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    PTC Inc (PTC)

    Business Description

    PTC is a global software company that specializes in providing digital solutions to transform the engineering, manufacturing, and servicing of physical products . The company primarily serves industries such as industrials, aerospace and defense, electronics and high tech, automotive, and medical technology and life sciences . PTC's product offerings are categorized into several key areas, including Computer-Aided Design (CAD), Product Lifecycle Management (PLM), Application Lifecycle Management (ALM), and Service Lifecycle Management (SLM) .

    1. Product Lifecycle Management (PLM) - Offers solutions for managing the entire lifecycle of a product from inception, through engineering design and manufacturing, to service and disposal, led by the Windchill product.
    2. Computer-Aided Design (CAD) - Provides tools for creating precise drawings and technical illustrations, driven by the Creo product.
    3. Application Lifecycle Management (ALM) - Delivers software solutions for managing the lifecycle of applications, ensuring quality and compliance.
    4. Service Lifecycle Management (SLM) - Focuses on optimizing the service and maintenance of products to enhance customer satisfaction and operational efficiency.

    Q4 2024 Summary

    Initial Price$180.83June 30, 2024
    Final Price$180.66September 30, 2024
    Price Change$-0.17
    % Change-0.09%

    What went well

    • PTC is experiencing strong momentum in its key products, particularly Codebeamer and Windchill, with significant expansion in the automotive vertical. For example, in Q4, two of the ten largest automotive OEMs expanded their use of Codebeamer.
    • The company's strategic realignment towards vertical markets is expected to enhance effectiveness and drive sustainable ARR growth, aiming for low double-digit growth over the medium and long term.
    • PTC's strong free cash flow generation enables it to invest in future growth and return value to shareholders, as evidenced by the announcement of a $2 billion share repurchase authorization.

    What went wrong

    • PTC's go-to-market realignment may introduce significant near-term risk and uncertainty, potentially disrupting fiscal 2025 performance.
    • No specific vertical has significantly advanced in adopting multiple PTC solutions, indicating challenges in cross-selling and achieving comprehensive digital thread adoption across industries.
    • Persistent macroeconomic uncertainties, including geopolitical tensions and supply chain disruptions, may continue to impact customers' budgets and lead to cautious spending, potentially affecting PTC's growth prospects in the near term.

    Q&A Summary

    1. Guidance Revision and Conservatism
      Q: Why is guidance now single-digit growth instead of double-digit?
      A: Management explained that the guidance is now more conservative due to potential impacts from the go-to-market realignment. They emphasized that the guidance has been revised to single-digit ARR growth from the previously indicated double-digit growth to account for any disruption during the transition.

    2. Western Europe Demand and Automotive Sector
      Q: What is the outlook for customer spending in Western Europe?
      A: Management noted that while they delivered solid results, some deals in Western Europe, particularly in the automotive sector in Germany, were delayed or reduced in size. Automotive companies are under pressure but need PTC's solutions like Codebeamer and Windchill to remain competitive.

    3. Go-To-Market Realignment and Industrial Demand
      Q: Will the go-to-market changes align with potential industrial demand improvement?
      A: Management stated that teams are already executing the new plan and are prepared to capitalize on any increase in demand. They believe their vertical strategy positions them to quickly respond if industrial sentiment improves.

    4. Vertical Focus: Federal, Aerospace & Defense, Med Tech
      Q: Are there notable trends in other key verticals?
      A: Significant demand and backlog are evident in the Federal, Aerospace & Defense sector. In Med Tech and Life Sciences, companies need to develop products faster, driving adoption of PLM solutions like Windchill and Codebeamer.

    5. Automotive Exposure and Codebeamer Adoption
      Q: How has PTC's exposure to automotive changed?
      A: PTC's foothold in automotive has significantly shifted, focusing heavily on Windchill and Codebeamer. They are assisting customers in building software-defined vehicles rapidly to compete with Chinese OEMs.

    6. Go-To-Market Disruption and Guidance
      Q: Will there be peak disruption due to go-to-market changes, and is growth guidance conservative?
      A: Management does not expect disruption but acknowledges possible friction during transitions. They have set guidance conservatively to allow room for any short-term disruptions.

    7. Digital Thread Adoption Across Verticals
      Q: Which verticals are adopting multiple solutions most rapidly?
      A: No single vertical is significantly ahead in adopting multiple solutions. However, there is substantial opportunity to promote integration of PTC's products across all key verticals.

    8. Impact of Election on 2025 Budgets
      Q: Has the election increased uncertainty about 2025 budgets?
      A: Management believes customers' needs remain consistent regardless of the election outcome. They continue to require PTC's technology to move product data faster and remain competitive.

