PTC Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2021

There are 9 speakers on the call.

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2021 Third Quarter Conference Call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for questions. I would now like to turn the call over to Emily Walt, PTC's Senior Director of Investor Relations.

Operator

Please go ahead, ma'am.

Speaker 1

Thank you, Peter. Good afternoon, everyone, and thank you for joining us for PTC's conference call to discuss our Q3 2021 financial results. On the call today are Jim Heppelmann, Chief Executive Officer and Christian Talbotchia, Chief Financial Officer. Before we get started, please note that today's comments included forward looking statements, including statements regarding future financial guidance. These forward looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements.

Speaker 1

Additional information concerning these factors is contained in PTC's filings with the SEC, including our annual report on Form 10 ks and quarterly reports on Form 10 Q. As a reminder, we will be referring to Operating and non GAAP financial measures during today's call. Discussion of our operating metrics and the items excluded from our non GAAP financial measures And a reconciliation between GAAP and non GAAP financial measures are included in our earnings press release and related Form 8 ks. Lastly, we will be referencing our earnings presentation today, which you can find posted on our IR website. And with that, let me turn the call over to Jim.

Speaker 2

Thanks, Emily. Good afternoon, everyone, and thank you for joining us. I hope you and your families are well during these continued uncertain times. I'm pleased to share that PTC has welcomed Many of our vaccinated employees back to our offices where requirements allow, and we look forward to the day when we can do this on a global scale. Meanwhile, we're monitoring the growing concern with the delta variant of the virus and hoping this new development Before I dive into the quarter, I want to share some important news on the Investor Relations front.

Speaker 2

Emily has been doing a great job holding down the fort since Tim Fox left, but keeping up with IR demands is a big job and Emily was happy to hear that reinforcements are on the way. I'm pleased to announce the hiring of Matt Shimao as our new Senior VP of Investor Relations. Matt Came to us as a recommendation from one of our largest investors, and he came out on top following a thorough search process. Matt comes to us with a finance background in several successful stints on both the corporate side and the sell side of Investor Relations. He's a strategic thinker, and we're excited to bring him on board.

Speaker 2

Turning to Slide 4. With 3 quarters behind us, our guidance for FY 'twenty one has us right on track to deliver mid teens ARR growth and $340,000,000 of free cash flow this year. That would be a 4th consecutive year of double digit top line ARR growth, And I anticipate we'll be discussing a 5th consecutive year of double digit ARR growth when we guide fiscal 'twenty 2 in 90 days or so. While the stronger PMI numbers that we're seeing can only be helpful, I'm pleased to see that PTC is earning a reputation As a company that can consistently perform at high levels, in good times and in bad. In preparing for this call, I thought back to where we were a year ago, With shutdown orders in place, empty offices and factories and schools contemplating how to educate from home, against that chaotic backdrop, I'm very pleased with the results that PTC has been able to deliver right through the pandemic.

Speaker 2

Some years back, In the days when our portfolio was narrower and sold in a perpetual model, our business was much more cyclical. But consistent reliable performance is always what we strive for, and we did the difficult work to earn that. The type of steady organic top line growth performance you see from PTC hasn't been the rule in our peer group, especially among our most direct CAD and PLM competitors. I attribute our superior performance to a better business model, In terms of growth drivers, PTC is well positioned for the future. The new logo success of our Onshape and Arena businesses Demonstrates the growing demand for SaaS Technologies.

Speaker 2

We see PLM joining IoT and augmented reality As key digital transformation technologies for industrial companies and years of market outgrowth in the CAD business Speaks to the innovation we've reignited there. Turning now to Slide 5, so we can get into the Q3 details. PTC delivered another strong performance in top line ARR and bottom line free cash flow in the 3rd quarter. Bookings grew in the mid-30s, a strong rebound in comparison to a year ago when bookings declined. In the top line category, we had a very solid quarter With ARR growth of 18% or 15% in constant currency to 1,420,000,000 Growth was driven by solid performance in our growth businesses, continued momentum in our core business, where we again outpaced market growth and by a solid contribution from Arena Solutions.

Speaker 2

On an organic basis, ARR grew 14% or 11% in constant currency in Q3, in line with our guidance. To close out the top line category, revenue growth of 24%, As reported, was driven by strong execution, aided by the impact of ASC 606 revenue recognition policies, plus of course the Arena contribution. Switching to the bottom line category, we delivered strong free cash flow of 85,000,000 And non GAAP EPS growth of 34%, reflecting a combination of strong top line results, combined with continued operating expense discipline, even while we also invest for growth. We continue to feel confident about our FY 'twenty one Up $340,000,000 in free cash flow. Moving to Slide 6.

Speaker 2

Digital transformation remains our main Secular driver of growth. You may remember last quarter, I shared our new tagline, Digital Transforms Physical. These three words are captured in our logo and embody how PTC thinks about our long term strategy. PTC is a digital company, But our customers do business in the physical world, making physical products in physical factories and servicing those products at physical customer sites. In my LiveWorx keynote in June and again at our Global Partner Summit in July, I outlined the power of PTC's unique Digital transformation story that has 1 foot in the digital world and 1 foot in the physical world.

