Q3 2020 PTC Inc Earnings Call
Presentations accomplished will be open for questions.
I would I was trying to call over to some Fox P. C Senior Vice President Investor Relations. Please go ahead.
Thank you.
Good afternoon, everyone. Thank you for joining Ptcs catherines called the Scott sorry, third fiscal quarter financial results and the call today, or Jim Heppelmann, Chief Executive Officer, and Christian cobbled.
Chief Financial Officer.
Before we get started please note that today's comments include forward looking statements, including statements regarding future financial guidance. These forward looking statements are subject to risks and uncertainties involved factors that could cause actual results to differ materially from those expressed or implied by such statements.
Additional information concerning these factors contained in Ptcs filings with the FCC, including our annual report on form 10-K in quarterly reports on form 10-Q.
As a reminder, <unk>, referring to operating and non-GAAP financial measures during today's call.
Especially the operating metrics in items excluded from our non-GAAP financial measures in a reconciliation between GAAP and non-GAAP financial measures.
And our earnings press release and related form 8-K, lastly references to growth rates will be in constant currency unless otherwise noted.
With that let me turn the call over to Jim.
Thanks Kim.
Good afternoon, everyone and thanks for joining us.
I Hope you and your families continue to stay safe and well during this crisis.
I'd also like to think the extended global PTC team for their continued hard work and commitment during this time a disruption.
Before jumping to review of our quarter I'd like to briefly reflect on the Corona virus crisis and review the headwinds and Tailwinds, that's been creating for our business.
In terms of headwinds, we all know that the kobin driven economic downturn is creating profitability and even business continuity concerns for many companies around the world.
Naturally somebody affected companies are PBC customers and prospects.
Second major headwind is the travel bans and work from home requirement, which slows down selling processes and interferes with onsite project work.
As a result of these headwinds we've seen pressure on bookings and some purchases get pushed out.
Fortunately to date the pressure has been somewhat less than we discussed in our guidance commentary last quarter.
Our Q3 bookings were down mid 20% year over year.
Which is slightly better than the expectations, we shared I've down 30% to 50%.
Based on a current forecast, we expect Q4 bookings growth rate to improve sequentially.
The impact on renewal rates continues to be muted and we believe our previous guidance, suggesting a modest downtick in renewals remains an accurate assessment.
So in aggregate.
Just point, we think that the Kobin crisis will continue to be a major headwinds, but perhaps less. So then we got into last quarter.
Am I do however that this situation remains very dynamic and we don't have a crystal ball to see what lies ahead in the future.
Like everybody else, we sure like to see a vaccine become widely available.
At the same time, the coven crisis is creating some strong tailwinds still.
We expect these tailwinds to persist for years to come.
Long after the short term headwinds fade as the health crisis passes.
If there's one thing the crisis has illuminated for our industrial customers, it's the need to accelerate their digital transformation efforts.
In my life works keynote I talked about the key learnings our customers have seen as a consequence of the crisis.
They include the need to embrace a mobile workforce.
The need for tools that better enable impromptu collaboration across supply chain partners.
The need to bring digital to the frontline workforce.
And the need to push forward with remote monitoring and optimization to products in factories.
These needs very directly translate into elevated levels of interest for our Peel them.
T augmented reality and SAS solutions.
The cobot situation is driving higher pipelines for windchill, but thing worse for before year end for on shape.
Each business is feeling the negative effects of the headwind still but in cases like do 40 and on shape. The new Tailwinds are strong enough to cancel most of the headwinds and these businesses continue to exhibit hyper growth rate.
With before Vietnam shape in particular, where we have a deal push because of economic concerns a new one tends to pop up because of the needs of the new normal.
When the health crisis is ultimately managed down through a vaccine or other means I expect the PTC will be in a very strong growth position as the tailwinds blow uncontested.
With that let me now turn to our Q3 results.
Overall, we're very pleased with our performance.
We delivered 10% here our growth.
Which was above our expectation of high single digit growth.
We delivered very strong revenue and S.
An exceptionally strong free cash flow in the quarter.
Christian will get into details later, so let me focus on providing color on the trends, we're seeing across our business segment.
From a geographic perspective, or our growth was evenly balanced with 10% year over year growth across all three major geographic regions.
One notable area performance was in China, which posted mid teens here our growth and early indicator that the economy. There is on the path recovery and that our subscription model is gaining traction.
Turning to our business performance by segment, let me begin with that growth products, which as a reminder includes aiotv aer and on shape.
Growth product or our grew 24% year over year.
Which is below our expectations for a normal environment, but consistent with the Kobin dynamics, we've discussed which in particular have extended sales cycles for new loyalty customers.
Remember that Aiotv is where the physical world meets the digital world and we typically have to engage the physical world and the initial set up phase. So that we can then remotely monitor and control it thereafter.
It's hard for example to make progress selling a smart factory project to a new logo, if the factory shutdown or you're not allowed to go there for coal that reasons.
But once the out of T systems in place customers really see the value of remote monitoring and optimization and the expansion business remains brisk.
Before I went on shape, our relatively less affected due to lightweight deployment models and their pure SaaS nature.
Let me provide you some highlights in these two areas starting with they are.
We delivered a solid quarter overall with record Vuforia chalk enterprise sales an acceleration in.
[noise] in six figure Hey, our deals and we added substantially to the burgeoning a our pipeline, which will serve us well in the fourth quarter and beyond.
