Q3 2021 PTC Inc Earnings Call
[music].
Good afternoon, ladies and gentlemen, thank you for standing by and welcome to the PTC tend to only 1 third quarter conference call. During today's presentation. All parties will be in a listen only mode. Following the presentation. The conference will be opened opened.
And for questions I would now like to turn the call over to Emily Walt Ptc's Senior director of Investor Relations. Please go ahead ma'am.
Thank you Peter Good afternoon, everyone and thank you for joining us for PTC conference call to discuss our third quarter 2021 and financial results on the call today are Jim help women.
And its executive officer, and Kristian Talvitie Chief Financial Officer.
Before we get started please note that today's comments included forward looking statements, including statements regarding future financial guidance the.
These forward looking statements are subject to risks and uncertainties and the Gulf factors that could.
<unk> actual results to differ materially from those expressed or implied by such statements.
Additional information concerning these factors is contained in P. T SEC filings with the SEC, including our annual report on form 10-K, and quarterly reports on form 10-Q.
Cause the 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-K.
Lastly.
And we will be referencing our earnings presentation presentation today, which you can find posted on our IR website and with that let me turn the call over to Jim.
Thanks Emily.
Good afternoon, everyone and thank you for joining us I hope you and your families are well during these continued uncertain times.
And I am.
Lastly, the share that PTC has welcomed many of our vaccinated employees back to our offices where requirements of LOE and <unk>.
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 doesn't lead to another round of business Lockdowns.
<unk>.
Before I dive into the quarter I want to share some important news on the Investor Relations front the.
Emily has been doing a great job holding down the fort since Tim Fox luck, but keeping up with IR demands as the big job and the Emily was happy to hear that reinforcements around the way.
I am pleased to announce the hiring of Matt Schmal.
I'm pleased as our new senior VP of Investor Relations.
And that came to us as a recommendation from 1 of our largest investors and.
And it came out on top following a thorough search process.
That comes to us with the finance background and several successful spin on both the corporate side and the sell side of Investor Relations.
All of the strategic thinker and we're excited to bring him on board.
Turning to slide 4 with 3 quarters behind us our guidance for FY 'twenty, 1 has us right on track to deliver mid teens, <unk> growth and $340 million of free cash flow this year.
And that would be a force.
Fourth consecutive year of double digit top line growth and I anticipate we will be discussing a fifth consecutive year of double digit IRR growth. When we guide fiscal 'twenty, 2 and 90 days or so.
While the stronger PMI numbers that we're seeing and can only be helpful. I am pleased to see the PTC is earning.
<unk> reputation as a company that can consistently perform at high levels and good times and and bad.
And preparing for this call I thought back to where we were a year ago with shutdown orders and place empty offices and factories and schools contemplating how to educate from home.
Against that chaotic backdrop.
Im very pleased with the results of the PTC has been able to deliver right through the pandemic.
Some years back and the days when our portfolio was narrower and sold and a perpetual model our business was much more cyclical but.
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 hasnt been the rule and our peer growth, especially among our most direct CAD and BLM competitors.
I attribute our superior performance to a better business model too.
Tremendous strength across our entire portfolio.
And to growth drivers that are now more secular than cyclical.
In terms of growth drivers PTC is well positioned for the future. The new logo success of our on shape and arena businesses demonstrates the growing demand for SaaS technologies.
We see.
<unk> of Lam, joining Iot and augmented reality as key digital transformation technologies for industrial companies and.
And years of market outgrowth, and the CAD business speaks to the innovation, we've reignited there.
Turning now to slide 5 so we can get into the Q3 details.
<unk>.
<unk> delivered another strong performance and topline and.
And Bottomline and free cash flow in the third quarter.
Bookings grew and the mid Thirty's, a strong rebound and comparison to a year ago when bookings declined.
And the topline category, we had a very solid quarter with a growth of 18%.
15% and constant currency to 142 billion.
Growth was driven by solid performance and our growth businesses continued momentum and our core business, where we again outpaced market growth and by a solid contribution from Irina solutions.
On an organic basis.
<unk> grew 14% or 11% and constant currency and Q3 in line with our guidance.
To close out the topline category revenue growth of 24% as reported was driven by strong execution.