Speaker 2

We tell our customers that Our digital transforms your physical. And by that, we mean we help customers use digital to define, Manage, Connect and Augment Physical Products. Our portfolio is already transformative. But now with SaaS, PTC is at the very forefront of thinking about how customers will use digital to disrupt physical in terms of taking an entirely different approach across the hardware, software and system administration of their IT systems. SaaS is surely coming to our market As it has so many other B2B software markets and PTC has carved out an enviable leadership position, We now have the most to gain from this disruptive force.

Speaker 2

With that as context, let's take a look at the respective contributions of the FSG, core and growth segments of our portfolio. Moving to Slide 7, you'll see that ARR In our Focus Solution group showed growth of 4% or 1% constant currency, which aligns with our growth expectations for this segment. ARR growth for our core business was 14% or 11% in constant currency. Our gross segment saw 60% ARR growth with 23% organic constant currency growth, Reflecting on one hand some lingering hangover from COVID, but counterbalanced by solid performances from our Onshape AR and Arena SaaS Solutions. Let's go a click deeper into the main elements of our large core and growth segments.

Speaker 2

Turning to Slide 8, Our CAD team delivered another impressive quarter with ARR growth in the low double digits, reflecting growth across all geos and an improving demand environment. The additional features and functionalities that Creo 7 delivers, including Creo Simulation Live and Creo ANSYS simulation continue to demonstrate the power and differentiation of Creo. In addition, last quarter, we announced Creo 8, which includes the generative design extension module called GDX, which is based on our Atlas SaaS platform. While it's still early days for Creo leveraging Atlas, this module is a great example of how PTC plans to deliver innovative SaaS based capabilities as we systematically transition our core products to SaaS. On Slide 9, a great example of how CAD generative design and real time simulation make an enormous impact can be found at HPE Coxa, a provider of products, engineering solutions and technology projects for the performance, automotive and motorsports sectors.

Speaker 2

The company designs and manufactures car components and complete systems for some of the highest profile super premium sports car brands around the globe. Inefficiencies in a multistep, multisoftware approach to design were causing miscommunication between design and analyst teams, which delayed production times and caused customer satisfaction risks. By adopting fully integrated and streamlined generative, Simulation and additive technology workflows in Creo, HPE COXA simplified the design sequencing, reduced overall design and You'll see that PLM continued to deliver very strong performance with another mid teens ARR growth quarter. From with a solid quarter in the reseller channel. And we saw increased demand for PLM through the Microsoft Alliance, Another proof point suggesting more customers are understanding the critical role that PLM plays in their digital transformation initiatives.

Speaker 2

Incidentally, during the quarter, we won 3 more Partner of the Year awards from Microsoft. On Slide 11, we profile a win with CellCentric, a Daimler truck and Volvo joint venture, which helps Hydrogen Fuel Cells, which develops hydrogen fuel cell systems and believes that PTC's PLM solution is best in class. As the deadline of becoming an independent entity loomed on the horizon, CellCentric knew they needed a PLM backbone in place quickly. PTC delivered our cloud based wind chill offering, establishing a best in class application landscape for PLM in a great competitive displacement. Moving on to our growth businesses, I'll begin with IoT on Slide 12.

Speaker 2

IoT delivered high teens year over year ARR growth, Driven by strength in Europe and APAC, Rockwell was the largest reseller of IoT in the quarter. On Slide 13, we discuss how Eaton, a multinational power management company, saw the need to deploy a digital transformation strategy across their enterprise. Our factory insights as a service IoT application helped to deliver quick wins, forming a digital foundation upon which they can easily add more use cases. Eaton was able to realize multiple improvements, including improved OEE, reduction in unscheduled maintenance, Reduction in manual efforts and 100 percent worker compliance with SOPs. Let me shift to our augmented reality business on Slide 14.

Speaker 2

The Vuforia augmented reality team again delivered strong results in Q3 With ARR growing across all geos, we saw improving retention and expansion rates The opportunity to cross sell into the larger PTC portfolio is gaining momentum. This quarter, we also announced a new AR product, Vuforia Instruqt, a unique Atlas based SaaS solution designed to enable enterprises To leverage 3 d CAD data to deliver create, deliver and scale interactive AR work instructions to optimize inspection procedures. When you consider that 2 thirds of manufacturers are still using paper based inspection processes, you can appreciate how Instruqt Delivers considerable value to our customers. Vuforia resonates with the customers we engage through our alliance Microsoft and one of the awards we won this quarter was Partner of the Year in Mixed Reality. On Slide 15, you'll see an innovative example of the use of Stair lifts are customized systems configured for and installed in the consumer's home to help those with difficulty navigating stairs, For example, the move from the 1st floor living room to the 2nd floor bedroom.

Speaker 2

Stetana leveraged Vuforia to create an AR application that allowed customers to see how a customized 3 d hologram chairlift could fit and work in their homes. With COVID limiting the amount of face to face interaction by sales and service teams, Vuforia enabled a customer centric tool that could be used by sellers during the sales cycle to help potential buyers visualize a residential stairlift in their home. SCANA saw increased purchase confidence, improved differentiation against competitors and shorter sales cycles through improved Turning now to Slide 16, Onshape delivered a very strong quarter with ARR growth of 40% year over year. We had a very strong bookings quarter in the Onshape core commercial business with larger deal sizes and stronger renewals, thanks to a maturing product. Onshape continues to gain share in the education market too, as schools and students turn to SaaS based solutions for mobility and ease of everything.