    Key Metrics

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    Executive Team

    NamePositionStart DateShort Bio
    Neil BaruaPresident and Chief Executive OfficerFebruary 14, 2024Neil Barua is the President and CEO of PTC Inc. He became CEO on February 14, 2024, after being CEO-Elect since July 2023. He joined PTC through the acquisition of ServiceMax, where he was CEO .
    Kristian TalvitieExecutive Vice President and Chief Financial OfficerMay 2019Kristian Talvitie has been the Executive Vice President and CFO of PTC since May 2019. He previously held roles at PTC, including Corporate VP of Finance and SVP of Financial Planning and Analysis .
    Alice ChristensonChief Accounting OfficerN/AAlice Christenson is the Chief Accounting Officer at PTC, overseeing accounting functions. Her beneficial ownership of PTC securities was reported on February 14, 2024 .
    Michael DiTullioPresident and Chief Operating OfficerFebruary 2023Michael DiTullio served as President and COO from February 2023 until September 30, 2024. He has been with PTC since 1999, holding various roles, including EVP of Global Sales .
    Catherine KnikerExecutive Vice President, Chief Strategy and Marketing OfficerFebruary 2023Catherine Kniker is the EVP, Chief Strategy and Marketing Officer since February 2023. She joined PTC in 2016 and has held various strategic roles, including Chief Strategy and Sustainability Officer .
    Aaron von StaatsExecutive Vice President, General Counsel2003Aaron von Staats has been the EVP, General Counsel, and Secretary at PTC since 2003. He joined PTC in 1997 and has held various legal roles before becoming General Counsel .

    Questions to Ask Management

    1. Your fiscal '25 ARR growth guidance midpoint has decreased from double digits to single digits over the past 90 days; what specific factors have led to this reduced outlook?

    2. You've mentioned potential near-term disruptions due to the go-to-market realignment; can you elaborate on the challenges you anticipate and how you plan to mitigate them to avoid impacting sales performance?

    3. With macroeconomic uncertainties and possible budget impacts post-election, how confident are you in achieving your fiscal '25 targets, and what contingency plans are in place if market conditions worsen?

    4. Given that your R&D expenses are growing at approximately 11% CAGR while SG&A is growing at approximately 4%, how will this imbalance affect your ability to drive sales and marketing effectiveness in a challenging selling environment?

    5. As you shift to a vertically aligned go-to-market strategy focusing on five key industries, how are you ensuring that specialization doesn't lead to siloed operations and that cross-industry opportunities are not overlooked?

    Share Repurchase Program

    Program DetailsProgram 1
    Approval DateOctober 1, 2024
    End Date/DurationSeptember 30, 2027
    Total additional amount$2 billion
    Remaining authorization amountN/A
    DetailsReturn approximately 50% of free cash flow to shareholders via share repurchases. Plan to repurchase approximately $300 million in fiscal year 2025.

    Past Guidance

    Q4 2024 Earnings Call

    • Issued Period: Q4 2024
    • Guided Period: FY 2025 and Q1 2025
    • Guidance:
      1. Constant Currency ARR Growth: 9% to 10% for FY 2025 and approximately 10.5% for Q1 2025 .
      2. Free Cash Flow: $835 million to $850 million for FY 2025 and approximately $230 million for Q1 2025 .
      3. Revenue and EPS Guidance: Provided but not specified; ARR and free cash flow emphasized as key metrics .
      4. Operating Expenses: Non-GAAP operating expenses expected to grow at roughly half the rate of ARR over the medium term .
      5. Cash Interest Payments: Approximately $90 million in FY 2025 .
      6. Cash Tax Payments: $110 million in FY 2025 .
      7. Share Repurchase: $2 billion authorization through FY 2027, with $300 million planned for FY 2025 .

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q4 2024 and FY 2024
    • Guidance:
      1. Constant Currency ARR: $2.2 billion to $2.22 billion for Q4 2024, with 11% to 12% year-over-year growth .
      2. Free Cash Flow: Approximately $83 million for Q4 2024 and $725 million for FY 2024 .
      3. Fiscal Year 2025 Preliminary Guidance: Low double-digit ARR growth and free cash flow of $825 million to $875 million .
      4. Share Repurchase: Potential resumption around $300 million in FY 2025 .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      1. Annual Recurring Revenue (ARR): $2.05 billion to $2.065 billion for Q3 2024, with 11% to 12% year-over-year growth .
      2. Free Cash Flow: Approximately $240 million for Q2 2024 and $725 million for FY 2024 .
      3. Revenue and EPS: Provided but not specified; ARR and free cash flow emphasized as key metrics .
      4. Share Count: Expected increase by approximately 1 million shares in FY 2024 .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      1. Annual Recurring Revenue (ARR): $2.05 billion to $2.065 billion for Q2 2024, with 11% to 12% year-over-year growth .
      2. Free Cash Flow: Approximately $240 million for Q2 2024 .
      3. Full Year Guidance: 11% to 14% ARR growth for FY 2024 .

    These metrics reflect PTC's focus on ARR and free cash flow as primary indicators of business performance.