Great. Good morning, everybody. We're going to get started. Thanks so much for being here. My name is Adam Borg. I'm an analyst on the software team here at Stifel. Thrilled to have PTC once again support our conference. With us is new CEO Neil Barua, Matt Shimao from IR. Thanks so much for being here, guys. In terms of format, I'm going to kick it off. I did want to kind of have more of a kind of foundational approach to the conversation today. I definitely have some new investors in the story and want to make sure that we kind of go through the business case and the big opportunities you're going after. Neil, really appreciate the time and so thrilled to have the conversation.
Great to be here.
Maybe just opening up big picture for those that may be newer to the PTC story, talk a little bit about an overview of PTC and the big opportunities you're going after.
Sure. PTC, as some of you know, is, I believe, the greatest enterprise software company out there, and I'm looking forward to many others hearing about it. We have been doing this for a long time, and predominantly we help industrial companies worldwide design, build, and service the critical assets that all of us rely upon. Really importantly, before I go into the product, the business has transformed into a very highly recurring subscription business that's got real great dropdown of free cash flow, high-quality dropdown of free cash flow, which allows me and the team to have visibility around where do we want to put wood behind what arrows, and we'll talk about that from an innovation standpoint. From a product perspective, there's a few categories of our strength and focus. First is what we do to help industrial companies design their products.
A flagship product called Creo is our CAD tool that allows product companies to design their tools in a 3D manner, by which it then goes into a very important system called Windchill, which is in the category of product lifecycle management that takes all those 3D drawings and puts it all together, sort of like a recipe by which all the configuration parts requirements are created by which a product is actually manufactured. Once that product is out in the field, we have a product called ServiceMax, which allows product companies, through their service technicians, to understand what actually happened to the product in the field.
In between all this, and a really interesting part of our business is called ALM, Application Lifecycle Management, a product called Codeb eamer that is the fundamental basis by which software, which is now a critical component of anything that is product-related, we have the capabilities now for customers to leverage our tools by which that becomes an important part of their process. All those things are very interesting to our customers, as well as the legacy, as well as the go-forward momentum of the business going forward.
That's awesome. That's a great kind of overview of the stack, I'll call it. Let's give a little perspective about yourself, right? You joined, officially became CEO back in February, joined via the ServiceMax acquisition. Maybe talk a little bit about the big observations you've had so far coming into the seat, and maybe even the biggest surprises.
Sure. From a product capability standpoint, addressing these amazing industrial companies worldwide, I believe PTC has assembled very strong product capabilities, and we've advanced our leadership in many of these. I feel really strong about our capabilities and the feedback that we're getting from customers. Two is from a response of our customer base. The amount of change and transformation that is happening and still to happen, I believe still in the early innings of the most important product companies in the world deploying technologies like Windchill, like Codebeamer , still for their success and competitiveness is the great opportunity we've got ahead.
Lastly, from an employee and from what we have as capabilities within the company, we have tenured folks, new folks that have joined that are thrilled to be part of the journey, and I'm excited to go serve our customers in a meaningful way with all of them.
That's great. If you think about this vertically integrated stack across the portfolio that you talked about, how complete is this portfolio today? Is it something where we need to make major acquisitions? Is it talking? Is it just execute? Kind of talk through kind of how you're thinking about the completeness today and the vision going forward.
Yeah, as I mentioned, I believe the product portfolio satisfies the desires and needs of our customers today. As far as the eye can see, we are innovating and building on the roadmaps of our core systems in CAD, PLM, ALM, and ServiceMax. We are continuing to make sure we are best in class in those areas. The execution of those, how the tools work together, how they integrate in an open way with other tools, how the user interface looks like, those are the areas by which we are continuing to reinforce our investment, putting more wood behind those arrows to make sure we have success with our customers in what is a very seminal moment for our customers needing the support from people like PTC.
