM system that you've had for, whatever, 10 years, 15 years, that has a lot of customization, and, you know, your business processes are built around it. So you know, what we're hearing from customers is: yes, there's continued interest in SaaS, and one of the biggest areas where they need help is OCM, Organizational Change Management, in order to really drive that transition and get it over the goal line.
So we're still booking, you know, new net new, for example, Windchill+ SaaS transactions. We're still seeing customers convert. I expect we'll continue to see that. But, you know, as you can sense from, again, as you pointed out from, you know, Neil's talk track, the primary objective is, let's focus on delivering the value that the customer wants, and then secondary question of how they want it delivered.
Got it. And I think in the past, you sort of talked about this S- curve in terms of adoption for SaaS reaching 70% over 10 years. Is that still the right way to think about how you're thinking about this opportunity, or any changes that you might make to that based on the trends you've seen over the last year?
... No, I mean, at this point, we haven't said anything different. I still think that's right. Even-
Yeah
... you know, I said earlier, I think this part of the space is gonna move, by and large, to the SaaS delivery model-
Right
... eventually. You know, I think it's just a question of time. Now, there are certain customers that-
Yeah
... I would still maintain are never gonna move for, because of the kinds of products they're working on. They're on air-gapped networks, you know-
Right
... in general, they're not gonna move.
Right.
But you know, I think those targets are reasonable, I think, and I think we're seeing progression towards them. It's the amount of time that I think is the question.
Yeah. So a common question we often get from investors is just, you know, look, PTC has been around for a while, CAD, PLM, relatively mature markets, yet you're posting really impressive growth. You know, those businesses have been growing pretty consistently in the double digits, especially PLM. Maybe we start on PLM, but what would you attribute the strength in PLM to? There's been some discussion about PLM being in a renaissance, maybe some competitive changes too. If you could sort of help investors unpack, you know, what's been driving this higher-than-expected level of growth over the last few years, and is it sustainable?
Yeah. Another great question. So, you know, I think we've probably talked about this a few times, but, you know, I would start off. It's not the primary driver, but in terms of sustainability, I would start off by just reminding you again of the subscription model versus the perpetual model. The subscription model is, you know, it is a more sustainable growth driver just by the virtue of the model. So let's not discount that. As it relates to PLM, yes, PLM has been around for, you know, twenty-plus years, but what it was and what it is, and how it's used and viewed by customers has evolved, you know, over the years.
If you went in the hot tub time machine, you know, way back originally, it was really PDM, product data management. It was a vault for CAD files, check-in, check-out, you know, managing your CAD files and offering kind of rudimentary collaboration. There were a lot of capabilities that were kind of customizations in the early days, that allowed for a broadening of the scope, but still the preponderance of customers, you know, I think would have thought about it that way as kind of just PDM.
Fast-forward to today, and you know, hundreds of millions, but probably over $1 billion of investment in the tool set itself, and what you're seeing now is a lot more standard functionality that allows for much more than just CAD data management. It's collaboration, you know, not only within the engineering department, but opportunities to collaborate on this kind of key product information outside of engineering, with whether it's the quality department and the customer, or whether it's the supply chain, or manufacturing, or into service, in some cases, even into sales and marketing, and leveraging the real product information, which is really housed in their PLM system if they're using it that way and thinking about it that way.
And I would submit that, you know, not all customers have gotten there. But you know, again, some of our more sophisticated customers are really thinking about it that way. They're thinking about, you know, their PLM system as their quote-unquote "system of record" for product information, and leveraging not only communication out from engineering into different parts of the organization, but getting feedback back into you know into engineering, where those changes can really be made if necessary to a product, you know, again, in the system where they need to be changed so they can be proliferated.
I think when we talk about, you know, PLM seeing a renaissance, I think what we're trying to communicate is that we're seeing more customers thinking more expansively about how broadening the use of their or expanding the use of their PLM system can actually be a competitive advantage for them in, you know, in the markets in which they compete.
Yeah.
And you know, as a consequence, we have been seeing pretty steady demand.
Yeah. No, that's a great way of putting it, kind of the almost redefining or expanding the traditional definition of PLM. I'm curious, how much do you think, though, the competitive side is also playing into that? Because I think, you know, one of your peers across the Atlantic has made some changes in terms of some of the newer versions of their PLM products, kind of closing off access to other ecosystem partners, that perhaps has created some customer confusion or frustration. Have you noticed any changes to your win rates or share gains in anything that you think could be helping you on the competitive front?
... Yeah, it's still a difficult competitive environment. I think these things play out over time. It like again like any enterprise system switching is difficult. It's costly, it's disruptive. So you know, it's one of the good points about the industry, is across the industry, I think we see high retention rates in general. You know, on the flip side, it makes switching more difficult. So you know, I would say we haven't seen a meaningful change in win rates. But you know, again, yeah. Confuse and anger your customers long enough, you know, ultimately they may make another decision.
