Hi, thanks everyone for joining us today. I'm Joe Vruwink. I cover physical software at Baird. My next presentation comes from PTC, one of the biggest technical application companies. This is software for engineers, manufacturing, and the servicing of physical products. With me is Kristian Talvitie. He is Executive Vice President and CFO. This is going to be a fireside chat. If you have questions, you can email Session 2 at RW Baird. I'll put those on the iPad. To begin, maybe I'll ask Kristian just for an intro to PTC and overview of the investment case.
Yeah, great. First of all, thanks for having us. Always appreciate the opportunity. Secondly, before we really get into it, my general counsel would be very angry with me if I did not remind everybody about our safe harbor language and forward-looking statement. Caveats that you can find on our press releases and our SEC filings, forms 10-K on file with the SEC. With that, PTC, super round numbers, is about approaching $2.5 billion on the top line. It is primarily subscription software. Some of it deployed in a SaaS model. The majority of it is still deployed on-premise, but on-premise subscription. From a bottom-line perspective, we tend to talk about free cash flow as opposed to EPS or operating income because of the impacts of ASC 606 on revenue on our pipeline. We talk about really about billings and free cash flow.
The space that we operate in is, as Joe mentioned, kind of a technical software space. Our customers design, manufacture, service, products across multiple industries and multiple size companies. Industries like federal aerospace and defense, industrials is kind of our largest vertical. Med tech, automotive are kind of the primary electronics and med tech are the primary verticals that we serve. Company's been in business for 40 years as of May, 35 years as a public company. It is actually a really exciting space because the customers that we serve, all in their own respective markets, have a similar problem, which is they need to figure out how to get better quality products to market faster. There are competitive dynamics. There are a bunch of other—you could call them pressures or opportunities that they're facing, whether that's electrification or, again, just advancements in technology in general.
They are constantly thinking about their product categories and how to improve the throughput that they have for new product design, which makes it a really exciting space for us.
I have a handful of questions that basically boil down to why do you grow like you grow? This year has aimed to be high single digits. More normally, it's been low double digits over recent history. The company talks about going forward, the aim is low double digits. Maybe just to begin, if you're a 40-year-old company, is much of that growth with an existing installed base that you need to keep growing further with as opposed to new logos?
Yeah, it's a great question and somewhat nuanced. If we look back '22, ' 23, '24, we were growing in the double digits. I guess there's another way to look at growth, which is how much net new ARR we're adding in any given year. And over that past three-year time frame, it's actually been a pretty consistent amount of net new ARR that we've been adding in and around $220 million per year. This year, given some of the macro uncertainties, we're guiding maybe less than that. We'll see how that plays out in the end. With net new ARR flat and your base constantly growing, that obviously puts pressure on a growth rate.
Getting back to the kind of the customer perspective and what they're looking for with the product categories that we have, we think we have ample opportunity to continue to grow and expand with our customers and help our customers solve their problems. We have undertaken a few different initiatives that are perhaps maybe more in our control to try and also augment that growth and get back to net new ARR growing versus net new ARR being flat. I could put those kind of three categories, I guess, into three buckets. One would be around a transformation of our go-to-market model. It's really an evolution of our go-to-market model. The second would fall into product categories and what we're doing there around making sure that we have good integrations between ALM and PLM or PLM and SLM.
In addition to that, as we talked about on the most recent conference call, introducing Agentic AI into the product portfolio. There is still the ongoing SaaS transition, which we began a couple of years ago, that also could provide tailwinds to support, again, net new ARR growing. The third and last piece I would call out would be what we call commercial optimization. This is something that we've been doing for a number of years now, but I think there's still continued opportunity for us there. The net intent of all of those things is really to be able to get us back to net new ARR growing, even in what's been a challenging macro now for coming up on three years.
Maybe let's take some of those, starting with the go-to-market evolution. PTC is somewhat famous, I suppose, in the enterprise software space. Just historically speaking, you end up producing a lot of very successful sellers that go on and lead other sales organizations. We've kind of used Oracle for that reputation in many ways. In taking that and then kind of acknowledging, but it could be even better, what were some of the things you were noticing internally? Now, how are you, I guess, addressing them in this new structure that's getting rolled out?
Yeah, that's a great question. I think I would maybe boil it down into two or three different categories, the first of which is a move to verticalize the go-to-market organization. I say go-to-market because I do not mean just the sales organization. We also mean marketing and customer success and the technical resources that actually help our customers implement and get value from the software that they are implementing. Earlier, I mentioned it is more of an evolution. I say that because already, historically, there have been pods in the sales organization. In Europe, for example, there was an automotive pod. In the U.S., there was an A&D pod.
Really, what we're trying to do is more formalize that across geographies and then also bring marketing and the customer success organization in line so that when we're interacting with customers, we have folks that really understand their industry, the nuances of their industry, their specific regulatory requirements, etc., and how to best both set up, configure the software that they're implementing and how to get value from it. That's certainly one piece of it, is really just getting alignment across the entire go-to-market function, alignment within the function and alignment with our customers. Additionally, we also undertook a, I guess you could call it either territory optimization or a coverage model optimization effort, depending on which lens you want to look at it through. Really, what that means is making sure that we're covering the market appropriately with the go-to-market teams.