Aided by the impact of ASC 606 revenue.
The recognition policies plus of course, the arena contribution.
Switching to the bottom line category, we delivered strong free cash flow of $85 million and non-GAAP EPS growth of 34%, reflecting a combination of strong top line results combined with continued operating expense.
Our Ireland, even while we also invest for growth.
We continue to feel confident about our FY 'twenty, 1 target of $340 million and free cash flow.
Moving to slide 6 digital transformation remains our main secular driver of growth.
You.
This will remember last quarter I shared our new tagline digital transforms physical the.
These 3 words are captured in our logo and and body, 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.
You may re physical factories and servicing those products at physical customer site.
And my LIBOR ex keynote in June and again at our global partner Summit in July.
Outlined the power of PTC is unique digital transformation story that has 1 foot in the digital world and 1 foot in the physical world.
And the 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.
And of thinking about how customers will use digital to disrupt physical and 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 <unk> software markets and PTC has.
And is carved out and enviable leadership position.
We now have the most of the gain from this disruptive force.
With that as context, let's take a look at the respective contributions of the SG core and growth segments of our portfolio.
Moving to slide 7 you'll see that.
And our focused solutions group showed growth of 4% or 1% constant currency, which aligns with our growth expectations for this segment.
<unk> growth for our core business was 14% or 11% and constant currency.
Our growth segment saw 60% AOR growth with 20.
23% organic constant currency growth.
Reflecting on 1 hand, some lingering hangover from Covid.
<unk> balanced by solid performances from our on shape AAR and arena SaaS solutions.
Let's go a click deeper into the main elements of our large core and growth segments.
Turning to slide 8 our CAD team delivered another impressive quarter with our growth and the low double digits, reflecting growth across all geos and and improving demand environment.
The additional features and functionalities that create and 7 delivers including <unk> simulation live and Clio and <unk> stimulation.
<unk> continued to demonstrate the power of the differentiation of Korea.
In addition last quarter, we announced <unk> hundred 8 which includes the generative design extension module called <unk>, which.
Which is based on our Atlas SaaS platform.
While it's still early days for Creel leveraging Atlas this.
Casuals of Great example of how PTC plans to deliver innovative SaaS based capabilities as we systematically transition of 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.
Net HPE coxa.
Provider of products Engineering solutions and technology projects for the performance automotive and Motorsports sectors.
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 and a multi step multi software approach the design, we're causing miscommunication between design and analyst teams, which delayed production times and cause customer satisfaction risks.
By adopting fully integrated and streamlined generative simulation and additive.
<unk> workflows and Korea.
<unk> simplified the design and sequencing reduced overall design and production time, and the approved design of agility and time to market.
Moving on to slide 10, and our Pls business Youll see that <unk> continued to deliver very strong performance.
With another mid teens <unk> growth quarter.
From a geographic perspective in Q3, we saw broad based strength across all our geos and and our customer base with a solid quarter and the reseller channel.
And we saw increased demand for <unk> through the Microsoft Alliance another proof point.
Technology and more customers are understanding the critical role the pls and plays in their digital transformation initiatives.
Incidentally during the quarter, we won 3 more partner of the year Awards from Microsoft.
On slide 11, we profile of win with cell centric, a daimler truck and Volvo.
The joint venture, which helps hydrogen fuel cells.
<unk> develops hydrogen fuel cell systems and believes that Ptc's BLM solution is best in class.
As the deadline of becoming an independent entity loomed on the horizon cell centric knew they needed of pls backbone and place quickly.
Suggests PTC delivered our cloud based <unk> offering establishing of best in class application landscape for BLM and a great competitive displacements.
Moving on to our growth businesses I'll begin with Iot on slide 12.
Iot delivered high teens year over year growth day.
Driven by.
And Europe and APAC.
<unk> is the largest reseller of Iot and the quarter.
On slide 13, we discuss our Eaton a multinational power management company saw the need to display to deploy a digital transformation strategy across the enterprise.
Our factory insights as the.
The service Iot application helped to deliver quick wins.
Forming of digital foundation upon which they can easily add more use cases.
Eaton was able to realize multiple improvements, including improved OE reduction and unscheduled maintenance reduction and manual efforts and 100%.