Speaker 2

Looking ahead to Q4, we see a strong pipeline for both the commercial and larger account enterprise business. Turning to Slide 17, it is fun highlighting customer stories, especially when that customer is solving a problem through innovation. Delta Development, an R and D company specializing in military applications for cooling and heating systems in extreme environments, The company was seeking to reduce its IT overhead, which had been taking up 20% of the engineering team's product design time. By moving from an on premise CAD system that took a lot of care and feeding to Onshape, the time loss associated with software installations, Licensing and regular system upgrades was eliminated. They both reclaimed the 20% of

Speaker 3

their design

Speaker 2

capacity and at the same time enabled real time collaboration on 3 d designs across the distributed team environment. Moving to Arena on Slide 18, Arena continues its growth trajectory, delivering ARR growth of over 20%. Arena is seeing strong traction with upselling as they increase penetration in the current customer environments and keep retention rates high. By all measures, Arena looks to be a great acquisition. I'm also pleased to note that we opened our first European Arena Sales Operation During the Quarter.

Speaker 2

Turning to Slide 19, NEXTracker, a flex company, It's one of the fastest growing clean tech companies in solar, offering next generation solar power plants with smart solar trackers and energy storage solutions. The company lacked a single source to track and manage its engineering design and development processes. They needed a better way to manage With Arena, NexTracker was able to reduce review and approval times by nearly 60%, eliminate time zone delays with global partners and accelerate product introductions by 25%. Arena has helped NixTracker significantly improve the way they design and get products to market. Naturally, I'm pleased that PTC has been able to complement the strong performance of Creo and Windchill in the traditional market With breakout performance from Onshape and Arena in the burgeoning SaaS market of tomorrow.

Speaker 2

The success Geographic performance was strong on a global basis and is shown on Slide 20, reflecting the performance trends we've seen year to date. America's ARR growth of 21% was driven by solid core performance and arena. Europe ARR grew 9%, consistent with prior several prior quarters, with strength in CAD, PLM and improving growth in IoT As we work toward full recovery from COVID there, APAC delivered the 4th quarter in a row of mid teens ARR growth with strong performance in core and growth businesses. Summarizing the state of the business on Slide 21, we're pleased with the general good health of PTC across all of its different dimensions and moving parts, and we look forward to wrapping up a great year of ARR and free cash flow growth here in FY 'twenty one. With that, I'll turn it over to Christian to take you through more details on the financial results and guidance.

Speaker 4

Thanks, Jim. Good afternoon, everyone. Before I review our results, I'd like to note that I'll be discussing non GAAP results and guidance, And most of the growth rate references will be in constant currency. So let me start off with a review of our 3rd quarter results And then we'll review guidance for fiscal 'twenty one. Turning to Slide 23, fiscal Q3 ARR of 1,420,000,000 Increased 15% year over year and on an organic basis, ARR grew 11%.

Speaker 4

Q3 free cash flow of $85,000,000 was solid and in line with our expectations. Q3 revenue of $436,000,000 increased 24% year over year as reported We're 19% in constant currency. Revenue performance was driven by strong execution and also reflects the impact of ASC 606 on revenue recognition, as well as a modest contribution from Arena. The strong Revenue growth, along with continued financial discipline, resulted in non GAAP EPS growth of 34% year over year. Turning to Page 24, I'll begin with the balance sheet.

Speaker 4

We ended Q3 with cash of 366,000,000 And $1,500,000,000 of gross debt with an aggregate interest rate of about 3.1%. We paid down $30,000,000 on our revolving credit facility during With our leverage ratio now less than 3x, which we told you was our goal, we expect to be in the market buying back Now turning to guidance, Slide 25 highlights a few of the key guidance assumptions. And while our assumption on the impact of currency on ARR has changed from neutral To an approximately 60 basis point tailwind, the rest of our guidance assumptions remain the same as they have throughout the year. So putting our ARR guidance into perspective and turning to Slide 26, last quarter, we told you that we expected fiscal 'twenty one ARR to be 1.445 $1,000,000,000 a growth rate of 14% to 16%. This assumed 10% to 12% organic growth, 400 basis points from Arena And no FX impact.

Speaker 4

Our revised guidance range is now 1,453,000,000 to $1,478,000,000 which is still 14% to 16% growth and assumes 10% to 12% organic growth, 400 basis points from Arena and approximately 60 basis points of currency impact. Regarding ARR linearity in fiscal 'twenty We've delivered consistent organic constant currency growth around the middle of our guidance range for 3 quarters, and we continue to expect the growth rate to be consistent in Q4 as we close out fiscal 'twenty one. Free cash flow is still Our $340,000,000 free cash flow target also includes approximately $15,000,000 of acquisition related fees, An additional $5,000,000 of incremental interest we expect to pay this year due to the Arena related debt, and also includes approximately $15,000,000 of restructuring payments. This is offset by incremental cash flow from Arena And free cash flow is also net of approximately $25,000,000 of capital expenditures. As a reminder, collections are stronger in the first half, offset by timing of expenses and headcount ramping throughout the year.