Super clear. I'd love to go through a deeper dive of the portfolio, but even just before we do that, just talking about the macro, it's hard not to think about design software in general and PTC in particular without at least acknowledging the cyclical end markets perhaps that some of your customers are in. PMIs have been turning up and is a little bit mixed potentially in yesterday's reading, but globally still up. Maybe talk a little bit about PTC's ability to bifurcate from the macro and kind of how important are these macro data points? Should investors be thinking about those as you think about the PTC business and the drivers going forward?
Yeah, first off, as a reminder, when PTC was not a subscription business, we were tied to PMIs. That has not been the case. We've been decoupled from PMIs for many years now. Part of the drivers of this is not only the shift of perpetual to subscription, but really importantly, what I look at is how customers are creating the criticality of tools that PTC has to transform their business, irrespective of the economic environment. While I've said and we've been consistent around sales cycles being very much stressed for the last six quarters, and we've driven very strong results through that period, the macro environment has impacted that basis, not the decision for companies to have transformative projects like PLM expansion, like Creo, like ALM. That has not impacted them in what we're seeing at least.
Got it. If you think about kind of the key priorities for PTC, going deeper in PLM is, to correct me if I'm wrong, priority number one. Talk a little bit about the opportunity that you see for core PLM and the evolution of how customers are using PLM and how that's been changing over time.
Yeah. First off, historically, PLM was used as a CAD vault. So all the design drawings would be just put into a vault of sort. Now, as the world has become more complex, meaning products are being more complex, more customized, there is more variance to products, there is stress in supply chains. The ability for PLM to now have product data coursed through the veins of the entire enterprise in a seamless manner is more critical than ever before in the history of all these companies. That is why Windchill is such a critical part of the transformation of these businesses for their desire to have faster cycle times, faster new product introductions, lesser quality defects, ability to actually understand their ecosystem before they manufacture and spend money on a very expensive part of their process.
All those things come back to needing a product data tool that creates seamlessness across the enterprise, and that's what Windchill does.
Got it. Taking that a step further, you've talked about the definition or the usage of PLM expanding both within R&D and outside of R&D departments. I'd love to kind of flush that opportunity out.
Yeah. You know, previous to PLM being utilized across the enterprise, most of what happens to the design of a product was happening through swivel chair or manual processes. So the engineering department creates the configurations, et cetera, of the product, and then hands it off to a supply chain engineer or a manufacturing engineer after all that work has been done. That's too late. It creates longer cycle times. Because of the need for constant iteration, collaboration in what has been historically siloed and manual processes post-engineering, we now need, and what our customers are adopting is a broad utilization of PLM across not only engineering, but all the other downstream groups that need product data to actually execute across new product introductions and lowering quality defects.
Got it. Maybe last point on PLM before switching gears, it's been a really good growth engine, really durable, called low to mid-teens growth in recent years. Is this a trend that's kind of nearing its end, or is this still a multi-year tailwind for the reasons you just talked about?
We're just getting started. That's truly the real exciting part of being in the seat is we've executed, I believe, really well in difficult selling environments for the last few years. We've driven strong PLM growth during that period. When I've looked at the business and uncovered and continued to uncover more stones, I see that that business has massive tailwind in terms of being at the early innings of adoption of this at a critical time when the world is getting more competitive. Cycle times are needing to be compressed from 60 months. Automakers now, because of Chinese automakers, need to compress to 30 months. Guess what? You can't do that without having a PLM system at the central nervous system of your business. That's why the exciting part of the next number of years are ahead of us in terms of PLM growth.
Makes a ton of sense. Thanks for that. Maybe talking about ALM application lifecycle management, you kind of gave a brief overview at the top. Talk a little bit more about what Codebeamer is, how companies are using it, and why this has been this kind of growing opportunity for PTC.