Worker compliance with Sop.
Let me shift to our augmented reality business on slide 14.
And before you augmented reality of team again delivered strong results and Q3 with <unk> growing across all geos.
We saw improving retention and expansion rates.
And the opportunity.
The cross sell into the larger PTC portfolio is gaining momentum.
This quarter, we also announced the new ER product before you instruct a unique Atlas based SaaS solution designed to enable enterprises to leverage 3 the CAD data to deliver create.
Create deliver and scale.
Scale interactive <unk>, our 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 instruct delivers considerable value to our customers.
Q4 year resonates with the customers we engage.
Through our alliance with Microsoft and 1 of the awards. We won this quarter was partner of the year and mixed reality.
On slide 15, Youll see and innovative example of the use of augmented reality that comes from standard a UK company dedicated to the design production and service of residential and commercial stair.
Yes.
Stair lifts, our customized systems configured for and installed and the consumer's home.
All of those with difficult day navigating stairs for example, and the move from the first of all of our living room to the second floor bedroom.
The Dan and leverage before yet to create and AAR application that allows customers to see how.
Gauged customized <unk> hologram chair lift could fit and work and their homes.
With Covid and limiting the amount of face to face the interaction by sales and service teams before you enable the customer centric tool that could be used by sellers during the sales cycle to help potential buyers visualize the residential stair lift.
And their home <unk>.
<unk> increased purchase confidence.
Proved differentiation against competitors and shorter sales cycles through improved customer communication.
Turning now to slide 16 on <unk> delivered a very strong quarter with ADR growth of 40% year over year.
We had a very strong bookings quarter and the ion shaped core commercial business with larger deal sizes and stronger renewals thanks to of maturing product.
<unk> continues to gain share in the education market too as schools and students turned the SaaS based solutions for mobility and ease of everything.
Looking ahead to Q4, we see a strong pipeline for both the commercial and larger account enterprise business.
Turning to slide 17 is fun, highlighting customer stories, especially when that customer is solving a problem through innovation.
Delta development, and R&D company specializing and military.
Military applications for cooling and heating systems and extreme environments.
It was contracted to design and manufacture and autonomous portable refrigeration unit for deployment by medics on the battlefield.
The company was seeking to reduce its overhead which had been taking up 20% of the engineering.
And with product design time.
By moving from an on premise CAD system. The took a lot of care and feeding to on shape. The time loss associated with software installations licensing and regular system upgrades was eliminated the.
<unk> reclaimed the 20% of their design capacity and at the same time enabled real time.
And collaboration on 3 D designs across the distributed team environment.
Moving to arena on Slide 18 Arena continues its growth trajectory delivering a growth of over 20% of.
Arena is seeing strong traction with Upselling is the increased penetration and the current customer environment.
Environment and keep retention rates high.
By all measures arena and looks to be a great acquisition.
And I'm also pleased to note that we opened our first European Arena sales operation during the quarter.
Turning to slide 19 next tracker of Flex company is 1 of the fastest growing cleaned.
Tech companies and 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.
And they needed a better way to manage product information and across distributed teams.
To enable.
The automated approvals and to improve tracking and accountability.
With the Arena next tracker was able to reduce review and approval times by nearly 60% eliminate.
Eliminate time zone delays with global partners and accelerate product introductions by 25%.
Arena has helped mix trackers significantly.
And improve the way the design and get products to market.
Naturally I am pleased that PTC has been able to complement the strong performance of <unk> and windchill and the traditional market with breakout performance from Unshaped and arena and the burgeoning SaaS market of tomorrow.
The success, we're having with <unk>.
On shape and arena and the small and mid market is 100% complementary to <unk> and windchill success and larger companies.
Geographic performance was strong on a global basis and as shown on slide 'twenty, reflecting the performance trends, we've seen year to date.
Americas <unk> growth of 21%.
It was driven by solid core performance and arena.
Europe grew 9% consistent with prior several several prior quarters with strength and CAD <unk> and improving growth in the Iot as we work towards full recovery from Covid there.
APAC delivered the fourth quarter and the role of mid teens <unk> growth.
And with strong performance and core and growth businesses.
Summarizing the state of the business on Slide 21, and 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 <unk> and free cash flow growth.