Speaker 4

And as you know, Our bond interest payment will hit in the 4th quarter. So we've already delivered more than 90% of the free cash flow target for the year, We are raising revenue guidance and EPS guidance for the year. Our prior guidance for fiscal 'twenty one was 1 point $710,000,000,000 to $1,740,000,000 a growth rate of 17% to 19%. We're now expecting fiscal 'twenty one revenue of $1,733,000,000 to $1,763,000,000 a growth rate of 19% to 21%, which includes Operating margin guidance, both on a GAAP and non GAAP basis. GAAP operating margin increases from 15% to 17% To 17% to 19% and non GAAP operating margin increases from 31% to 32%, Now to 32% to 33%.

Speaker 4

Non GAAP EPS guidance previously was $3.18 to $3.39 and our revised guidance is now expected to be $3.35 To $3.60 That's growth of 30% to 40%. Turning to Slide 27. Our total ARR growth, which includes deferred ARR, was 12% On an organic basis in Q3, and we expect organic active ARR growth of 10% to 12% And are now expecting approximately $95,000,000 in deferred ARR for the full year, which is up from what we told you last quarter of of around $90,000,000 Wrapping up, we had strong financial performance again in Q3. We delivered double digit ARR growth, while maintaining discipline on our expense structure as we continue to navigate what still remains a somewhat unsteady macro environment. Year to date, our performance has positioned us well to deliver attractive double digit Top line growth and very strong free cash flow growth for the year.

Speaker 4

So with that, I'll turn the call over to the operator, and

Speaker 2

we can begin the Q

Operator

And your first question will come from Saket Kalia with Barclays.

Speaker 5

I'll keep it to one, maybe for you, Jim. Lots of fun stuff to talk about with the business this quarter, but Maybe just to get it out of the way, I think we all saw some of the announcements by Rockwell and PTC intraquarter. So I was wondering if we could get maybe your perspective on how some of those changes maybe sort of impact the economic relationship And how, if at all, it maybe impacts long term PTC's long term strategy in your view. Does that make sense?

Speaker 2

Yes, sure. Well, the biggest piece of news, of course, was Rockwell acquiring Plex For $2,200,000,000 or so. So I would say, first of all, everybody should know that Plex It's 100% complementary to PTC. We have never ever competed with Plex at all. And in fact, New Plex pretty well because it's run by Bill Baruti, who's one of my better friends in life and reported to me for a dozen years or so.

Speaker 2

So Plex is a great company. We know who they were. We kind of had decided it wasn't quite the right Fit for us to acquire, but actually we're pleased to see Rockwell acquire them. And I think there's actually some opportunity for Synergies between what Plex does and what PBC does. You might almost think that Rockwell is adding Plex in a way from my perspective to the Innovation suite we built together.

Speaker 2

So I don't see any conflict at all. I think Rockwell will be probably sharing some attention cycles With Plex that maybe had been previously committed to PTC, so we'll have to see how that plays out. But in general, Rockwell They won our Partner of the Year award after they acquired Flex. So I think that the partnership is important. It's sort of built into the business as we run it today, and I don't see anything dramatic changing there going forward.

Speaker 2

There was also a question somebody else asked me, is Rockwell going to sell their PTC shares? And I would say you probably should ask Rockwell, but certainly they Have not suggested to us they're going to and I think their public announcement said they were going to fund the Flex acquisition with new debt and cash on hand. So I don't think anything really changes in the relationship other than something new came in and on one hand, it's Bringing new capabilities that might help us against competitors collectively. And on the other hand, we'll have to share attention cycles with it. So That would be my thought there Saket.

Speaker 5

Got it. Very helpful. I'll hop back in queue. Thanks, Jim. Thank you.

Operator

And your next question will come from Matthew Broom with Mizuho.

Speaker 5

Thanks very much. Hi, Jim and Christian. I guess just on that general theme, it'd be interesting to get your Cadmoc has an adjacent opportunity. Clearly, you did make an acquisition in that space yourself last year.

Speaker 2

Yes. So you're probably referring to some activity between Autodesk and Altium, I'm guessing. So Altium is one of 3 main printed circuit board designers, software companies. And then of course, there are other companies that provide integrated circuit software. The integrated circuit software really doesn't have a touchpoint with our world of CAD and PLM, but the printed circuit board design software does.

Speaker 2

We have a partnership with Altium. I'd like to find ways to strengthen that partnership. I don't really see us trying to acquire them. For one thing, we'd have to Auto Best Price, which I don't know that we're in the mood to do. And then secondarily, I don't think they want to be acquired.

Speaker 2

So I feel like there's a good opportunity there for us to do more in the partnership, both on one hand with Onshape and Arena, which are a nice fit In the lower part of the market with Altium, but also with Creo and Wind Shell, which are also a nice fit. So there are many Creo and Wind Shell customers Who put circuit boards in their otherwise mechanical products, and the same would be true of Onshape and Arena. So there's Lots to do there in terms of a partnership. I don't see us trying to acquire them in the near term given the circumstances as I know We did make a small ECAD acquisition, actually a company called ECAD, MCAD, but it really was a very Small deal and it really was at the interface

Operator

of ECAD and MCAD.