You may recall that in response to the crisis back in March we decided to provide free access to before you Chuck which is the entry level capability of the do for you a suite that allows everybody to use their mobile device to see and Mark up real world frontline worker environments, such as factories and work site.
It is proving to be incredibly helpful for remote support and problem solving.
The adoption of chalk has been exceptional with daily production usage levels across the customer base now running five times higher than before we launch the program a few months back.
All those companies using chalk now represent an exciting upsale pipeline to pursue in Q4 and beyond.
Because of the strong adoption, we've seen when we took the sales friction out of the way, we're moving toward a freemium program that positions Chuck as a basic offering that's an easy entry point into the broader before your sweet.
What are the most interesting upsell opportunities has to be a 40 expert capture a more advanced solution, which was a key driver in large E. R deals in Q3.
Expert capture is tailor made for doing knowledge transfer between frontline workers in the remote work situation that are industrial customers are currently navigating.
We had two notable wins in Q3 that highlight the value of our broader ERP suite.
The first is a leading us based manufacturer of specialty measurement equipment.
Before the crisis, yet their services organization had kicked off initiative to transform the way.
Over services.
To differentiate their offerings and improve operational efficiency.
When the crisis hit the encountered new services delivery challenges because of travel bans and onsite restrictions.
We see introduced the before your sweet through this free truck program and in less than three months, the customer adopted and deployed euphoria, Chuck and expert capture across the global services team.
Using before you can now delivering highly effective remote support and are capturing best practices from internally experts for distribution to their end customers.
A second great success story in the quarter was Philips healthcare.
As the Cobot 19, pandemic unfolded Phillips needed to significantly ramp up ventilator production to aggressively address the growing health care crisis. They face to significant challenges. The first was accelerating training of new staff required to enable 24 by seven production chefs.
The second challenge was the travel ban, which threatened to delay their new production capacity in India.
PTC introduce Philips to our before you expert capture solution and then less than 30 days Philips was capturing expertise from technicians in the U.S. and remotely training new hires across the globe.
Despite facing the same covert headwinds that we're navigating across our business our pure SAS on shade CAD business delivered a strong quarter.
The on shape organization had a solid bookings quarter.
Added a record number of new logos in is tracking to achieve their f., why 21 or 20 plan.
It's worth noting that in this challenging macro environment on shapes growth rate is more than 30 percentage points higher than a well known mainstream product its most frequently displacing.
Which tells me that something interesting is happening.
Another proof point for on shape momentum is that the pipeline is four times larger today than when we acquired the company three quarters ago.
To support this strong demand, we're making significant investments in on shape go to market, including expanding sales reach into Europe, which is a large market for design software.
In Q3 on shape also book the first handful of orders from Ptcs reseller channel a new program that was just launched.
We believe getting PTC vars and the game will open another exciting vector of growth for the onsite business.
We're proceeding full speed ahead on the Atlas program tool, which aims to generalize the underlying on shape SAS architecture and put it to work more broadly across the entire PDC product portfolio.
Work has progressed well on the view for Ya and generated design front.
And we're working toward the day when there are versions of Creo and windchill that are fully multi tenant SAS.
Thanks to the underlying Atlas platform they share without shape.
Overall, we remain extremely excited about the opportunity to grow on shape into the leaving SAS engineering design suite.
As industrial companies rethink their innovation strategies for a new normal built around SAS, there's no better solution than on shape.
John her stick and John Mcelhaney and the rest of the on shape team of integrated seamlessly in the PTC and morale is very high.
And they've never missed a beat in their frequent delivery schedules.
Naturally they love the Atlas strategy and we're very pleased with how this acquisition is unfolding.
Lastly, in our growth business I'd like to discuss I O T a bit more as I mentioned earlier, we've seen pressure on new deal closure as result of the Cobot 19 crisis.
Well the new logo pipeline remains strong the inability to engage with customers on site the scope and plan enterprise solutions has elongated sales cycles.
But the interest level remains higher than ever so we're confident that as we see the environment begin to stabilize and engagement activity resume we'll get this part of the pipeline cranking Becca.
Meanwhile, we did see solid aiotv expansion activity in Q3, which is a testament to the value customers are realizing what thing works, we saw balanced expansion across both the smart connected products use case and the smart connected operations use case.
And from a vertical perspective, we continue to see broad based demand in our core industrial space in high Tech and electronics and in aerospace and defense.
But the real standout vertical in the quarter was the medical device industry.
Which is experienced less economic disruption during the crisis.
Medical device companies like Abbott laboratories, and Hologic are continuing to expand their smart connected product deployments, enabling them to remotely monitor and service the product fleet seamlessly. Despite the operational challenges caused by the pandemic.
A partner Rockwell had a relatively good quarter of Aer and Aiotv sales with a strong sequential pickup in business.
Like PTC Rockwell saw strong expansion sales, which is great for the success of the partnership as we have landed a lot of started deals previously.
Our partnership with Microsoft had a strong quarter across Aiotv, aer and PLM fronts.
We were pleased to learn just recently that we won Microsoft's global manufacturing partner of the year Award for a second consecutive year.
We've recently extended this partnership into a new class of Aiotv solutions called factory insight as a service.
This solution, which launched a few weeks ago is a three way partnership with Rockwell automation and Microsoft.
Factory insights as a service is a turnkey cloud solution that enables manufacturers to achieve significant impact speed and scale with their digital transformation initiatives.
All three companies are taking it to market.
