PTC (PTC) Annotations

Sure. On the first part, on CAD, we have 2 awesome ways in which we're addressing the market. As you know, Jay, we've got Onshape, the industry's only cloud native, CAD application, and we got Creo, which is awesome, as you know. And so those 2 together, we feel have competitiveness. I'm not talking about Onshape. It's a great part of our business, building momentum. We feel very good about our competitive positioning. It's starting to scale. I will talk about it when it has a meaningful impact at an aggregate level to the financials of the business. But strategically, we continue to make sure our chips are being placed to ensure that Onshape is successful against some of the other solutions that are out there from our competitors. And then you got Creo, which is a very strong tool. And our belief is the connection of Creo to Windchill and ultimately, Codebeamer, the 3 together is a very strong value proposition for many customers thinking about how they think about the digital thread. So Jay, I would say on the CAD business, we're ready, we're competing, we're in several different dynamics of deals that might cause share shifts might not. As you know, it's not an easy business to do share shifts, but we believe we have a very comprehensive offering on both fronts industry-leading scale player in Creo and Onshape, which is starting to hit their stride here, and we're going to continue to focus in on it. on your point around turning over stones on R&D, what I'll say is, we're focusing in, particularly on go-to-market and G&A, we're making sure on R&D, we are focused in on making sure the team is aligned to deliver on the road map. Every single one of our customers, Jay is saying, we love your products. We love where you're going in terms of building, feature functionality, scalability of those products, just do it.

Yes. Jason, -- it's the first time in my career where I've been spending so much time with executives that at customers and across the world, and they ask me who's going to win the election in the U.S. It's a consistent and quite a confusing time for everyone around what happens in the U.S. That being said, I think, for the most part, customers are understanding that whoever gets put in the office, a lot of things don't dramatically change depending on the composition of what happens across all different constituents of the U.S. election. And so part of what we're seeing and part of what we're continuing to assume and hearing most importantly from our customers is we got to get on with digital transformation, regardless of if this person is an office or that person is an office because we are not becoming competitive if we can deliver products faster with better quality and a more sustainable cost structure, given all the things that are happening around the world. I will say that geopolitics, the environment, the uncertainty, wars have been consistent for the last number of years, which is why we continue to say we've not said that the environment is getting better. We don't believe it's getting worse based on this, and we're going to navigate through this time period, and we've thought through that in the way in which we set the guidance here

I actually kind of want to follow up on that last question. I want to ask it a little differently. Kristian, I always appreciate your accounting [indiscernible], and one of the things you emphasize is kind of the relationship between ARR and free cash flow. And I guess if I look, free cash flow missed by $10 million in the quarter, and you're also lowering the midpoint of the full year ARR number by $10 million as well. It kind of implies that there was a $10 million deal or $10 million of ARR that should have landed this quarter and is no longer in the guidance. I guess is that the right read? And if so, is that because the deal is going to close in later periods? Or is this just you guys being prudent? Any color there would be great. Kristian Talvitie Yes, sure. It's a great question, Josh. No. And that actually is not the case at all. On free cash flow is actually simply timing. I mean here just being completely candid, we had a bunch of collections that were due in the last 2 days of the quarter, the last 2 days of the quarter happened to be a Saturday and Sunday. We were hopeful that we were going to get that cash in on Friday or before, but obviously, customers have a contractual right to actually pay it the following week. And so that's what happened on the cash flow. We were hopeful that we were going to get it on the week before. We've now got that cash. So hence, there's no change to the cash flow forecast for the year. That's the timing issue.