Right. Got it. As you think about capital allocation, you know, we talked about a number of the acquisitions the company's made between ServiceMax, Codebeamer, Onshape, Arena. How are you thinking about capital allocation from here, you know, between paying down debt, future M&A? What are areas that are interesting to you versus, you know, buyback or potentially a dividend?
Yeah. So, you know, as you point out, we took on a considerable amount of debt as we acquired, you know, primarily Codebeamer, ServiceMax over the past two or three years. We've been kind of diligently paying that down, you know, according to plan. We do have a, we'll call it a stated policy of returning about 50% of our free cash flow to shareholders via share repurchases, of course, while taking into account other strategic opportunities and of course, the interest rate environment. So, you know, we have put that on hold for the past couple of years, focused really on paying down debt. The interest rate environment's very different today than it was a couple of years ago.
You know, I think I mentioned on our last quarterly conference call that as we start thinking about next fiscal year, you know, I think what we'd see is a slight rebalancing, if you will, of capital allocation in fiscal 2025. Meaning, I think you'll see us resume share repurchases probably in and around the $300 million level, with the remainder, you know, going to continued debt paydown at this point. You know, M&A opportunities are. You know, there's a couple different kinds of them. There's smaller tuck-in ones we look at fairly regularly. Those can happen and shouldn't really have any impact on that kind of capital allocation decision. Larger ones, you know, are much more of a wild card, difficult to say.
You know, I think we'd have to weigh opportunities as they come to market, and whether or not we think it's a good strategic fit. In the meantime, we're focused on you know, driving the free cash flow. We're focused on paying down debt and resuming share repurchases. Dividends I do not believe are in the cards for us here, at least in the short term.
Yeah. Okay. Now, in the last few minutes, I wanted to just get your perspective on how you're seeing, you know, the topic of generative AI play out across your customer base. What is PTC's strategy there? And, you know, how often is that coming up when you're talking to customers, and is that something that you're kind of at the, you know, the front of the table, so to speak, in terms of having that strategic conversation?
Yeah. So generative AI, or, you know, even AI more broadly, I think is, you know, customers are looking for how they can leverage AI to get better value out of the information that they have? Or can it improve the use of the tool sets? You know, as you know, for example, in CAD, a few years ago, we had acquired a company called Frustum that does generative AI for, you know, for CAD. We have customers that are looking at it. We have customers that are using it, but it hasn't really become a mainstream driver. So, customers are aware that it exists. It just hasn't... the demand from them just hasn't materialized in an explosive way as I think maybe you're asking about.
So that's on the CAD front. You know, on, you know, we've introduced, in kind of pilot format, for example, copilots in ServiceMax. These are, this is, you know, being well-received by customers, that are testing that out, and they like, you know, they like the use of some of this technology. And then frankly, part of the overall message as well is that really to leverage AI, generative or otherwise, you do need to have your digital house, as it were, in order.
Mm-hmm.
You know, and again, for the part of the enterprise that we serve, that largely means your PLM system in order to, and more expansive use of it, and that will actually enable you to leverage, you know, leverage AI more broadly across your organization. So, you know, we're seeing interest. We're going after opportunities methodically as we see them. But, you know, at this point, I also would not say that they're a significant demand driver.
Right. And I guess on the other side of that, some software companies have almost called out GenAI as a distraction or even a headwind to, you know, traditional IT budgets. Obviously, your customer base is, you know, the more cautious and conservative, not a kind of, you know, forward-leaning, you know, digital-native customers or anything like that. Is that causing any distraction or reallocation of budgets as far as you can tell, or is it sort of just, you know, a conversation, but not anything negatively impacting the pool of spend that you're going after?
Yeah, I haven't heard from any of our sales leaders that that's a major issue for them-
Yeah
... in the field today.
Right. Right.
You know?
Yeah.
Again, that's today. Who knows what happens?
Yeah, yeah.
Times evolve-
Yep
... but we haven't heard that as of yet.
Great. Great, well, Kristian, maybe in the last minute or two, I'll just open it up to you if you had any closing comments or thoughts that you wanted to share with the audience, but I appreciate you coming down.
Tyler, thanks very much for having us. We always appreciate the invite, and thanks to everybody in the room and, I'm presuming-
Yeah
... this is a webcast, so anybody on the webcast as well. I appreciate this interest and the support, and if you have any questions, I think you know how to reach us. You can find Matt Shimao, our head of IR, and or reach out to me directly. We'd be happy to engage in a dialogue.
Great. Thank you very much. Thanks, everyone.