Lastly on Aiotv. In addition to solid expansion activity and healthy backlog and pipeline heading into the fourth quarter, our confidence in Ptcs OTI market position was once again validated by the industry analyst community.
Address knowledge solutions identified PTC as the outright leader in industrial Iot platforms in its latest spark matrix report based on technology excellence in customer impact.
Well put this report on our Investor Relations website for you to reveal.
To wrap up on a growth business. The punch line here is the cobot crisis creates a significant long term growth opportunity for PTC balanced against some near term headwinds, we believed that our fundamental changes happening in industrial economy that will play out in our favor over the coming years.
Fostered by the strong alliances with Rockwell automation of Microsoft PTC is extremely well positioned to be a central part of the digital transformation strategies of our industrial customers.
Turning now to the core business.
We're very pleased with our Q3 performance with a our our growth up 10% once again outpacing the market growth.
The juxtaposition of Creo and windchill being up a combined 10% in a quarter, where adestos cut Tia and Innovia businesses were down a combined 10% is interesting.
I attribute that 20 point disparity to the great progress PTC has made to strengthen our products and the strength in our business model.
Q3 was the 11th consecutive quarter that our core a our growth rate has been in the double digits.
With such steady and predictable performance over a long period now it's obvious that we've made tremendous strides driving the cyclicality out of our core business.
At this point PMI fluctuations seem to have a more muted effect on PDC than they do on some of our peers.
Ptcs PLM business continues its streak of strong performance with mid teens ear our growth in Q3 from a geographic perspective, PLM performance was broad based with double digit growth across all three major geographies led by the APAC region.
The momentum in our PLM business was underscored by a major win with the US Navy, which we announced earlier this afternoon.
Following a rigorous competitive process against a dozen other technology providers concluded with the small initial when a year ago.
We conducted a successful pilot program and we've now one a substantial expansion agreement the power a cloud based digital transformation and modernization effort around the weapons readiness and we're fighting capabilities of the Naval Sea systems Command.
This project will drive a fundamental change in the way. The Navy operates in supports its fleet of ships in submarines.
PDC software will be used to creating model based digital twin of each ship that will be used by more than 15000 users and an expansive supplier network to optimize lifecycle costs and maximize operational availability.
With additional options in place that could expand the our of this project to over $25 million in year. Five this contract is poised to become Ptcs largest run rate customer so long as we successfully executed.
The Navy when reinforces my earlier point about the digital transformation trends that are happening across the broader industrial economy.
And how they're driving new demand for PLM.
Our PLM pipeline looks strong and with many more digital transformation projects being discussed.
We feel the prospects of a new wave of secular PLM growth are increasing.
Turning now to cat, our cat team delivered a solid quarter with our growth in high single digits.
Growth across the goals was mixed with APEC, leading the way followed by the Americas in Europe.
In Europe, which has our largest CAD channel exposure sales were more severely impacted by the cobot crisis, given the patchwork of government shutdown in across the regions.
But CAD renewal rates were extremely strong.
We had solid results from Creole simulation life, our cat solution that Embeds real time simulation from answers.
We closed 10 expansion deals across a number of verticals like automotive medical device and industrials.
We inked our first seven figure CSL deal with a large U.S. government agency.
It feels like we're gaining some steam with CSL and we look forward to launching new marketing programs in the coming quarters.
And finally, our focus solution group was flat more or less as expected given the difficult circumstances.
With high profitability and low churn this business continues to add real strength of the portfolio.
To wrap up my comments I think it's safe to say that were operating in unchartered waters as we navigate through this pandemic.
However, I couldn't be more pleased with our strategic position and with our teams execution in the face of these challenging times.
We're fully mindful of the headwinds the pandemic will place on new business as we continue to target double digit growth in Asia, or our revenue and EPS for the year.
Confident that once this crisis passes will be well positioned to drive even higher levels of growth margin expansion and shareholder value creation.
With that I'll turn it over to Christian will take you through more details on the financial results.
Great. Thanks, Jim and good afternoon, everyone before I review our results I'd like to note that I'll be discussing non-GAAP results and guidance in all growth rate references will be in constant currency.
Let me start off with a brief review of our third quarter results and then spend the balance of the call on our outlook for the remainder of the year.
Q3, a our AR was 1.21 billion, representing 10% year over year growth at constant currency, which was slightly above the guidance commentary we provided last quarter.
Upside was driven by solid new ACB bookings and only modest deterioration in churn, which came in essentially in line with our forecast for the quarter.
Q3 revenue of $352 million was up 20% year over year, driven by 28% recurring revenue growth.
As we've discussed previously revenue is impacted by S. C. Six so sick and related business policy changes.
Operating margin of 29% increased approximately.
1200 basis points over Q3, 19, and lastly, non-GAAP EPS of 62 cents increased almost a 180% year over year.
Q3 free cash flow of 99 million was ahead of our expectations driven primarily by the timing of collections lower than.
Allowed for customer concessions and lower than planned expenses such as travel.
And the virtual Liveworx event.
I think the key takeaway here is that even in the current macro environment customers are clearly getting value from our solutions and paying largely on time.
Moving onto our balance sheet.
Following the redemption of the 500 million of 6% senior notes in May we ended Q3 with 1.1 billion of debt, including 1 billion of senior notes with a weighted average cost of debt of 3.8% and 138 million outstanding on our credit facility.
We ended Q3 with cash and marketable securities of 435 million.
We believe this is a very attractive and staple debt structure, especially in light of the current economic backdrop.
Now turning to guidance.