Yes, sure. I mean here, again, I don't think we really want to get into the nitty-gritty details of the guidance for next year. As I said, we're still working through detailed planning process. That said, I think that we've seen our, we'll call it, budgeting process play out here this year. As we've articulated, we started the year with a range of expected outcomes on the top line. We started the year with a spend run rate. And as we progress through the year, as we get more comfortable, we release more incremental funding into the system. So that's how we try to gauge it, and we would continue to try to do that, and we're frankly doing it right now, already in preparation for next year and that's how we're thinking about it. So we're really talking about modulating incremental expense into next year and hopefully not putting ourselves in a situation where we've where we've got to actually pay back expense [indiscernible] feel comfortable about it

What would it -- what kind of environment are we talking about to kind of get below to the double-digit range in ARR? And then secondarily, how close are you guys to having the playbook ready to respond on the cash side, like you said, you would be able to in that environment. I don't think we're going to like that type of scenario, but like it seems like your model is very defensive from this perspective, it would take a lot to kind of drive it to that point.

n terms of what I'm looking for, what Chris and I are looking for in terms of areas where we would feel the environment is getting better is how we think about close rates, and consistently for the past few years, close rates have been difficult and challenged. Once those close rates on a growing pipeline become better is my indication of when the environment is better for PTC in terms of securing the deals in a more accelerated manner. But I absolutely feel good about the demand, in fact, our sequential growth and pipeline is increasing and so we're focusing on closing deals and how they actually attribute to in-quarter ARR

We think our guidance range for Q4 and the full year balance both risk and opportunity. And looking out a little further ahead to our fiscal '25, and here, keep in mind that we're still in the middle of our detailed planning process. But I would not be surprised if our official fiscal '25 guidance, when we give it next quarter was in the low double-digit ARR growth range, consistent with our medium-term targets and in line with our performance over the past couple of years, again, balancing both risk and opportunity. I also anticipate our free cash flow guidance would be somewhere within the $825 million to $875 million range we previously communicated.

eflecting our year-to-date performance and our outlook for Q4, we're updating our fiscal '24 constant currency ARR guidance, lowering the high end of the range by $20 million and now expect to end the year with constant currency ARR growth [ of 11% to 12% ]. It's worth noting we're updating our revenue guidance accordingly, reducing the high end by $20 million. We're reiterating our free cash flow guidance of approximately $725 million in fiscal '24, given our year-to-date performance and Q4 outlook. For Q4, we're guiding for free cash flow of approximately $83 million and constant currency ARR of $2.2 billion to $2.22 billion, which corresponds to year-over-year growth of 11% to 12%. We believe we've set our guidance appropriately. I'll get a little more into ARR guidance details on the next slide. But before I do, I'd also like to reiterate my favorite reminder. To help you with your models, we're providing revenue and EPS guidance. But ASC-606 makes revenue and EPS difficult to predict for PTC since we primarily sell on-premise subscriptions

So you mentioned on the call that the selling environment has been sluggish. Has this bottomed out? And any view on what needs to happen for a macro uplift in the software environment? And also for an industrial guy, if you can point out which verticals are particularly weak, I would imagine maybe life sciences, ag, machinery, but just any color there. Neil Barua I'll start, Kristian, you could add. I don't see right now any change in the selling environment it's been tough going for at least 6 quarters now here at PTC. That didn't change in Q2 despite having solid results. So the team continues to deliver despite a challenging selling environment. We look at every metric, GDP, PMI, you name it. We have not seen a change yet given some maybe positivity, they have not turned into a trend. I will say from a broad base outside of industries -- outside of specific industries, the point that I think we're trying to articulate is the challenging selling environment really is punctuated in the larger deals. So these are the large digital transformation deals that are 7, 8 figure that I'm truly excited about seeing how the pipelines building on that. That continues to be challenged, the same by which it's been for the last 6-plus quarters around the large yield in getting those projects to be the key priority by which you could get the sign PO and begin implementation. That's the area we continue to work through. To be clear, we continue to do well around securing those, but those are the areas by which the challenging selling environment really impacts us the most, and I don't see that changing right now in the current environment. Kristian, anything to add?