Historically, we had a situation where many of the best sellers were long-term PTC sellers, and it accumulated territories over the years that may, in the end, have actually ended up being more customers than they could really effectively cover. Newer folks that were coming into the organization did not have territories with the same kind of opportunity. What we wanted to do was really rebalance that and make sure that those customers are all getting the right coverage. The outcome of that should also be that all the sellers, even newer sellers, should have better opportunity to hit or meet their quotas. Those are two fundamental pieces of a go-to-market change.
I guess the third piece that I would talk about really is we also recently added a new Chief Revenue Officer, a gentleman named Rob Dahdah, who has been a great fit to the organization. I think he is also bringing his own, we'll say, level of maturity to the go-to-market efforts. He wants to make sure that we're elevating the messaging. We've historically done a very good job selling into the director of engineering, the CIO, etc. Some of these transformations that we're enabling on behalf of our customers are much bigger than that. He wants to try to make sure that we're elevating that up into the C-suite and getting broader support in these companies that we're supporting.
He's also brought a different level of discipline, I'll say, just in general sales hygiene and sales process management as well, consistency of pipeline metrics and methodologies across the various verticals and geographies that we serve, for example. He's been a busy guy.
I guess it's an easy heuristic to think PTC, I think your first six months for CAD and Deere blue-blood machinery companies, that's where you do well. You have a competitor that does well in non-res construction, one that does well in auto, aerospace, and that's how you divide the market. Recently, you've disclosed some conquest wins where customers in auto and in aerospace are consolidating onto PTC and CAD and PLM. How much, if anything, does that have to do with some of these go-to-market changes we just walked through versus there's other imperatives inside those industries or customers that, on a product level, PTC is standing out better than maybe used to be the case?
Yeah. I think that trying to draw direct linkage to the transformation that we're going through, which just in case I didn't mention it, we really launched this in our Q2, which was we were in the middle of our Q3, so we're a quarter and a half in right now. I think it might be premature to attribute anything of that nature to this transformation. The industry as a whole, the competitors and the other kind of pure technical software companies, it's a great case because we all actually enjoy very high retention rates, customer renewal rates. It's one of the things that actually makes it such a compelling, we'll call it business opportunity. I'll leave it to you whether it's a compelling investment opportunity, but certainly a great place to do business.
Frankly, switching systems like your CAD system to your CLM system, it happens periodically. It does not happen with any real degree of regularity. When it does happen, we like to celebrate it because it is a great milestone and recognition of all the investment that we have put into the products and into the customers and working with customers over the years. I do not know that I would characterize it as a trend, at least not yet.
Okay. That was question one you mentioned, go-to-market evolution. Question number two is product. I guess the way I would introduce this question, under Neil, the messaging has changed in that the core products, PTC, is focused on, there's now four things that would be brought up, and it's PLM, Windchill, CAD, PLM, as we just discussed. ALM, which is Code Beamer, ServiceMax, which is on the field service management side. There are some things not mentioned anymore. IoT and augmented reality, for instance, not a part of what would be considered core. Also, two of those, Codeb eamer, ServiceMax, newer things that I would say have risen to prominence, ServiceMax by acquisition, actually Codeb eamer by acquisition. What is it about those two categories that is interesting to the heritage install base, the CAD, PLM users?
What does PTC need to do to drive better selling effectiveness there? How do you get the bundle ultimately between the four as opposed to just the individual product purchases?
Yeah. It's a complicated question. I'll try to give you a simpler answer. The fifth category, of course, is SaaS as well, where we continue to think about the SaaS migration opportunity over time as well. I think maybe the right way to frame this is, again, from the customer lens. The complexity that they're seeing is not only from the kind of complexity they can create in mechanical products now with the software tools where they are, whether it's CAD or whether it's simulation, for example. The complexity that they can create is then much more complicated by the amount of software that is increasingly going into these products. The tie between the hardware, the software, and how companies are thinking about developing products using a platform strategy, the tie-in there is all really around your PLM system.
Look, they want to manage product requirements. ALM has historically been kind of software product requirements, but they do not want to manage just software requirements over here and hardware over there. They want to manage the requirements for their product, which is a combination of hardware and software. They are doing that in tight coordination with ALM and PLM. By the same token, they are also able to put out more complex products into the field. For those products that live in the field, need to be serviced in the field, this is also where the tie-in between PLM and SLM comes in because you get field technicians that are out now servicing increasingly complex products. How do they get there?
Make sure they have the right parts, make sure they have the right work instructions on how to repair, what may be wrong, what spare parts may be required, what replacement parts they may have, and how to get those efficiently out there. It is taking that kind of customer view of their problem. That is really been the focus of the CAD, PLM, ALM, SLM messaging and SaaS.