ALM application lifecycle management, our product that we believe is the leading, most modern, scalable product out there in the marketplace is called Codebeamer . Codebeamer has been accelerating, and we see a lot of interest in Codebeamer at scale currently because of a few things. At the highest level is software-defined everything is occurring. When all the product companies in the world need to now embed software into what has historically been mechanical, electronic, and hardware design, you now need software engineers at these companies that previously just had mechanical engineers. Those engineers that are dealing with the software component need tools that actually allow them to perform their roles in product companies.
Codebeamer , particularly in an agile product development process, is the absolute leader of all the things a software engineer does to actually test, create requirements, release a software component to the rest of the organization. That is what Codebeamer has been successful in. The second piece that has been very important and that will be even more important over the next number of years is the regulatory and the compliance nature of software releases for product companies. I mentioned automotive as an example. In automotive, an OEM who has deployed Codebeamer has multiple different suppliers needing to drive, for example, a lane departure warning system, right? Others are creating the software, are creating the linkage to the hardware, to the braking system, to the signaling system, to the radar system to see how that actually works in practice.
The OEM, once it puts a car out into the wild, and if something happens with that lane departure system, as an example, which has created all this software development, hardware development from multiple different suppliers, including the OEM, if something happens, the lane departure does not work and there is a crash, there is a traceability that's needed of what part of the software did not work, what part of the linkage to the hardware did not work, to the braking system, et cetera. That's what Codebeamer does. It creates that traceability up and down the stack, which is so critical to the lifeblood of any of these companies and will translate to many other industries like medical devices, like defense, energy. It's continuing to build momentum as we focus in on automotive as well as some of these other segments that are growing in importance.
How do we think about the opportunity around tip of spear? In other words, not just cross-selling Codebeamer into your stall base, but using Codebeamer as a foot in the door to then go back to potentially Creo or Windchill over time.
Yes, we have a fundamental belief here at PTC where the strength of Windchill in our PLM system, which does a remarkable job of hardware and mechanical configuration, the same will be needed of software configuration. When you think about our ALM suite, which includes Codebeamer and Pure Variants, we have the most complete offering of an integrated approach from hardware, mechanical, electronic to software configuration management. When we talk about tip of the spear, we feel as we continue to accelerate the deployment of Codebeamer across each one of these verticals that our opportunity to win incremental PLM displacement over time will be advantaged going forward, given it's a highly differentiated offer versus anything out there competitively.
Maybe just closing the loop competition-wise, who are you competing against? Is it homegrown and potentially who are you replacing?
For ALM, it's a growing market. No one can even put a finger on this market yet because it's moving at a pretty remarkable pace that's reminiscent of my days in the Silicon Valley. That being said, there are historical tools that don't fit this regulatory framework that I talked about that Codebeamer is advantaged in, things like the big blue IBM DOORS, others that are out there. Siemens has got a product called Polarion that doesn't have what we believe is the agile product capabilities that Codebeamer has. There's other competitors. We feel like we've got a leg up and we're putting more wood behind that arrow so that that gap widens.
Super clear. Let's switch to ServiceMax for a minute. Part of the business, I know you know very well. Maybe you remind everybody what Service Lifecycle Management is and how companies use it.
Sure. Service Lifecycle Management, our marquee product there is ServiceMax. We've got others called Servigistics that does very sophisticated AI-based parts planning that reduces inventory levels for our customers and some others. Let's focus on ServiceMax. ServiceMax is the capabilities we give to product companies that have field technicians by which we give them modern web or mobile-based tools to replace the paper-based or manual ways in which they were able to fix, repair, and maintain complex, long lifecycle assets in the field.
Got it. On the last earnings call, you did talk about, I thought, a pretty interesting customer win with an elevator manufacturer. I think it talked to some of the cross-selling opportunities. Maybe talk a little bit more about either this deal or kind of more broadly cross-selling opportunity and integration overall, where we are in the integration between ServiceMax and the broader portfolio.
