Good afternoon, everyone. Thanks for joining us today. My name is Patrick Baumann. I work with Steve Tusa on the electrical equipment, multi-industry, and now industrial software team. We've been covering the space for a little bit over a year now, and we're pleased to have with us here today PTC, and with me today is CEO Neil Barua. The format's going to be just a fireside chat, and then I'll open it up for questions for the last maybe five minutes or so. For those in the audience that don't know PTC, maybe it would be helpful to give an overview of what PTC is, what you guys do, just the basics. I mean, I have sat in on some meetings where people are still asking some basic questions, so I think that'll be helpful for everybody.
Sure. Thanks for having me, and happy to talk about PTC, which I believe is the best company in the world, and looking forward to making sure everyone knows more about it. PTC is a company been around for some time, but we are the leaders in providing industrial software for companies that design, build, and then service all the critical products that are out there in the world. We have been doing it for a number of years. Predominantly, I'll give an example of how our software solutions work for our customers in the industrial manufacturing space in particular. As an example, a wind turbine gets created and designed in our software solution called Creo. That 3D model design then goes into another one of our software solutions called Windchill, which is in the category of product lifecycle management.
All the components, the parts, the configurations, the recipe of that wind turbine is created and built on Windchill before it actually gets manufactured. After manufacturing, the wind turbine actually gets sent out to the field by which it actually operates. In that scenario, the wind turbine gets serviced by something called ServiceMax, which allows our customer, the manufacturer of the wind turbine, to fix, maintain, and repair that wind turbine. In addition to all this, which is actually really interesting, and we'll get into it, is within the wind turbine, there's now software being embedded into the hardware. We have something called our application lifecycle management suite of services called Codebeamer that allows software to be embedded into the build-out of the product by which it gets manufactured and delivered to the field.
Super helpful. Maybe stepping back, I know you have joined PTC maybe a year ago, took over as CEO earlier this year. What were some of the key learnings so far, maybe, in terms of your experience here? Maybe some of the biggest surprises that you have seen since kind of coming to the company?
First of all, I'm very pleased by the set of capabilities that we've assembled at PTC currently, in particular with the transformation that all of the customers that we are partners with and that we're looking to are going through such transformation to keep competitive in this market space, particularly with the product data element, the complexity of products, the embeddedness of software, the necessity to actually think about servicing those assets and the efficiencies of it are right now and for the last number of years really hitting momentum by which companies need to transform. We are very well placed to be the partner of choice for that actual transformation. That's number one from a positive surprise and an inspiration for all the things we could do at PTC. Second is around the business itself.
What we're doing since I took over back in February is really prioritizing the things that really matter and create most customer value. As I mentioned, that begins the continued investment and reinforcement of our core systems, Creo on the CAD side, Windchill on the PLM side, Codebeamer on the ALM side, and ServiceMax. Those actual product categories are the inspiration for a lot of our customers' conversations of needing to deploy those tools by which they can stay relevant in the market space. We have a great portfolio at a critical juncture for our customers, and we're looking to execute across that strategy to build on the continued momentum of PTC.
Do you think, as you look at this portfolio, that you have all the pieces that you need? From this point forward, it's just about execution, or do you think, based on your initial views of the business, that there are things you got to add still from an acquisition perspective?
Right now, I feel great about the portfolio. We've assembled the set of capabilities that I believe are critical and at the right moment for our company's journey on this transformation. Today's job number one, two, and three is execution of the strategy, the five priorities that I've laid out around PLM expansion, application lifecycle, cross-sell of Codebeamer, ServiceMax, service lifecycle management, alignment to all the core systems that we're doing. Underneath it, really think through a thoughtful process around the SaaS journey with our customers. All of that is execution-related. Given the results of the business, which have been solid, and the continued view of building on that momentum, right now the team is focused on making sure we have continued and increased effectiveness across those core capabilities so that we provide the best value to our customers.
Is there anything that you think from your background in PE? Clearly, there's overlap because you were head of ServiceMax, but anything from the PE perspective that you could bring to bear at PTC?