Speaker 2

It was not ECAD capabilities, but it was the ability to import in real time Synchronize between an MCAD product like Onshape and an ECAD product like Altium. So it's actually going to prove useful In some of the integration activities that we want to do. But anyway, Altium is a good company. I'm perfectly happy if they remain standalone And we PTC look forward to strengthening our partnership because there's lots of synergy on both sides of that partnership.

Speaker 5

Got it. Makes sense. And then if I can maybe just quickly ask about general interest in demand for generative design within your customer base. How have you seen adoption within Creo? And how close are we to seeing sort of GD become an integral part of any sort of mainstream design process for Cogues and Plains and so on.

Speaker 4

Yes, I

Speaker 2

think there's a lot of companies exploring it, trying it out, Doing what ifs and proofs of concept. And frankly, they get some pretty good results. But it is a very different way of doing engineering. We always thought of computer aided design, but actually the computer wasn't So much aiding the designer, it was just simply documenting the ideas. But this really is computer aided design where the software is providing ideas to the engineer as opposed to just capturing the engineers' ideas.

Speaker 2

That's a different process that people have to wrap their head around. I'll follow AI around. But Like I said, the results are pretty spectacular sometimes. So there's definitely a lot of interest. I think it'll take a while to mainstream, but certainly it's going to be It's going to be a wave of growth in mechanical CAD over the next 5 years.

Speaker 2

I just I don't think it will come on super strong in the near term.

Speaker 5

All right. Perfect. Thanks very much.

Operator

And your next question will come from Jason Celino with KeyBanc Capital. Your line is open.

Speaker 5

Hey, thanks for taking my question. Jim, Onshape seems to be doing great, 40% growth, very impressive. The AR business doing also quite well. But the growth segment did decelerate a bit to that 23% organic constant currency growth level. Is the overhang still on the What gets that to turn around?

Speaker 2

Yes. Well, if you look at scale, Jason, about 75% Of that growth segment in terms of scale is IoT. IoT is a much bigger business because we started it sooner and really had a lot Success, Amit. So in a way, right now, as IoT goes, it has a big influence on the overall performance of the overall growth segment. So most of the slower growth was in IoT, and most of it is still related to hangovers from COVID.

Speaker 2

So if we kind of look at what's happening on the sales front with IoT, I mean, sales have improved year over year. They're still not Back to where we want them to be. But in general, what we're seeing is a good quantity of deals, but smaller deal sizes, which I just attribute really to Conservatism around people doing IoT projects in factories and in general, as they come back to speed following COVID. You might remember too that we mentioned clearly at the beginning of the year that we had a 2 point headwind to growth In our deferred, what we at the time called backlog, but deferred ARR was a 2 point headwind. Well, a lot of that headwind landed in IoT Because that's the place where our sales were softest last year.

Speaker 2

So some of that is now coming home to roost now. It's not Just what did we sell in the quarter, but it's how much backlog did we also take advantage of maturing in the quarter. And that's Another pressure that we'll work our way out of as we kind of round trip the COVID impacts of The first or the back half of fiscal 'twenty and the front half of fiscal 'twenty one, let's say, mostly in fiscal 'twenty.

Speaker 5

Okay, great. Excellent. Thank you for the color. I'll get back in queue.

Operator

And your next question will come from Andrew Obin with Bank of America. Your line is open.

Speaker 6

Yes. Good afternoon.

Speaker 4

Hey, Andrew.

Speaker 6

Hey, how are you? John Christian. A question about actually a question about Onshape. You sort of talked about More mature model and sort of approaching larger enterprise customers. Can you just talk about where we are in sort of, A, how large are large enterprises and where are you in sort of Transitioning this product towards your more core customer base away from small and medium businesses and if I understood you correctly, frankly.

Speaker 6

Thank you.

Speaker 2

Yes. Okay, Andrew, those are good questions. So first of all, when I use the term enterprise, I was using it as defined by the Onshape team, Which generally means an account that would take 15 seats or more. I guess kind of a small definition of enterprise for the rest of us at PTC, but that's their definition. So I would say the definition of enterprise used by Onshape is a medium sized company.

Speaker 2

Got you. And the commercial business is small companies. Now, I would tell you that it's just a different buying market and our Creo software and our wind chill software for that matter does not participate effectively in the market where Onshape and Arena are making hay right now. So it's all complementary. And in fact, honestly, we're borrowing a page from Dassault's strategy of 20 years ago when they had SolidWorks in the mid market and CATIA and Innovia in the high end of the market and those two products prospered side by side 20 some years until they both grew a bit old and tired.

Speaker 2

But it's a strategy that works. It's market segmentation. And so I don't think that you're going to see Onshape and Arena put a dent in the Creo and Windchill because amongst other things Creo and Windchill are adopting the SaaS Technology called Atlas that makes Onshape so special. So when Onshape stealing larger accounts, it's basically by and large stealing them from SOLIDWORKS And then cherry picking a few others here and there, but they're starting to get some accounts whose brands you recognize. You might remember we had Garrett, Turbo present at an Investor Day, I believe it was.

Speaker 2

That's a pretty large company who went from Catia to Onshape. It really went for all the qualities of SaaS that they loved and of course, ease of use and other things of Onshape. So I think Onshape is an attractive product. It needs to mature more before it really could be a viable replacement for The high end products generally speaking, but I think it'll start to pick off a lot of medium sized accounts and then occasional larger account who maybe is over served by the more Operator? Operator, are you muted?