Based on our Q3 performance and outlook for Q4, we're raising the low end of our air our guidance and now expect year over year, a our growth of 10% to 12% on a constant currency basis versus our previous 9% to 12% range.
At the low end of the our our guidance, we expect new HCV bookings to be down approximately 30% for the back half of F. why 20.
Versus our previous low end expectation of down 50%.
At the high end of guidance, we continue to expect new HCV bookings to be down approximately 20% year over year, and we're still expecting churn of approximately 8% for fiscal 2000.
It's worth noting that despite these declines in new ACB bookings and slightly increased churn, we're still able to target double digit a our our growth which is a testament to the strength of our recurring business model.
Before I get into the.
Guidance details there are few important factors worth reviewing as it relates to a our first.
As a reminder.
The way that we define a our AR is the total value.
The total value of active HCV or annual contract value contracts at the end of the quarter.
This means the timing matters, both for new HCV bookings and renewal HCV bookings.
In that our subscription HCV is counted in a our our when contracts start. So for example, if we book in order at the end of the quarter, but the start date is in the following quarter, it's not counted in ending our for that quarter, but instead goes into backlog. The key takeaway here is.
Well, we build a set of start date assumptions into our forecast and guidance Theres always some risk that start dates move and hence our our in backlog change accordingly.
The second key factor is ramp agreements.
A portion of our new ACB bookings are structured with annual committed HCV ramps that grow each year of the contract duration.
The ramp agreements are great in the sense that they build future committed backlog, which in crude increases are a our visibility in the future.
However, if we book more ramp agreements than anticipated in any given quarter. This can also impact ending a R.R. and of course backlog.
Given the current macro environment, where customers are more cautious about their budgets and deployments we've seen an uptick in demand for ramp agreements. We factored some of this into our guidance, but we believe it's important to called this out heading into what is our largest bookings quarter for the year.
So now for the specifics, we're expecting fiscal 20 or our of 1.24 to 1.26 billion.
The constant currency growth rate of 10% to 12%.
Relative to Q3 are a our our guidance includes approximately 5 million of positive FX impact.
And the quarter over quarter increase in growth is driven primarily by both normal seasonality of our business.
As well as our backlog of deals booked in prior periods.
Turning now to free cash flow.
For fiscal 20, we're expecting to deliver approximately $210 million, which is an increase of about 10 million from our prior guidance due to modestly higher expect today are solid collection activity and FX.
And consistent with last quarter, even though we havent seen a material change in customer payment activity. We've built in some cushion for potential customer payment concessions.
Please note that the interest payments for the two senior notes we closed in February.
We will be paid in our fiscal second and fourth fiscal quarter is beginning this quarter, where the interest on the retired note.
Was previously paid in our first and third fiscal quarters.
For the full year free cash flow guidance includes 45 million and restructuring costs 9 million of acquisition related payments 65 million of interest payments and Capex investments in the low 20 low to mid $20 million range.
Now turning to PNM guidance.
We're expecting fiscal 20 revenue of 1.42 to 1.43 billion. That's an increase of 7 million at the midpoint of guidance, reflecting modestly higher or our and subscription revenue.
The resulting revenue range.
His growth of 13% to 14%.
On the expense front, we remain diligent relative to our headcount additions and continue to limit hiring to critical roles primarily in our growth businesses.
We continue to target operating expense growth in the lower single digits for fiscal 20, and an operating margin range of 27% to 28%.
Which is an increase of 700 800 basis points year over year.
Non-GAAP EPS is now expected to be $2 in 28 cents to $2 in 35 cents. That's an increase of four cents at the midpoint of guidance and represents 39% to 43% year over year growth.
A final point on guidance, you'll note that the implied Q4 PNM guidance calls for a slowdown in year over year revenue and EPS growth.
This slowdown is related to the accounting treatment of on premise subscription revenue under NSC six six.
And business policy changes, we put in place in Q4 of 19.
Subscription revenue under assay six so six is also impacted by contract term lengths. So to the extent that term length is change going forward you should expect to see variability on a quarterly basis.
That said it is important to understand this has no impact on our or free cash flow as we continue to build customers annually upfront.
Also please note that we're guiding to a higher than normal seasonal increase in operating expenses for Q4.
This is due in part to lower than normal expenses in Q3 with Liveworx being held virtually this year and other lower expenses such as travel.
Due to covert related restrictions.
And in Q4, we're also expecting per normal higher commissions.
Uptick in new hires.
Also there are four more business days in Q4 than Q3, which drives.
Incrementally clients as well.
So to sum up with the caveats I described earlier about start date timing and ramp contracts, we believe that our guidance to be appropriate.
We continue to be diligent on expenses and protecting earnings without impairing our ability to make key investments in our growth businesses.
And lastly, we have a strong and stable capital structure to support our profitable growth strategy going forward.
Well, we're not providing fiscal 21 guidance at this time it is worth noting that even under a scenario of prolonged economic softness.
We would still expect.
Solid our growth.
And as a reminder, there will be additional free cash flow tailwinds in fiscal 2001.
While we expect Capex to continue in the same mid Twentys ballpark interest expense is expected to decrease roughly 25 million compared to fiscal 20, given our new debt structure and assuming no restructuring, we would expect $30 million less of restructuring payments and assuming no.
Acquisitions, another approximately $10 million less of actual acquisition related payments in fiscal 21.
One additional note for those of you building models for fiscal 21, we will be moving to calendar quarters next year off of the modified for four or five quarters. We've had previously will provide more details on this topic next quarter.
