Sign in

    PTC Inc (PTC)

    Q2 2024 Earnings Summary

    Reported on Jan 10, 2025 (After Market Close)
    Pre-Earnings Price$174.96Last close (May 1, 2024)
    Post-Earnings Price$166.61Open (May 2, 2024)
    Price Change
    $-8.35(-4.77%)

    What went well

    • PTC is experiencing strong double-digit growth in its CAD business, driven by the success of Creo and the growing Onshape platform. Customers are consolidating their systems and moving from 2D to 3D modeling, providing opportunities for PTC's products to gain market share.
    • Despite a challenging macroeconomic environment, PTC continues to deliver solid financial performance, with consistent ARR growth and confidence in meeting their targets. The company's subscription model contributes to a strong run rate, and management remains focused on executing their organic priorities effectively.
    • PTC is strategically refocusing resources towards high-value areas such as PLM, ALM, and SLM, integrating IoT and AR technologies with core systems like Windchill and ServiceMax. This repositioning is expected to enhance operational efficiency and strengthen their customer value proposition.

    What went wrong

    • PTC has reduced its midterm Annual Recurring Revenue (ARR) growth targets from mid-teens to low double digits, reflecting a less optimistic outlook due to current market conditions.
    • The company continues to face a challenging selling environment with no improvement, particularly impacting larger digital transformation deals, which have been stalled for over six quarters.
    • PTC decreased the high end of its fiscal 2024 ARR guidance by $10 million due to customer contract renegotiations, resulting in $10 million of deferred ARR being moved to future periods. This indicates potential challenges in customer commitments and sales cycles.

    Q&A Summary

    1. Lowered Midterm ARR Growth Outlook
      Q: Why did you lower your midterm ARR growth target?
      A: CEO Neil Barua explained they updated the constant currency ARR guidance to 11% to 13% for this year and view "low double digits" as plus or minus that range. Over the past 5 years, growth has averaged about 12% through varying macroeconomic conditions. Given current market conditions, they felt it appropriate to adjust the midterm target from mid-teens to low double digits.

    2. Capital Allocation and Share Buybacks
      Q: Why not start share buybacks sooner given deleveraging progress?
      A: CFO Kristian Talvitie stated they still have over $2 billion in debt outstanding, and the interest rate environment is not favorable, with rates on their revolving credit facility at almost 7%. They prefer to wait a couple of quarters to reassess. CEO Neil Barua added that while they will always look at M&A opportunities, the focus is currently on executing organic priorities.

    3. Challenging Selling Environment
      Q: Has the sluggish selling environment bottomed out?
      A: CEO Neil Barua doesn't see any change in the selling environment, which has been tough for at least 6 quarters. The challenging conditions particularly impact larger deals, especially large digital transformation projects worth 7 to 8 figures. They haven't seen a change yet in the current market.

    4. Resource Allocation to PLM
      Q: What's next in focusing investments on PLM?
      A: CEO Neil Barua emphasized reallocating resources from IoT and AR to focus on PLM, particularly enhancing Windchill with improved user experience, stronger integration with Creo (CAD) and Codebeamer (ALM), integration with ServiceMax (SLM), and leveraging AI capabilities within Windchill. The goal is to drive greater customer value by focusing on core products.

    5. AI Impact on Sales Cycles
      Q: Is AI affecting customer IT budgets and slowing pipelines?
      A: CEO Neil Barua stated absolutely not. In their market segment, AI is not taking away from IT prioritization. They are involved in AI use cases and believe a digital foundation is necessary before practical AI at scale, which requires systems like theirs. AI is not causing a difference in the selling environment.

    6. Indirect vs. Direct Sales Performance
      Q: How is the indirect channel performing versus direct?
      A: CEO Neil Barua is ensuring the channel operates with the same energy and focus as the direct side. They are working on enablement and prioritizing focus areas to improve pipeline and ARR growth. He has high expectations that channel partners must deliver the same results as the direct teams.

    7. SaaS Transition with Creo Plus and Windchill Plus
      Q: How are Creo Plus and Windchill Plus resonating?
      A: CEO Neil Barua stated that SaaS is a priority, and they continue to build momentum with Creo Plus and Windchill Plus. They view it as a 10-plus year journey, working through conversions and investing resources to prepare for at-scale conversion into their Plus strategy. Progress is considered "okay to good" over the last few quarters.

    8. Continued CAD Growth
      Q: What drives double-digit growth in CAD beyond SaaS?
      A: CEO Neil Barua attributes CAD growth to having a great product in Creo and the rising adoption as customers consolidate CAD systems. For example, a medtech customer expanded Windchill and also replaced disparate CAD systems, benefiting PTC. Additionally, the shift from 2D to 3D models in markets like Japan opens opportunities for Creo and Onshape to displace competitors.

    9. Predictability of 606 Revenue Recognition Effects
      Q: Can you predict the 606 effects on revenue and guidance?
      A: CFO Kristian Talvitie stated that predicting 606 effects is challenging due to variables like contract type and term length. While they try to incentivize certain customer decisions, it's difficult to predict the volatility caused by these factors.

    10. Retention and Business Variability with Integration
      Q: How does closer product integration affect retention and variability?
      A: CEO Neil Barua emphasized they remain open in integrations, allowing customers to choose best-of-breed solutions. However, customers are pushing for more distinct integration points between products like Codebeamer and Windchill, and ServiceMax and Windchill. He believes this customer-driven approach will win out in the long term.

    11. Performance of Onshape and Arena
      Q: How are Onshape and Arena performing?
      A: CEO Neil Barua is enthused about Onshape, seeing momentum in its SaaS-based CAD offering. Arena is also showing positive trends, particularly with supply chain modules. Both are important parts of the business with potential to become high-priority areas. They are not abandoning IoT and AR but are repositioning focus to align with core systems like Windchill and ServiceMax.

    12. Outlook on Large PLM Deals
      Q: How do you view close rates for large PLM deals?
      A: CEO Neil Barua can't predict when the selling environment will change but is focused on demonstrating the critical value of enterprise PLM to customers. He believes that companies without enterprise PLM won't survive in the future. If the selling environment improves, they have a large pipeline that could lead to ARR growth higher than current aspirations.

    Related Publications