I think this is a good segue into AI. I'll ask two different flavors of AI. One is we are hearing from some very marquee customers at PTC. You have an independent user community, so they have an event in January. Customers are talking about what you can as a strategy to basically bring all engineering data together. These are multinationals with a lot of data. That investment ended up morphing into the lynchpin of the AI strategy because getting that cleaned up and structured now gives them the ability to start their own AI development. How much is that coming up as a driver of PLM modernization? The more company, I mean, engineering is going to be one of the tough nuts to crack in terms of AI bringing a lot of human replacement just because the accuracy needs to be so great.
If you are going to start on that journey, is there a better system than PLM to maybe start modernizing and getting your engineering data ready for that future development?
I don't think so, to be honest with you. For certainly an advanced user of PLM, an advanced view of that would be. That is your system of records for your product information. That is the system where, in some cases, multinationals can have multiple divisions, multiple systems, getting their data house in order so that they can deploy AI more effectively. I think that is the place for them to start. That is what we're hearing in customer conversations as well. I think they understand this. I think they understand it's part of the digital transformation journey that they're all, and we are too, by the way, but all invariably involved in at a certain point in various parts of their organizations.
The second flavor of AI is coming out with all new AI products is recently has been the agent variety. PTC has co-pilots too, but more recently some agent offerings. I guess when you think about those relative to the opportunity of just PLM system upgrades, is actually that way more consequential in a financial sense? As investors, I think we're prone to focus on the shiny new object, which is these AI offerings. It would seem like for PTC, if you're going to go through this huge upgrade cycle in one of your core systems, that should really be garnering the focus.
To be honest, what we've launched now most recently are some agents in ServiceMax and will have some more agentic AI coming out in Codeb eamer and Windchill or ALM and PLM a few months from now. I think it's still pretty early days to say what the actual impact is going to be. Obviously, we're hopeful that there's going to be customers who are going to realize how much value they can get from the agentic AI that we're going to be offering. Again, I think that still remains to be seen. There's certainly not really a customer conversation that goes on without somebody bringing up AI and wanting to understand what our roadmap looks like and how it might benefit them and how you can use that in the future. There's certainly a lot of interest there.
Right now, it's just a very nascent offering for us in the market.
Last thing you brought up at the very beginning, commercial optimization. I think that those kind of play into the opportunity at hand this year where you happen to have a lot of renewals, an unusually large number of expiring contracts, which, as you mentioned earlier, typically very low churn in this business. The renewal happens. I guess the question is, what's the value associated with that renewal? I wanted to ask, even in a tough environment like we are currently in, do you continue to see renewal values increase in line with how maybe you budgeted this year to go? If a renewal is seeing an increase in ACV, what are the drivers behind it? Is it simply price? Are your enterprise accounts still adding seats? Are there other things that typically happen upon renewal that would not normally happen in regular way business?
Yeah. Just to be super clear, I think just from a volume of contract perspective, I'm not sure that I would say that we have a higher volume of contracts as prior in this year. It's the mix of multi-year contracts and therefore the size of the ARR base that happens to be coming up, right, as opposed to a.
Units.
Units. I think that is one distinction to be made. I think then in terms of the renewal rates and in a more turbulent or challenging macro, do we tend to see impacts of the renewal rates? I guess I can speak to the two other significant macro disruptions that I've lived through at PTC, one being the GFC in 2009 and the other being the global pandemic, the COVID pandemic in 2020. We did not actually really see in either of those cases renewal rates meaningfully impacted. What you've tended to see was a pause in new business as customers chose to either downsize or delay the start of a project temporarily. In both of those cases, we saw that come up pretty quickly after the uncertainty subsided. That is certainly what we saw in those two previous scenarios.
I guess we'll see how this one continues to play out. So far, through the course of the year, our renewal rates have remained high. We'll see what happens over the next couple of quarters.
Question from the audience. It kind of gets at your partner strategy. Over time, people remember the PTC Rockwell partnership, which still is in place. PTC Ansys had close connections. Where do you stand in the NVIDIA Omniverse ecosystem? The question was specifically asking, do you have a competitor in Germany that is maybe better positioned there, or are you participating in that work?
I'm not. I'll let any competitors speak to what they're sharing in Germany or elsewhere speak to their own.
Maybe just with NVIDIA specifically.
Yeah. They are a customer. We continue to have good conversations with them. I think that there's ongoing opportunity.
Okay. Good. You mentioned your Emmert index at the very beginning. I guess I wanted to ask about that more in a positive light as you think about PTC being more weighted to industrial machinery, automation, aerospace, and defense. Those are the biggest in terms of concentration. Then tech electronics, automotive. Is that an Emmert index that is good because you're seeing proactive progressive investment in your tech solutions? When you create a kind of difference from what peers have focused on and therefore their growth rates, have you ended up benefiting from your end market exposure, basically?
I like the end market exposure that we have. In times like this, it gets complicated because, for example, there are certain verticals that are under more pressure right now. You could take industrials as an example. Just given the uncertainty in the environment, you could take automotive even to a certain degree just given pressures of some electrification, pressures from the Chinese automakers. On the other hand, you can look at the aerospace and defense market, whether it's here, whether it's in Europe, actually seems to be doing quite well right now. I think it provides a healthy mix for us, and it's proved resilient in the past.
We're at time, but please join me in taking questions.