So wrapping up we had another solid quarter, but recognize that the market is changing rapidly. We believe we're very well positioned to perform during the downturn and to continue delivering significant value to our customers which in turn.
Will drive a our growth well into the future.
With that I'll turn the call over to the operator to begin una.
Thank you.
Ladies and gentlemen, let's ask the question. Please press Star then one on you touched on telecom.
I just ask a question. Please press Star then one we do asset you limit yourself to one question.
And then returned to the Q4 follow up question again, we do ask that you asked one question. Thank you.
Our first question comes from that add Burke of RBC capital markets. Your line is open.
Hey, guys. Thanks for taking my questions Hey, guys.
You are all doing well and it's great to hear your voice is again.
Jim I think what really is in treating me and I just wanted to dig into it a lot in some of the work that we'd be doing is you guys leveraging atlas.
Which I think is obviously one of the crown jewels about shape.
You know during your prepared remarks, working on a SaaS version of Creo and Windchill and you said you know it's still an ongoing process I'm just wondering could you provide a bit more detail on there on how you think about the timeline for that rollout and how existing customers might leverage.
A SaaS version of Creo and windchill.
Yes, well, Matt good good catch there because I think it really is ultimately a very large opportunity, but let me be clear as kind of a mid to long term thing because we're really looking at doing kind of a major redevelopment of those properties onto this platform and.
A key thing for us would be that optimize for compatibility and continuity. So I sort of I have an analogy I have shared internally many times and probably help with investors as well if you think of Google Docs, It's a completely fresh thought fresh look at let's say office productivity suite.
Meanwhile, you had Microsoft office, which was on Prem.
Microsoft came out with office 365, which was hsas and companies like PTC might have been thinking about whether or not we should go to Google Docs I mean, many many do and particularly new companies, but our SaaS companies have been using office forever really do prioritize compatibility of data and use.
We've experienced but we'd like to have SaaS. So you could imagine we could build a product it looks a lot like Korea, but.
Got it runs in the cloud and as multi tenant but you open up your same old thousand you go right back to work with the same old user interface much like it did with office 365. Meanwhile, on shapes over here more like Google Docs Unbridled unconstrained innovation no legacy trying to invent the next generation.
Of application, so I think on shape fighting the fight against competitors and Atlas allows creo and windchill to bring their customer base with.
Again, it'll take us I'm going to say a couple of years to do this.
I, partly tell you have because it's part of our commitment to really go to SaaS. It is a long term monetization effort that significant because while we've brought our customers from perpetual to subscription theres, another and potentially bigger monetization associated with bringing them from on prem into SaaS.
So I'm excited about that.
In really to me if the on shape acquisition seemed expensive I mean, it was but what people didn't realize it we were getting both.
I think through CAD system, but also a breakthrough CAD platform that will allow creo and windchill.
To get into the Esas world years earlier than they would have independently and on a consistent platform. So that as we bring our customers to SAS everything's knitted together on a on a common platform as well. So we're very excited about it but I want to be clear, it's not a short term strategy I.
I think the only talking about.
Let me just add one more comment if you're thinking about are there any drivers for longer term strong growth in CAD and PLM I would say, yes, there's kind of two that have captured my attention one would be the movement of Creo and windchill. The SaaS in the second one is something I mentioned, which is the digital transformation story around winchell.
Now starting to get more and more traction.
Thanks, a lot of him.
Thank you our next question comes through.
Korea Barclays. Your line is open.
Hey, Socgen, Hey, guys, Thanks, Hey, Jim Hey, Chris Thanks for taking my question here.
Jim I mean, we want to pick up on that last item that you just mentioned with with wind chill and Pete.
And just PLM broadly.
Can you just talk about that strengthen PLM error is it related to that digital transformation, you talked about a secular wave and PLM again is it in market share gains and how do you should think about that going forward.
Yeah, I think when I talk to my sales team and when it's been a lot of time with customers I think that.
In the past PLM, followed cat around now is starting to follow digital transformation initiatives and what really happens there is industrial companies say, how could we think about.
Taken ourselves through a digital transformation that didn't involve digital product data being under control and well managed and so forth. So I think like the Navy example, it's got nothing to do actually with engineering, it's about a model driven you know.
Operation and support paradigm.
And it's got nothing to do with following cat around it's really about how do you use that data to transform the way products are operated and serviced and supported.
During the lifecycle out in the field and Thats a great example, the kind of initiatives, we're hearing more and more about his people, saying that product data could be useful for a lot more than engineering and if we want to try to do that digital thread discussion reuse it for manufacturing reuse it for service potentially use it for sales and marketing if we want to do that.
We got to get it under better control and wind chill excels at that you know, it's already assassin web based system.
And it differentiates well you know every single Magic Quadrant report you've seen in years Winchell's way out front in terms of that.
Competitiveness, let's say and I, just think that digital transformations become a real driver.
Got it makes sense thanks, guys.
Thank you.
Question comes from Andrew gas Barry.
Alan Burn your line is open.
Thanks for us.
Hi, good morning.
Maybe just one.
One or two questions. The first on Q4 and our I was just wondering in terms of the makeup of that guidance.
Can you maybe elaborate a little bit how much of that is based on ramp deals versus brand new bookings.
Yeah.
Well as we've said numerous times before we're not getting into the specifics around that.
But we do have a fair amount of visibility into the are.
Again, if it's our.