Operator

And your next question will come from Ken Wong with Guggenheim. Your line is open.

Speaker 7

Carl, we're going back just in time. Thanks for taking my question. I just wanted to circle back on Rockwell real quick. I saw you guys mentioned that Rockwell became the largest IoT Just wondering, is that a new dynamic there? And as we think through some of the kind of those earlier discussion points you had with Saket's question, is that a position that you think kind of I was Saket's question.

Speaker 7

Is that a position that you think kind of sustains going forward kind of based on what we know?

Speaker 2

Yes. Well, Rockwell as a reseller has been growing and growing and growing and most of that reselling is in the field of IoT and AR. Let's be clear on that. And we have many other resellers, but they're largely in CAD and PLM. So Rockwell has become an important reseller For sure of IoT and AR.

Speaker 2

And I don't see that ending. When I talk to Blake about how this fits in with his strategy, even Post Plex, Blake says, hey, I need an IoT platform. I need an AR platform. I even want to have a CAD and PLM platform Available to me when required because his competitor Siemens has that stuff, not all of IoT and AR, but some IoT and lots of CAD and PLM. So we remain important to Blake and there's nothing he acquired in the Plex acquisition that supplants any of the capabilities that PTC brought them in the FactoryTalk Innovation Suite.

Speaker 2

So I think it's Blake and Rockwell's strategy, as I understand it, to add Flex To what they're already doing with PTC. And I don't have any issue with that whatsoever, because I think it's complementary. And like I said, maybe even some upside opportunities. I just noted that we're going to be sharing some mindshare with Rockwell, who now has kind of Another child in the family, let's say, that's going to need some attention to. So I don't think it's going to materially change our partnership.

Speaker 7

Got it. Thanks for the insight, Virgen.

Operator

And your next question will come from Blair Averini with Rosenblatt Securities. Thanks. Hi, guys. Jim, nice quarter, guys. I just want to dig in a little more on Arena.

Operator

And Now that you've owned it for 7 ish months, how are you thinking about the go to market there for the team? And is it Vis a vis Onshape's pipeline, are you working those 2 In parallel, are they coming together? What's sort of your thoughts there as we kind of move through into next year?

Speaker 2

Yes. Okay, great question. So first of all, we're very pleased with the performance of Arena. It has in fact accelerated since required Now there are several things we're doing that I feel like aren't fully in the game yet. One of them is a link to Onshape.

Speaker 2

And in fact, we've built some technical integration between the two products, which is easy to do because they're both SaaS based. And that Technical integration has generated some rave reviews from customers. And if you think about it, any customer who wants SaaS For PLM, China, they have the religion and they really want to ask for everything, including CAD and vice versa. So we do think there'll be some cross selling there. That might that benefit might accrue more to Onshape in the near term because Arena accounts tend to be a little bigger, like 12 seat CAD accounts might not need PLM.

Speaker 2

But arena accounts You know it could generate a fair number of can seats, 15 or more. So I think there'll be some benefit in both directions that might help Onshape first. But then the thing we can really do for Arena is to globalize the sales force, because Arena really is a U. S.-based Business, a tiny bit of business in Europe and essentially none in Asia other than sometimes an American company might have some users in Asia, They're not Asian companies. So we PTC, of course, are much more globally balanced.

Speaker 2

And we have the capabilities to help them kind of spread their operation around the world pretty quickly. And Underway and I mentioned we opened the European sales operation. By the way, Arena and On You still need a European operation and the right time zones and all that, but it's a cost effective go to market model As opposed to kind of the PTC larger accounts where we have outside reps living in all the different countries around the world next to the customers So I think we're going to be able to generate some acceleration for Arena to even higher levels next year, but we still need to plan all that out, but

Operator

And your next question will come from Adam Borg with Stifel. Your line is open.

Speaker 8

Great and thanks so much for taking the question. Maybe just first John, the IoT business, Jim, you talked a little bit about there being

Speaker 2

a hangover. Just curious if

Speaker 8

you could comment a little bit more about the pipeline as you head into the important Q4.

Speaker 2

Yes. Well, I think if you look at any ARR stream at PTC, its growth rate is a function of bookings, churn, But also start dates, backlog, price increases and so forth. And again, where IoT has Been held back is kind of in deal sizes on new bookings and in sort of a softer, What we used to call backlog, now called deferred ARR. So when we look though at the pipeline, the forecast, I mean, we feel pretty confident. It looks So I think we're going to end the year on a strong note.

Speaker 2

I certainly expect that based on the forecast in the pipeline. I think we're in a better position going forward into next year. Bookings certainly are up year over year. Like I said, just not back to where we want them to and that's more Deal size and transaction count.

Speaker 8

Super helpful. And maybe just as a quick follow-up, you talked to an earlier question about And obviously, that's not it's a nontrivial undertaking. So just curious kind of how is that going? And what percent of your R and D efforts are really focused on replatforming today and how that should evolve?

Operator

Thanks again.