I like to look at things in what really matters the most. We've been saying it around putting wood behind the right arrows. As a company, again, we are focusing in our core systems because they're absolutely critical for our companies, our customers to adopt. They're what the customers are asking us to serve them with. We'll make sure, and we are already in earnest doing, putting the focus, attention, and resources on the things that matter the most. I think that discipline that we've already instituted, I mentioned in the last earnings call, how we're thinking about IoT and ARB being enabling technologies of these core systems is a reinforcement of making sure that we put the wood behind the right arrows, which are these core systems to make sure we take advantage of the market opportunity there. That's number one.
Number two is on the way in which we simplify the business in terms of what matters the most. I think with the team's alignment here, aligning ourselves towards those five priorities, but then aligning the organization and the accountability and the discipline around that is something that's really important because it creates momentum, excitement with our customer base, and an excitement within the employee base that we can continue to build on for the next number of years.
Helpful. Maybe stepping back, and a lot of these presentations, you're going to get questions on the macro, so I want to give you kind of a macro question in terms of the environment. You're starting to see improvement in PMI indices and spots. How does that translate to your business? It didn't seem like you really saw a dramatic pullback in ARR growth with PMIs coming below 50. How should we think about the correlation between your business and those macro indicators?
As you mentioned, the company's been performing in a bad economic environment for the last number of years. We believe we're decoupled from the PMIs. Just when I look at what's happening with the business, customer conversations, I rarely look at PMI. What I look at is what's happening in the pipeline, what's happening with customer conversations. What I'll say is that the results are due to the fact that when I think about and talk to customers, as an example, last week in Europe, you will see that transformation, despite any PMI reading in companies, is critical to just remain competitive from a how do you accelerate new product introductions, how do you increase quality of the products that you deliver, because competitively the world is moving at pace, and our customers, the largest of the industrial manufacturers of the world, need digital tools to do that.
When I talk to CEOs, C-levels that I've been doing, they rarely talk about the macroeconomic conditions. They talk more about what do I need to do to make sure I'm relevant in the next two, three, four, five years based on what I'm seeing externally. That's what we've been focused on, making sure we serve the tools by which they could actually remain competitive.
Just along these lines, it's probably not even along these lines, but just kind of to refresh the recent update of the midterm ARR targets and what drove that decision. I don't think it has any impact on the free cash flow outlook at all, basically, but maybe just a quick overview. You talked about it on the earnings call, but maybe it would be helpful for the audience just to provide just a quick overview of that.
Yeah, it varies simply. I'm having a more measured view around ARR. I'm assuming that the environment that we reside in, which has not been great, continues. I'm hopeful, glass half full, that it improves, but I'm not assuming that in the ARR guidance. Right now, I just want to keep focusing the team on our own execution, delivering customer value. If things get better, where close rates and the largest of deals get better over time, then the actuals will show that. I don't want to put that out there. I want to have a measured view of ARR guidance and keep executing on our internal plan.
Yep. No, we thought that made a ton of sense. I mean, it was not exactly your target to begin with, so having a fresh point of view is helpful always. Maybe just turning over to PLM, which is the key product category for you guys, obviously. You have been talking a lot on recent earnings calls about PLM expansion. Maybe help the audience understand what exactly that means, what it does for companies, and then first just kind of level set what PLM is maybe would be helpful first. Yeah.
We're very proud of our momentum, heritage, and product lifecycle management in PLM. Again, our flagship offering being Windchill. We have a native cloud offering in PLM, also called Arena, but we're really focusing on Windchill given the potential of the aggregate dollar growth of that business, which is why it's the number one priority that I've set forward for the company. What it does, very simplistically, is it creates the 3D design, again, built on Creo. It takes those and historically has been just a data vault for those design drawings. It's now expanded in many of our cohort of customers and will do so over the next number of years because customers need to understand their product data seamlessly at every stage of that development.
It can't be done in a sequential manner in terms of how a supply chain or a manufacturing engineer sees the changes that's happening in product configurations. Within PLM, every constituent of an enterprise that works with product data can see that data, can see the changes happening to the configuration of the product by which they can then think about the downstream impacts that in advance they could plan for. As an example, a design change happens on a part for this wind turbine in Windchill. You could see it. With Windchill now, the supply chain group can see which parts are being put into final design by which they could take a look at, do we actually have the right vendor, partner logistically to actually get that product on time by which we could deliver to the customer that purchased that wind turbine.