Largest bookings quarter of the year, which does make it a little bit harder to call around the.
The line.
Of start dates and how much is actually going to come in as ramp deal.
But from a.
Fundamental.
Much business or reselling out into the market perspective, I think we feel pretty good about the.
About the prospects for Q4, and we feel good about.
The ranges, we've put out with those caveats.
Yes, and maybe just to add Andrew I mean, clearly Q4 has for ever been a seasonally strong quarter for bookings and so it's natural that it would be a seasonably strong quarter for backlog as well. So we start Q4 with.
Seasonally high backlog.
And then we're going to.
In some of that new bookings will lend in the quarter and some of it will go back into backlog. So again, when Christian saying is the real risk here is calling the timing of it because how much of the new bookings lens that backlog versus in the quarter. I mean, that's actually important to the way we report, although it's actually not important to that how well the business is doing.
The important thing there is how much business that we go get so I'd say seasonally high but we don't really want to get into the details and percentages of it.
That's helpful. Just quickly on on shape in terms of the channel and how much you're essentially leveraged that I mean as at this point is it clearly out there or is it just to select fear that had been able to sell it and if given the success would you consider accelerating that process.
Yes, so it's a couple dozen right now, but it's a couple dozen of the Beslans biggest invest so what we did as we said.
We have hundreds and hundreds of channel partners.
Right.
There's a there's definitely kind of a.
Tail, let's say to that so let's start with the biggest best ones the ones who are in best position to invest in new sales capacity.
Because there's still selling trail and and lets go ramp them up and see how it goes so we started that last quarter and by the way we thought we would do this some gain.
But coven convinced us we should do it right now because we just saw the pipeline just blossoming and we said you know we just don't have the capacity to execute on this and it's probably a lot more business that we're not even finding so.
That's what we're doing there were taken couple dozen of our biggest invest resellers, they're ramping up incremental new capacity and they're selling.
They are selling.
On shape kind of into the lower end segment of the market typically against Solidworks and they're continuing to sell creo kind of them slightly bigger and more sophisticated customers who.
For whatever reason really need that more advanced functionality of a higher end product.
Thanks, Jim.
Thank you Sir our next question comes from Adam Borg of Stifel. Your line is open.
Hey, guys, Thanks, and say Hey, guys. Thanks for taking the question just real question on Opex was I think beyond this year, obviously I'm not looking for guidance, but you guys have done a great job this year living opex spend.
Some of that is onetime in nature of some of that is expense discipline.
Should we think about opex growth more quantitative qualitatively going forward just given the.
Opportunities that you're talking about in attracting youre seeing I know we've talked in the past about opex going at estimated there arent just curious if that thinking has changed thanks so much.
Yes, great Adam Good good question I think as a general rule of thumb I think thats the right way to think about it thats, certainly where we start with with our planning process and we're in the middle of the planning process right now now in any.
Given year, we may.
What's that up or down but over the longer term that's that's definitely the.
Starting point.
But again, it can and can fluctuate a little bit depending on timing and opportunities we see in front of us.
Great and maybe just a quick follow up any comments on just recent business trends in July versus what you're seeing Angie. Thanks again.
Thank you normally say is.
All I would say is the quarter I was nervous as we came to the ended the quarter.
And.
It was surprisingly not that stressful so the quarter ended without a lot of fireworks and without a lot of inks and so forth. It was it was actually quite relaxed.
So I would that just tells me that.
It Didnt get worse, it probably held together and gives me more confidence looking into Q4 forecast.
Great. Thanks again.
Thank you I'll. Thank you. Thanks.
Our next question probably tolerated Citi. Your line is open.
Hey, Thanks for taking my questions.
I wanted to ask about the growth business obviously the.
Our.
Decelerated, there and I think you called out some headwinds as it relates to selling some of these new aiotv deals into customers, where you have to be on site. I guess, how are you thinking about the trajectory of the.
Gross hey are our is this kind of the trough and would you expect that to Reaccelerate next quarter with the.
The overall a are expected to Reaccelerate and then.
Regions, whether it's China or Europe that are further along the reopening or you are you starting to see any signs of those.
Two deals starting to pick back up just as things start to reopen thank you.
Okay.
Good Yeah sure Tyler good question.
Again.
Yes, I think that demand environment still remains.
A little the challenging out there. So we're mindful of that that said echoing Jim's comments earlier, we do we do have committed.
Backlog, if you will have a are coming into Q4, so we would actually expect to see.
Fairly solid our performance for the growth business in Q4.
Just given some of that visibility that we have over the longer term.
As you start looking into next year, I think that that part still still open yes, and let me maybe just say in Q4, you know Q4 is always for us.
Seasonally strong quarter, we have a hockey stick in Q4 and.
We're telling you we expect Q4 to be down less year over year than Q3 was which means there's going to a good step up and it's it's not possible to achieve a good step up in bookings without Aiotv plan, a major Raul. So there's a lot of LTE business in our in our Q4 forecast certainly a.
I will step up.
And at the same time, we feel like we're we're applying some conservatism there so what I would say Christian said this problems in the demand environment I'd actually say this problems in the closing environment because the demand is high and so what we what we need to do in Q4 is called the right close right and I think in any case, we're going to.
Have a sequential step up this quite quite interesting.
In the on T. business and therefore, this probably would be the trough.
In the growth growth rate of the growth business.
Okay.
Great and then are you just seeing any type of demand differences in regions that are opening up faster than others.
Well we have seen.
China.
As an example has continued to.