Speaker 2

Yes, well, this is Not going to be a big bang approach, it's going to be kind of a systematic module by module approach. And then in the end, we'll have it all replatformed. But if you look at what we did with The generative design extension, that's a good model to explain what we're trying to do. And that is we want to be able to Key subsystems from Creo Windchill in particular and build them on Atlas and Deliver better value, more capabilities, better cost profile to customers through SaaS and then take another module. And so a customer might incrementally Buy more and more SaaS from us over time and we envision this taking a few years.

Speaker 2

And then at some point, just flip the switch and say, I'll just take it all to SaaS. So again, don't think of it as big bang, think of it as incremental. Yes, it's a big development effort. The good news is We're not trying to invent the platform we're replatforming onto. That platform has been under development for 7 or 8 years by the Onshape guys, that's Atlas.

Speaker 2

And it's a fantastic platform, I mean, really great. So I feel like time will tell, but in the end, With Onshape, we're going to get a really great SaaS based CAD system, but we're actually probably going to get something even bigger, which is The singular platform that powers PTC's next generation of software that's going to breathe another decade or so of growth into our Creo and Windchill product

Operator

Excellent. Thanks so much. Your next question will come from Matt Hedberg with RBC Capital.

Speaker 5

Hey, Matt.

Speaker 3

Great. Yes, thanks guys. This is Matt Swanson on for Matt. So Jim, really appreciate the Commentary around the secular tailwinds towards digital transformation. But when we're starting to think about your customers as they're presumably returning to on premise, Have you seen any changes in conversations around SaaS more broadly?

Speaker 3

And I guess thinking more about like what's driving your customers Towards that, especially from that enterprise segment, that might not be a good fit for Arena or Onshape. What those

Speaker 2

Yes, Matt. Well, there's an interesting it's a good question. And the interesting survey we do where we reach out to our Creole wind chill customers and test their receptivity towards SaaS. And that Receptivity expanded dramatically over the last year. I mean, like from a minority to a very strong majority of them are saying, I want SAS.

Speaker 2

Now, if you think about it, Creo and Windchill are very sticky products. So they're saying like, I want SaaS, but I don't want to switch. Because switching CAD systems, especially when you're a big user I'm a high end CAD system and you've got years and years worth of data. I mean, that's a project. But if I could within Creo go to SaaS, That'd be wonderful.

Speaker 2

If within Windchill, I could go to SaaS, that'd be wonderful. Now why do they want to go to SaaS? Well, they realize, 1st of all, Our mobile workforce and everybody has some hybrid working office strategy going forward. The thing is that the Software, if your CAD software, for example, runs on a big desktop computer in the office, well then how do you work from home? Do you set up another big desktop computer at home and then how do you shuffle the files back and forth?

Speaker 2

I mean, it's just hard. It'd be better if all this data was never on the desktop, it was always in the cloud. Same with the application. So for example, during the COVID initial shutdowns, Windchill worked great Because Windchill is web based and the data actually is in some web server somewhere, so you just go home and you jump on whatever computer you have there, even a Your web browser and you're doing windshield stuff. Creo and everything like Creo in the market is a different story.

Speaker 2

That's a big, what we call a fat client executable, typically with a whole bunch of modules installed, typically integrated to other Software on that same computer might be simulation, might be CAM software, whatever. So there's a whole ecosystem of software set up on that computer. How do you recreate that at home? It's hard and there's licensing obstacles and whatnot. So what a lot of people did is they used virtual desktop infrastructure.

Speaker 2

That is from a computer at home, you logged into the computer at work, ran the software on the computer at work and pipe the user interface Onto the computer at home. If you did that, it really makes for a pretty crappy workday. This is not really the way to do things like CAD. CAD is optimized for graphics performance and so forth and all that optimization is completely lost when you're piping the display across the Internet. So you really want something that's designed to never put the data and ideally don't put the application On the desktop computer in the 1st place, because if it's not there, that means you can move around.

Speaker 2

So with Windchill, you can move around, but people like to Offload more of the cost. These are complex systems. So mobility is one thing they want, work from anywhere anytime, Work from the office 3 days away, work a week, work from home 2 days a week. But the second real thing is cost. They And they're saying, if you guys could just let me pay for the value I get for the software and not for an infrastructure and the care and feeding of it, it would be great.

Speaker 2

A third thing we talk about is real time collaboration. Again, CAD systems are kind of based on the premise of check-in and check out. That means I'll take the file, lock it, so you can look at it, but you can't change it until I declare I'm done changing it. Well, There's a lot of IP in one file and a lot of times people are saying, well, like in any other kind of I'm used to. We're working in the same stuff at the same time.

Speaker 2

How come I can't do that with CAT? Again, you can with SaaS. So I can go on there more qualities that are important to people. But let's just say what Creole and Windchill customers really want is all the benefits of Onshape and Arena Without switching from Creo and Winchell, and that's what we're trying to bring to them.

Speaker 3

Yes. No, That makes a ton of sense. It's a really compelling value proposition. If I can add one more on digital transformation. You mentioned PLM as Part of that growth group there.

Speaker 3

Could you talk a little bit about the progress of moving deeper into customers with PLM kind of beyond those traditional use cases? It's something we've been talking about for a long time, and I think it's always seemed really interesting.