Exciting priority number one for ServiceMax is leveraging the customers of PTC that look, smell, and feel like the existing customers of ServiceMax pre-acquisition that have the same needs for their technicians to service assets. We are off to the races making sure, like we did at this elevator company, to make sure we leverage the relationship of 30+ years of PTC to then show them the highly differentiated offerings of ServiceMax for their field technicians. That is the concept of point priority one of what we are doing with ServiceMax in terms of synergies with PTC. We have plenty of wood to chop there and are still in the early innings of continued momentum building that started at the onset of this year and will continue over multiple years to attack that opportunity.
Number two, exciting priority for the business is something very differentiated, is linking back the service technician details that are now in ServiceMax for an asset for a product company and looping it back to Windchill. Now this closed loop potential view, we're putting out a new release in July or first one of an integration between Windchill and ServiceMax where a design engineer or an engineer can now look at what parts are failing or succeeding, how often they're being repaired, how often they're being maintained, what warranty is on certain parts of a, call it MRI machine that they either want to solidify, make a different design of a product to make it more resilient, or quite frankly, charge more for a warranty so that they can make more money.
That loop is very differentiated, and we have the right to win between the system of Windchill and ServiceMax to enable our customers to do so.
Makes a ton of sense. Maybe one more question, then we'll open it up. Just competitively, similar question to what we talked about for Codebeamer a few minutes ago. Talk about the competitive landscape for ServiceMax and who you typically replace.
Predominantly for ServiceMax, it is replacing homegrown systems or very manual processes, giving the modern tools that all of us knowledge workers have been accustomed to, to the people that actually do all the hard work in this world, give them that sort of modern tools. That is what we are convincing our customers to do so. We are making great progress around it.
Awesome. What's on your mind? Keep thinking. Yeah, please. Maybe just to repeat the question, as we put kind of the whole portfolio together, how do we think about top-line growth?
Yeah, good question. I put out a recent my view of our mid and long-term ARR guidance. So the metrics we look at, ARR and free cash flow. ARR, I said, would be low double- digits ARR growth. Over the last number of years, we've gone anywhere between 10% ARR growth to up to 15%. I put out an ARR growth target that I believe is measured that doesn't take into account the calculus of the macro improving, i.e., sales cycles getting shorter and less complex in the arc today. I believe it's in that range for ARR growth.
Very importantly, I've reiterated the free cash flow guidance because it goes to my view of the quality and the flow through of the free cash flow is very strong at this company and something I feel confident to make sure we hit those targets over the next few years on free cash flow.
When will you be in a position to stop buying back stock? ServiceMax acquisition, you guys postpone the buyback, just an update on uses of cash and buying back stock.
Sure.
Maybe just to repeat the question, share buybacks and when can we restart resuming those?
Sure. Christian and I are aligned on this year being a debt- paydown year, and we are making headway there, as you have seen over the last quarter's results. At the end of this year, we will go back to assessing the 50% buyback kind of philosophy that we have got and make some announcements at that point once we have decided that.
Assessing the buyback, does that mean potentially doing more than 50%?
Just assessing the buyback, does that mean the same as 50%, more or less?
I'm looking at the business. As we get to the end of the year, we'll make the decision on the percentage of the buyback. Right now, we've stated 50% after we get through the debt paydown that we're doing over the course of the year. 50% is the stated goal of how much we're going to allocate to buybacks.
Thank you. Thank you.
Let's talk about SaaS for a minute. This is super interesting. You've kind of articulated it's a 10+ year journey to SaaS. Let's first talk about what does that mean? What is going to SaaS really talk about in terms of Windchill+ and Creo+ ? Candidly, given some of the innovation, talk about why shouldn't it even be faster than 10 years?
Yeah. First of all, we're already at 30% of our business is pure native SaaS. In terms of when I talk about the Windchill on-premise that's currently on subscription and Creo business that's currently on-prem but subscription, that I view will take a 10+ year journey. The reason for that is while we're seeing continued progress on both those product areas, I am not going to rush the market and our customers to a delivery mechanism called SaaS if they are not ready. Whether that accelerates the 10 years or not might happen, might not, but I'm very focused on the business workflows of why PLM should be adopted across the enterprise, why Creo should and will continue to have the stability and the growth rate we've seen in previous years. How do we accelerate ALM growth from a business workflow standpoint?