That creates this seamless way in which the product can move faster through to manufacturing. Without it, right, the opposite, which many companies do not have this value, which is why it is so important, without it, it would only happen at the last stage of the process up to and including when it is actually been asked to order the part. Only then would the supply chain person say, "Hey, wait a second. We cannot get it through the Red Sea, so redesign that wind turbine again." Takes months of rework to do that. What PLM does is it allows a company to compress that product development lifecycle, keep it collaborative by which they could have faster net product instructions to the market and at a higher quality.
The PLM product for you guys has been a really nice growth engine for the last few years. Do you see that continuing, accelerating as it expands? How would you describe the opportunity over the next few years for PLM?
PLM, Windchill, is seen in many companies already, but will be seen universally as one of the, if not the most important enterprise system in a product company. That is our mission, and we believe there's a real opportunity to do so given the dynamics of all the things our customers need to keep pace with in the world. They have great systems in ERP, CRM, etc., all great. We work alongside those systems because the authoritative source of truth of the product data has got to live in PLM. It does not live in ERP, does not live in CRM.
When companies think about, "How do I compress development cycles from 60 months to 30 months?" they look through all the workflows that are occurring in their company, and they realize you cannot have manual swivel chair processes and product development processes to actually get to a 30-month development cycle versus 60-month. You need a system and a software solution like PLM to do so. That is why we are so well positioned for it, and we are very enthusiastic as far as the eye can see around the potential of that business.
Maybe switching gears to SLM, we talked a little bit about ServiceMax. Maybe it'd be helpful to tell everyone how companies use SLM first to begin with.
SLM is Service Lifecycle Management, and one of the core areas of real strength we have in our SLM suite of solutions is called ServiceMax. We've got others like Servigistics that does parts management, a fantastic solution, but we're focused in on ServiceMax given, again, the aggregate dollar growth potential of that business relative to the other parts of the portfolio. ServiceMax is the software solution that lets companies maintain, repair, and service long lifecycle, high-value assets out in the field. Take the wind turbine or take an MRI machine. Technicians at some of the largest companies need to send those technicians to the worksite and make sure those assets are having high uptime or being serviced in the right entitlement manner.
That's what ServiceMax does, and we're enthusiastic about the correlation with the number of PTC customers that design and build high-value, long lifecycle assets on Creo and Windchill that now can leverage ServiceMax to actually service those assets. One of the things that we're looking at is a two-pronged approach. Number one is making sure we cross-sell all those great PTC customers and make them also ServiceMax licenses at those technician license capabilities. Two, we're just putting out a release in July where the ServiceMax work order data, so everything that's happening to that wind turbine in the field, is being organized in the ServiceMax platform. We know every component, what's failing, what's working, what's being repaired, what's being maintained.
We are now going to take that service record history and port it back into Windchill by part number so that an engineer can see what's actually working within that wind turbine, what's failing, why, how much has it cost us by which they could redesign the part potentially or create different solutions by which they could charge their customers more for a more resilient wind turbine or in a different manner of actually producing the results that the customer was needing when they purchased the turbine. That connection point unlocks the actual living, breathing digital thread to actually work within our customer base.
No, it makes a ton of sense. In terms of the cross-selling aspect, maybe just talk about traction of getting ServiceMax sold against legacy PTC customers. Last quarter, you talked about an elevator company that you were working with on their service business to help them improve kind of productivity of the business, etc. Maybe you can elaborate on that a little bit.
Yeah, I think we're making solid progress in the cross-sell. We have much more to go. We have a very nice pipeline building and teams looking forward to seven, one-eight-figure ServiceMax deal, which we would never have gotten in a standalone basis to close out and continue to build momentum as we exit the year. As an example, this elevator company, this was a company that for about seven years at ServiceMax, during our time with GE and post-GE when we were owned by Silver Lake, we were trying to get to this company with no luck. They're a Creo and Windchill customer, and they bought into the vision of not only do they want best-in-class field service technician license and capabilities using ServiceMax, but very importantly, they want to use that ServiceMax data to make their design of their elevators better.
The example I gave to you about it being ported back into Windchill and ultimately creates a better design. That is a flavor of the conversations, and we are methodically going after this using a joint sales team approach, the right use case, the right value prop, and building on success, which nothing is better than close to a seven-figure type deal to get salespeople excited that they can make money by teaming up with their ServiceMax colleagues. We are building on all threads to keep building on this momentum that we have currently got with ServiceMax. Much more to go.