Speaker 2

Yes, I think What's really coming to light, it always was true, but it's really much more appreciated now, is that PLM is the system of record for products. So PLM in an industrial company, it's absolutely as important as your CRM system, which is the system of record for your customers or your HR system for employees or whatever. So when companies think, I really want these processes to be digitized And mobile you become mobile and global and all that, you realize we need a reliable source of product data that everybody in engineering, manufacturing, service, marketing, sales, whatever can transact against. So we need one single system And we all need access to it. And so we're starting to hear that more and more that it's not about making the engineers More efficient, which was kind of the 1st generation of PLM.

Speaker 2

This is more about making sure that everybody across the company Has access to the right product data because everybody's making decisions about products, pricing them, selling them, supporting them, manufacturing them. And we need to have accurate data and it needs to be 2 clicks away. And that's what PLM is now being recognized as the system of record for products. And industrial companies can't get very far down the journey of digital transformation without saying, hey, shouldn't we have a system of record for our products? I mean, honestly, they're product companies.

Speaker 2

So I think PLM is really emerging into something different. Quick example would be that Navy contract we won. It's about product support. It's about everybody supporting ships having access to data about ships in the systems they contain, Support data. And so we're using PLM concepts to support the operation of ship, not the engineering and manufacturing, but actually The operation of ships that were engineered and manufactured years ago, and it's kind of a good example of digital transformation versus engineering productivity.

Operator

And your next question will come from Jay Vleeschhouwer with Griffin Securities. Your line is open.

Speaker 3

Thank you. Good evening. Hey. Jim, at your partner conference last week, aside from the sessions on sales programs and Plans and the like. It was a very interesting roadmap session, which is the thing I want to ask about.

Speaker 3

It noted that as part of your Clio strategy, you have what was called Five dimensions and for Onshape, 6 dimensions to the strategy, plus various dimensions to the strategy for PLM, of course. The question I have about the Creo and Onshape strategies is that's a fairly good list of executable. So how do you think about the ones that are perhaps Most important on those lists for you to achieve or perhaps the most difficult to achieve, which Aren't necessarily the same thing. And then secondly, you referred to Microsoft a number of times. They're on the cusp of launching their manufacturing cloud.

Speaker 3

And I'm wondering how you're thinking about the opportunity for you in terms of drafting along with what they do with Manufacturing Cloud.

Speaker 2

Okay. So first on the priorities, Jay, I don't have those lists in front of me and I hate that off the top of my head, Try to represent them all back to everybody. But what you should think of is, there are large engineering teams behind these products. In the case of Creo, 400 plus people working on it. In the case of Onshape, not near that many because it's a smaller, tighter product, Yes, younger product.

Speaker 2

But there's room with the level of resources we have in these products to have 4 or 5 priorities. That's down from 20 or 30 that they would otherwise do, they're trying to narrow down and focus on the key ones. So I think we have the capacity to execute 4 or 5 initiatives at a time In both of these products, we can't execute 10 or 20, but certainly 4 or 5 big ones. And I guess you were wearing your hat as a partner that day We're just trying to share with our partners where we're going, what we think is important and frankly, where we think the money So that's what's going on there. With respect to Microsoft and their manufacturing cloud, there's a lot of conversations going on between PTC and Microsoft about how to align PTC with that manufacturing cloud.

Speaker 2

They want us to, we want to. It's just a question now of Figuring out what to do to make that happen. The fact that our former Chief Strategy Officer, Kathleen Mitford, just went over there is actually quite Kathleen and I are quite close and we've had some conversations since she's gone over there and she's now able Help me, let's say coach me and I'm able to coach her to make the companies better aligned together. So there's a lot of good stuff happening with Microsoft, Again, 3 Partner of the Year awards. I think the manufacturing cloud will be good for us, but there's some work to figure out once they put it out there, how do we tightly align with it.

Speaker 3

Thank you, Jim.

Operator

And that is all for our question and answer session today, I will now hand it back over to Emily Walt for the closing comments.

Speaker 1

Thanks, Peter. I'd like to thank everyone for joining us We look forward to seeing you on the circuit in the coming months. And again, thank you for your interest in PTC and have a great evening.

Speaker 4

Thanks everybody. Thank you. Have a good

Operator

day. This concludes today's conference call. Thank you for participating. You may now

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Key Takeaways

  • PTC delivered 18% ARR growth in Q3 to $1.42 billion (14% organic in constant currency) with bookings up mid-30s and free cash flow of $85 million, maintaining full-year guidance of mid-teens ARR growth and $340 million FCF.
  • SaaS transformation remains central, as PTC replatforms Creo and Windchill onto its Atlas architecture, launched the generative design extension (GDX) and the SaaS AR work-instructions solution Vuforia Instruqt.
  • Onshape ARR grew 40% year-over-year with strong bookings and a maturing enterprise pipeline, while Arena sustained over 20% ARR growth and opened its first European sales operation to accelerate global expansion.
  • IoT grew ARR in the high-teens, driven by Europe and APAC with Rockwell as the largest reseller, though deal sizes and deferred ARR are still normalizing post-COVID.
  • Windchill PLM achieved mid-teens ARR growth, fueled by reseller channel momentum and the Microsoft alliance, underscoring PLM’s role as the critical system of record for digital transformation.
AI Generated. May Contain Errors.
Earnings Conference Call
PTC Q3 2021
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