How do we link ServiceMax to the business of PTC and link it to the other core systems? That in itself has great potential and runway for growth. SaaS is the underlying potential delivery mode that puts the cherry on top. However, that's not necessary for me answering the position of what we're talking about from an ARR guidance standpoint in the mid to long- term.
Super clear. Just as a SaaS follow-up, are there certain either geographies or verticals where you expect to see kind of the shorter end of 10+ years versus the longer end?
Sure. I'll take the longest end. Defense companies might never go to SaaS, right? I'm sure you'll ask the AI question in a few, but some companies that are thinking about their AI strategy, which we're working hand in hand with them on, think about data integrity and data privacy and security. The concept of SaaS becomes somewhat more interesting in this AI world we live in. Yes, there are obviously shorter-tail customers that are looking to have maybe less complex infrastructure. They've already moved most of their systems to cloud. They want to put all of it consistently in a SaaS framework. We have a tool to do that. We've invested in it. We have the capabilities. It's off the shelf. They can use it, but we won't force our customers to do it.
The openness, working with our customers has worked well for PTC for a long number of years and will continue to be the way in which we run the business.
Great. What else?
Can you talk about go-to-market alignment between ServiceMax and the rest of PTC, how you're thinking about alignment with Salesforce? It's kind of like key things looking at, metrics you're looking at to see that cross-sale working well?
Yeah. First off.
Maybe just to repeat, just the go-to-market alignment for ServiceMax and PTC.
Yeah. First off, up until this year, there were two distinct sales teams, ServiceMax sales team and PTC sales team. We've now aligned the sales team where they have joint responsibility and quota, carrot, and stick alignment to make sure we take advantage of priority one, which is the similar PTC accounts to be able to see the ServiceMax offering. That's like job number one. Job number two is the product roadmap. We're making sure we see the releases come out and start seeing the customer feedback as well as hopefully the bookings from that area as well. On the first metric piece is we know who those customers are that are similar to ServiceMax in terms of the capabilities that we could provide. We're looking at what are the conversations with the customers? Where do they sit in the pipeline? How mature have they been?
How much bookings have we got on each one of those by account, by region, by leader? That's how we're creating accountability around it.
Since you teed me up, I'd love to ask about AI. Talk about kind of the AI opportunity for PTC, how you think about it internally, how you think about productizing it.
First of all, I'm super thrilled with the potential of GenAI. As you might know, we've been using AI and machine learning for 10-plus years, many of our products. GenAI, we've been creating a number of potential internal threads, one external where we've created a beta ServiceMax Copilot that takes service technician data and just makes it far more usable in a quick, efficient way for technicians to do their job more efficiently. We're getting really good feedback on that. We're thinking about ways in which we could use all the amazing parts information in Windchill to create far more efficiencies for customers, redesigning parts, spending less waste on part redesign, et cetera. We are very much in the centerpiece of that. Third is on Codebeamer around requirements management. The consistency of that and being able to recommend requirements management using a Copilot is very interesting.
I want to summarize that many of these are, and our view is to make them very much use case dependent. Ultimately, as I'm watching on the ServiceMax Copilot, how much are people willing to spend on this incrementally? Third, what is the cost I'm giving out to all the other big infrastructure players? Those components all need to work out before I come out on a call and pontificate about or tell all of you that this is the monetization increment that we're going to get at PTC because of these AI strategies. It's a strategy we're looking at, we're working on, I'm investing in. There's great opportunity. I'm not sure when it's actually going to hit the P&L in the manner that will allow me to discuss that in detail with all of you yet.
Awesome. I think we're out of time. Neil, thanks so much for being here, Matt as well. Hope everyone has a great rest of the conference. Thanks again.