Exciting. In that kind of a situation, who are you competing with? Who do you take the business from? Was there anything there to begin with?
It's predominantly homegrown tools, and there was another provider, that large enterprise software company without the vertical expertise that ServiceMax and PTC have.
Okay. Maybe switching to ALM, can you remind us what ALM is and what it does and kind of what your offering in this space is called?
ALM stands for Application Lifecycle Management. In layman's term, it means the toolkit, the software that allows for companies that embed software into their product to have the requirements testing, the requirements management, the test management, the release management, and very importantly, the traceability of when you develop software in an agile product development process, how do we actually trace what's actually happened to the product as it gets embedded into the hardware. That's what our product, Codebeamer, does. It's the most innovative, most interesting ALM product out there for our customers.
We could talk about what it's doing within the automotive sector as well as the suppliers of automotive, but we have a fundamental belief that not only does it create great value for companies building software in conjunction with their hardware and mechanical products, but very importantly, it needs to now build a very similar framework by which the release cycle of a mechanical part with an embedded software becomes one and the same. That is the theme that actually we feel very much excited about in the future, and it might come sooner than even the medium to long term, which is companies need to think about products as not hardware, mechanical, and software separately. It's one and the same. What Codebeamer does on one side, integrated with Windchill, is it's one throat to choke, one tool to do that type of development in one spot.
That's what we're long term most excited about.
That is Codebeamer, not Codebreaker. Someone called it Codebreaker before. Maybe we could talk about the auto market since that is obviously an area that is seeing the most traction with this product. After you do that, outside of auto, what kind of applicability does it have in other markets?
What I love about auto, I was in Italy with some of the most exclusive brands in the world. I was in Germany where everyone is thinking about how to be competitive in auto. And automakers, as we all know, have done remarkable things on the mechanical side. One of the best ways in which hardware has been configured, designed, and we feel very proud about our heritage, particularly in what we do with Windchill with auto OEMs. But Codebeamer, as I mentioned on a few earnings calls, has caught fire in that market because of predominantly software-defined vehicles. If we think about going into a car, everything is software-led.
When we see what's happened in China with their acceleration of really embedding great software with high quality and very low-cost cars, it's causing automakers around the world to say, "To remain competitive, we have to treat software the same as the way in which we treated our mechanical engineers." Codebeamer is one very critical and urgent element to facilitate that to be consistent with the high-quality German car with high-quality software embedded in it. How do you make that all work? Codebeamer has taken hold because of that, and we feel very good about building on that. Last part here is what happens with this market is the suppliers will also need to comply.
All the tier one, tier two auto suppliers who are providing parts of software-defined vehicles also need to have this type of rigor of release management, test management, traceability by which the OEMs can tell regulators or themselves that, "Here's all the things that happen with the software development release for, as an example, the autonomous driving release that a car has. And here's, if it fails, where it failed, and if it succeeds, here's where it succeeds." Great market, feel very good to make sure auto OEMs and suppliers stay relevant and competitive in a very interesting market because of China.
Great. Maybe switching once again, when we picked up coverage, I remember the SaaS transition was like a big theme. I think it's still a big theme for you guys. Maybe talk about the migration. Over what period of time do you think the transition will take place? Are there particular areas or customers that are going to migrate quicker than others and vice versa?
Using baseball terminal, I think we're in the early innings of SaaS transformation in our space. What I've said is we will be methodical, we will be continuing to invest, and we will be there for our customers when they decide to move to that delivery model. I'm very much focused as a company to make sure the business value of Windchill is seen. All the things we talked about, the business value of ALM, Codebeamer is seen. The business value of ServiceMax is seen. The continuation of the strength of Creo is seen. The delivery model is going to be up to the customer. We will be there to provide that type of solution.
It'll be good economics for us ultimately, but what's most important is we work through our customers through that journey in a highly important system for them across all those four flavors by which then they can move to SaaS when and if they decide. There'll be several of our customers that never go there for the next 50 years given some of the things that happen in some of the more regulated industries, but we'll be there for them. It's already started in a few, and we'll continue that journey, over a 10-plus-year journey in my estimation.