Accelerate.
Good that's both.
Function I think of their economy opening backup a little bit as well as.
Our subscription model.
Customers getting more comfortable to subscription model in that region as well.
I think.
Geo basis.
We are looking for continued strong performance.
In Europe in Americas, as well, but.
But on a growth percentage I think I think payback would be though.
Peter.
Okay. Thanks.
Thank you.
Thank you our next question, Tom Tom Jones, who asked however, our Griffin Securities. Your line is open.
Thank you good evening Hey.
Jim Let me start with you on a technology question, referring back to five works last month.
The most valuable part of because brings to the various roadmaps sessions in various products and was good to see that youre right here into the police cadences, particularly for windshield and of course the Creo. The question I have is when you think about the upcoming releases.
Do you just headquartered in December and in June next year, what do you think will be the most incremental or catalytic.
New features and capabilities I'm, highlighting PLM, because that's where I think a lot of the flux is technologically and in terms of the end markets.
So when you think about that what do you think could be the drivers and then additionally, how are you thinking about the incremental effect, possibly the new creo ensign simulation product for the higher end product you're coming out within the fall.
Yes.
Let me take the second question first I mean, there's.
Two things simultaneously happening in our relationship with Ansys.
One as we've seen a nice pickup in the first wave the Creo simulation live and then as you pointed out we're coming out with another wave of capability around.
Around the mainstream simulations weight that this called Ansys aim.
So.
While we are getting momentum, we're also not going to broaden the portfolio and I.
I think we're optimistic about that.
PTC does have some capacity to sell simulation, we just decided we'd rather.
Well with ansys than against them. So I think we have a best in class simulation suite now within our cat environment and.
And there's customer certainly are interested in that so I think the answers partnership will continue to gain traction Accordingly, and then on this winchell thing.
I do think Theres two big things, we're working on right now and without getting deepen the details.
Responding to this digital transformation moment.
Is one of them and then although I won't ship in the near term you know beginning to think about how do you go to a multitenant SaaS version of when shall we do sell windchill and SaaS today, but its single tenant and what that means that we don't have all the upgrades all the benefits of regular upgrades you know every three weeks the whole bases upgrade and so forth, but we.
You know tackle that problem.
We'd like to do it because it represents incrementally more value to the customer.
And it represents incrementally more value to PTC, I mean, frankly, less waste and energy by everybody.
No in the meantime, some of the things we are working on is even while it remains single tenant SAS, we could do a lot to make the cost of ownership lower.
Which would benefit PDC, when we provided assassin and benefit all those.
All those customers who.
We'll take it is on premise so I'd say again, those two things more related to responding the digital transformation moment and that includes integration with multi and integration with the before you suite and stuff like that and then.
Preparing both tactically and strategically for for a better SAS future.
For Christian how do you think the contribution from your partners and total pin number excellence say that you get some them might evolve into X today, where do you think it might be 235 years from now Microsoft has been.
Very vocal in just the last couple of months about their commitment to the manufacturing market. They highlighted to you.
There were multiple use cases, they are increasingly looking at.
Generally, but with what you do as well tied in so when you think about all your partners.
How does that footprint or ecosystem, whatever you want to call it proportionally become more important to you.
Yes, great Great question, Jay I think that the the partner economy is extremely important to PTC.
And.
That includes the more traditional partners as well as some of the.
The more strategic as we call them alliances, we've had recently and I'd throw in the global system integrators global system integrators.
Again Rockwell Microsoft.
You know ansys as well.
And.
So.
As we look out over multiple years.
I think that there is.
Historically, let me say it this way historically.
The channel contribution.
Has been in.
Mid twentys kind of 30% of Ptcs overall business and as we look out over multiple years.
We think that the opportunity for that.
Is certainly to push.
You know the high Thirtys approaching 40% of the.
Approaching 440% of the business.
Over over a period of time.
Thank you.
You do it.
Thank you. Our next question comes from Andrew Obin of Bank of America. Your line is open.
Thanks.
Just a question on on shape.
Yeah, you guys sort of highlighted revenue in the quarter was inline with expectations. We've been hearing through channel checks that actually Corbett locked down. The fact that everybody works from home actually stimulated a lot of demand for the products a lot of interest.
Do you see sort of the growth trajectory for on shape being meaningfully impacted post call that over the next several quarters that we can notice from the outside.
Yes, My view Andrew is that two things are happening simultaneously.
Some deals are being blocked because companies out of themselves in crisis mode and that tends to be larger deals.
So so theres a headwind for sure slowing on shape down, but then this this tailwind bringing in more deals that would not have if not for covance.
Probably wouldn't have been in the forecast, meaning people are talking to us about because of coal that I'm talking to you and so we think right now the headwinds in the Tailwinds are canceling each other out and we're basically on plan. However, we think at some point when when when the economic fear subsides, a little debt I mean.
Companies going out of business don't buy any software from anybody, but when they stop worrying about going out of business and they start thinking about going back to business. Then we think theres just the tailwind and so.
The real answer is that PTC has far more confidence in the future of on shape than would day, we pulled the trigger on the acquisition.
Nine months ago, we just feel like it was a great move both as a CAD tool and then.
Really something special in terms of this Atlas architecture that is going to help us and in many ways. So just question on slide access I didn't see any material improvement in July over June.
Again.
Our quarter is back end loaded okay. So we don't close near as much business in June as we do in July so for us the risk would be that we didnt close the business in July but we did actually we landed our forecast came in above the guidance range. We gave you.