Awesome. Maybe for Neil. Obviously, it's great to hear the strategy around the 5 focus areas. And just maybe drilling into the fifth area of SaaS. Maybe just an update on how Creo Plus, the Windchill Plus are resonating. Obviously, we've talked about this being a decade-long journey. But maybe just give us an update on how these conversations are going and how we should think about that in the coming years. Neil Barua Sure. Great question. It is a priority. We continue to build momentum there. we have not slowed down in terms of our approach, our customer conversations and our intensity to make sure we work through all the automation and back office elements to make the experience really great. . We're working through a number of conversions where we're learning a lot and making sure we continue to sharpen our sword, so to speak, to make sure the next conversion happens more seamlessly. As I mentioned, to reiterate, I see this as a 10-plus year journey. We will do it hand-in-hand with customers so the experience is good. So I think that's been working well. We've also put out new releases of Windchill Plus specific to the med device sector, that has greater emphasis around compliance and regulatory issues that we've embedded into our product. We're looking forward to continued view of how that is received in the marketplace. So we are not laying off the accelerator within our Plus strategy across even Creo. We're just -- we're putting out a release now, Creo Plus. So we continue to invest into it. Again, it will be a long journey. As I mentioned, I view 10-plus years. It might happen earlier. We're building the rep, so to speak, to make sure that we're ready for at scale conversion into our Plus strategy, and we continue to invest our resources and attention on that front and feel progress is okay to good on that front over the last few quarters.

We're not abandoning IoT and AR. We're absolutely not abandoning those 2 areas. And I'll take AR first. AR, we're not doing stand-alone applications, new product road map, expending resources for things that are discrete markets that have very little tied to our core systems. So that -- those cost items and more importantly the focus will be built upon AR tools that actually make sense within our core systems like Windchill, ServiceMax, et cetera, versus stainalle applications, which has been the case for the last few years. So we're stopping that. We're still going to support the current customers because that's important since they're part of the entire ecosystem and similarly in IoT, we'll make sure that we support what we've done in SCO, SCP. but position that IoT strength that ThingWorx capability to enable Windchill expansion in the enterprise.

will say from a broad base outside of industries -- outside of specific industries, the point that I think we're trying to articulate is the challenging selling environment really is punctuated in the larger deals. So these are the large digital transformation deals that are 7, 8 figure that I'm truly excited about seeing how the pipelines building on that. That continues to be challenged, the same by which it's been for the last 6-plus quarters around the large yield in getting those projects to be the key priority by which you could get the sign PO and begin implementation.

So when I took a look at how I want to put my stamp in a credible way around the company moving forward in the view of the midterm targets, I looked at all those variables. I also looked at the fact of the current conditions of the market and felt it was the appropriate thing to do to make the midterm target towards that low double digits versus have the mid-teens target out there.

Starting with our product groups in CAD, we delivered 11% constant currency ARR growth in Q2 and with the growth primarily driven by Creo. In PLM, our constant currency ARR growth was 13%, primarily driven by Windchill.

In the future, when their service technicians go into the field to service an elevator, they will know, using the ServiceMax application about the specific elevator so they bring the right parts to the work site. They will know the service history and have service instructions for that specific elevator. And of course, they'll be scheduled and routed efficiently to the job site. Furthermore, the elevator business is highly regulated and the ServiceMax application will ease the regulatory compliance burden by having traceable records of the work performed during service calls. This is how ServiceMax helps our customers

high-value long life cycle products.

providing the supply chain team with relevant product data earlier in the process enables any issues around component availability or component pricing to be identified earlier,

Before standardizing on Windchill, this customer did not have an authoritative source of truth for their product data.

o drive revenue growth, product companies have become increasingly focused on producing more variants of their products. Mixing certain hardware configurations with other software configurations, while at the same time, compressing the time it takes to get new products to market

5 focus areas include: number one, PLM, which has driven primarily by our Windchill product; number two, ALM, which is driven by our Codebeamer product; number three, SLM, which is primarily driven by ServiceMax, number four, CAD, which is driven primarily by Creo and lastly, number five, our continued focus on SaaS.