I want to quickly open it up for questions if there are any. Otherwise, I'll keep going.
Hey, Francois Yoshida with Matrix Capital. Thanks for taking the question. I wanted to ask how you guys are thinking about leveraging generative AI for your business across Creo and Windchill respectively, and how does that factor into any monetization timeline you're thinking about and specifically into the ARR growth building blocks you've talked about before?
Yeah, great question. Let me start with the first point. We have not figured out the monetization piece yet. We are spending a good amount of time focusing in on this. We have a point of view that the data foundation we have with Creo, Windchill, Codebeamer, and ServiceMax are some of the richest data sets that are out there in any industry, bar none. We've already put out a beta copilot using GenAI for ServiceMax to make technicians more efficient. We're taking a look. We're watching what the cost structure looks on that, how much companies are willing to pay for it. That is something that is already out there for the last three months. We're watching that carefully. We're building on use cases on Windchill.
We have a point of view that parts reuse is really critical to our customers, can create hundreds of millions, billions of dollars of value given all the change management that happens with parts, the waste that happens with parts, the emissions that happen with parts that never get used. We believe that a copilot, a GenAI solution with Windchill and Creo could be highly valuable. That being said, I want to be clear. We're not putting out a commercial model yet. We're learning a lot, and we will work with our customers to provide the right use case that creates real value. At the time that I believe it'll make us money or create greater ability to capture market share, we'll be the first ones to talk to you about it. Until then, stay tuned.
We're working on it, but we're not going to be screaming from the rooftops until I see us making money on it.
I'll ask a follow-up just on that. As your customers are looking at different AI use cases across their businesses, have you seen any hesitation in closing deals as a result of that kind of reprioritization that they might be going through?
No. In fact, again, referencing my trip to Europe, almost 80% of my conversations actually were from the CEO getting a lot of questions around GenAI from folks like yourselves and others, and then asking, "What will it take to drive real value using GenAI?" What it ultimately comes down to, the first real point that needs to happen is a clear data set and what I call getting your digital house in order. I think that should ultimately be a nice tailwind for PTC because we provide the software that allows product data, in the case of PLM, to actually be in order by which when we apply GenAI, whether through their own large language models or our own at PTC, that will be something that's necessary.
Without that right data set, you ain't going to get the right outcomes from the recommendations from a GenAI capability. We are feeling excited that the digital house getting in order, digital transformation will be even more inspired by people thinking about GenAI use cases, and we will be at the forefront of making sure people understand that.
Any other questions in the audience? Maybe I'll ask one on margins. Kind of how would you frame the opportunity for margins to expand in the coming years? Maybe the key drivers to that and expectations that are embedded in the multi-year free cash flow outlook, which is like $1 billion in a couple of years, right?
Yeah. I reiterated with Kristian our free cash flow guidance, and I feel we run a good disciplined business currently. It shows up in how we've produced really strong free cash flow results. It will continue, as we reiterated, in the new revised ARR guidance framework. Part of it is because, like we did with IoT ARR, we will be taking lower LTV/ CAC businesses and functions and areas to higher LTV /CAC solutions, to speak in your parlance. This goes back to the point of putting wood behind the right arrows. It also will take wood away from the arrows that dilute our focus, that dilute how we're actually operating within this framework. That is how we think about how we invest in the business.
That's how I'm excited that we're investing in the right areas with the right amount of money by making sure that the prioritization occurs around things that actually are accretive to us and of value to customers. That's how we'll think about the continuation of how we evolve the cost structure.
Helpful. Maybe lastly on capital allocation philosophy. What are your priorities? Debt pay down versus buybacks versus M&A? How are you thinking about that these days?
Our current policy right now is to continue to pay down debt. We'll reassess at the end of the year what we do with this strong cash flow performance that we have. We'll reassess that as we get to the exit of the year. In terms of M&A, right now, job number one, two, and three has been execution of the organic business, which there's plenty to chop wood on. That being said, we will always be open to M&A that accelerates and builds upon the core priorities of the business. The focus is on the execution currently. We'll just stay in the spectator seats and be very close to the field around what more can we do in M&A. It's been a great tool for the company, but we'll be very judicious and disciplined on that manner if we intend to do it.
Great. Thanks for joining us. I appreciate the time. Best of luck.
Thank you.
Thanks.