And so to US July was.
Certainly not worse than June and potentially better because a backend quarter close more or less as expected. Thank you very much.
Thank you next question comes from Ken Wong of Guggenheim Securities. Your line is open.
Great. Thanks for taking my question.
Perhaps for you Jim you touched on this movie deal potentially 25 million Yeah. Five years from now I guess, how should we be thinking about the that potential slope of that transaction from a ramp perspective, and then as we think about other areas or defense is it fair to assume that this is something that could potentially map over too.
Two other other other departments.
Yes, Okay. Those are both good questions. So first on the slope, let me just be clear what we have is a pre negotiated set of annual expansion options.
We're not calling it a ramp because they're not committed their options. Okay. So think of it like a ramp but without the commitment therefore, none of its in backlog none of its in our our none of that stuff. It's just out there.
But there they are pre negotiated and it's a pretty steady ramp that would get us from the initial deal which by the way the Navy disclose some information on this so I'll tell you they disclosed.
We had set aside $97 million for this for this contract.
And they also disclose that the first order was a little over 3 million. So think that we got a 3 million ACB order and and there's a series of additional orders that you added them all together over all the years.
Plus a little bit of services get you to that $97 million they've set aside for us.
Now again just to be clear we in the project needs to go well or you can imagine scenarios, where we don't get that full ramp.
No you're your second question just to clarify on that the first two years are in that 3% Rittenhouse two years in the three half all right.
So two years upfront and then a series of expansion options.
Thanks, Chris.
Now first of all the Navy Doesnt only have ships they have airplanes and so there is now see which is the deal. We won and there is now there and it's it's completely logical the Navy would use the same system for the airplanes and that would.
Potentially double it but then absolutely we're going to go pitched the same story that every other branch.
The military who operates all these assets and really see if we can't get others to follow soon we think we have some special there, but we're not we're not going to call anything right now other than put that in the category of the digital transformation tailwind for us for PLM. Because this is not engineering and CAD its digital product models under configuration manager.
But for purposes of operations and support.
Got it thanks for the detailed actually maybe a follow on I guess beyond defense and it sounds like this is something that could potentially map out to other other other end markets is that a fair statement or is this very very defense specific.
No no it's not defense specific at all in fact, they're deploying commercial off the shelf software that we actually developed for initially for non defense customers. So we're certainly engaged in similar discussions.
With a with other customers and in fact, if you go into the Liveworx event two years ago, something you might remember I was doing a configuration manager augmented reality inspection procedure against the global truck engine. That's actually the same story just.
Just a particular use case of it.
So this definitely could go elsewhere. It's just a course these military commands operates such large numbers of assets of such high value that there really really interesting if you can win them.
Great. Thanks, a lot guys.
Thank you. Thank you.
And our final question comes from Rich Valera with Needham <unk> Company. Your line is open.
Thank you. Thanks, Thanks for fitting me it.
Jim question for you on Io tea.
If you can put aside the logistical issues with deployment right now just wanted to get your sense of where that product is in its lifestyle. It lifecycle in terms of adoption and the things you've done specifically to facilitate adoption to reduce the friction and getting customers to adopted I know you just rolled out kind of insight to that service, which I think is one.
One of the things in that sort of fill and you've also been working on sort of I think more templates to make it may be more shrink wrapped in less customizable, but if you could just talk us through where that product is in its lifecycle and if you think theres kind of an inflection somewhere down the road as you. All these things sort of coalesce to make it more of a more of a final product as opposed.
Custom deployment.
Yeah, and I think Thats, a great question rich because I think the product has mature and quite a bit as a great platform to develop and run the business applications. Okay.
But what we'd like to do is have more than pre developed exactly as you said, we'd like it to be a solution in a way that has a platform in the background. If you want it but you'd really rather buy this solution.
I kind of an industry example that the bid dated would be like Salesforce dot com enforced dotcom to me like force that comment there. If you bought salesforce dot com, but most people really would focus on the CRM system or or what have you.
Just thinking about that for a minute, we'd like to have more value oriented outcome based solutions and are ready to go up and thats been a big focus that PTC, we we hired a new executive to run that but a year ago now.
Craig Melrose.
A longtime Mackenzie.
Manufacturing expertise in so the reason I really like Craig he looks at it from a value standpoint, he Mr customer whats problems do you have and what value could be created by solving those problems and then we want to come and say we have a solution that does exactly that.
Let's not talk about developing anything it's ready all so that's what we're aiming for again I think at the platform level. We now have them very mature system and really were.
Cussing now on the solutions. This factory inside his services a down payment, but I think you know in the next one and even two years, you're going to see us rollout a whole series of.
Very interesting solutions that will change the way we sell we'll go back to selling enterprise solutions built around the concept of Aiotv as opposed to and I don't see platform you could use concealed enterprise solutions, which is kind of the world. We've we've been coming from.
That makes sense. Thanks, thanks for that a clarification Jim.
Thanks Rich.
Thanks.
Ladies and gentlemen did that include up to any portion I'd like to turn the call back over to term for any closing remarks.
Thanks, Valerie and again, thank everyone for joining us today, we will be participating in a number of virtual events.
Being up this quarter you can find all the details on our investor website.
We look forward to seeing you on the conference circuit in the coming months and again. Thank you for your interest in PTC and we all hope you have a great evening.
Take care. Thank you.
Ladies and gentleman that does conclude today's conference. Thank you participating you may now disconnect have a great day.
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