Here in FY 'twenty, 1 and.
And with that I'll turn it over to Christian to take you through more details on the financial results and guidance.
Thanks, Jim Good afternoon, everyone.
Before I review of 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 and constant currency.
Currency. So let me start off with the review of our third quarter results and then well.
Review guidance for fiscal 'twenty, 1 turning to slide 23.
The fiscal Q3, IRR of 142 billion increased 15% year over year and on an organic basis <unk> grew 11%.
Q3 free cash flow of $85 million was solid and in line with our expectations Q3 revenue of $436 million increased 24% year over year as reported or 19% and constant currency.
Revenue performance was driven by.
Strong execution and also reflects the impact of ASC 606 on revenue recognition as well as the modest contribution from arena.
The strong revenue growth along with continued financial discipline and resulted in non-GAAP EPS growth of 34% year over year.
Turning to page 24, I'll begin with the balance sheet.
We ended Q3 with cash of $366 million and $1.5 billion of gross debt with an aggregate interest rate of about 3.1% we.
We paid down $30 million on our revolving credit facility during the quarter.
With our.
Our leverage rate ratio now less than 3 times, which we told you was our goal and we expect to be in the market buying back shares in Q4.
Now turning to guidance slide 25 highlights the few of the key guidance assumptions and while our assumption.
And the impact of currency on IRR has changed from neutral to and approximately 60 basis point tailwind the rest of our guidance assumptions remain.
The same as they have throughout the year.
So putting our IRR guidance into perspective, and turning to slide 20.
6 last quarter, we told you that we expected fiscal 'twenty, 1 and <unk> to be 1.445 to 1.470.
And <unk> billion of growth rate of 14% to 16%.
This assumed 10% to 12% organic growth 400 basis.
This points from arena and no FX impact.
Our revised guidance range is now.
1.4 of $5.3 billion to 1.4 dollars $7.8 billion, which is still 14% to 16% growth and assumes 10% to 12% organic growth 400 basis points.
Points from arena, and approximately 60 basis points of currency impact.
Regarding our linearity and fiscal 'twenty, 1 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.
And in Q4, as we close out fiscal 'twenty 1.
Yes.
Free cash flow.
<unk> expected to be approximately $340 million for the full year growth of approximately 60% year over year.
Our $340 million free cash flow target also includes approximately.
$10 million of ex acquisition related fees and additional $5 million of incremental interest we expect to pay this year due to the arena related debt.
<unk> $18 million of and Unforecastabel payment due to do 2 of foreign tax dispute and also include.
<unk> approximately $15 million of restructuring payments.
This is offset by incremental cash flow from arena and.
And free cash free cash flow is also net of approximately $25 million of capital expenditures as a reminder, collections of stronger in the first half offset by timing of expenses and head count.
And ramping throughout the year and as you know our bond interest payment will hit in the fourth quarter.
So we've already delivered more than 90% of the free cash flow target for the year, which is in line with our expectations and has been.
Now turning to the P&L.
Guidance, we are raising revenue guidance and EPS guidance for the year. Our prior guidance for fiscal 'twenty..1 was 1.710 to 174 zero billion of growth rate of 17% to 19%.
We're now expecting fiscal 'twenty 1 revenue of.
<unk> 7 and 3.3 billion to 1.7, and 6.3 billion of growth rate of 19% to 21%, which includes approximately 200 basis points from arena and approximately 100 basis points from FX.
We're increasing operating margin guidance, both on a GAAP.
1 of the 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%.
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.
Growth of the <unk>.
30% to 40%.
Turning to slide.
Slide 27, and our total <unk> growth, which includes deferred.
It was 12% on an organic basis in Q3.
And we expect organic active AAR growth of 10% to 12% and are now expecting approximately.
And $5 million in deferred for the full year, which is up from what we told you last quarter of <unk>.
Around $90 million.
Wrapping up.
We had strong financial performance again in Q3, we delivered double digit <unk> growth, while maintaining discipline on our expense structure.
<unk> 9 as we continue to navigate what is what's still remains.
Somewhat unsteady macro environment.
Year to date, our performance has positioned us well to deliver attractive double digit topline growth and very strong free cash flow growth for the year.
So with that.
<unk> turn the call over to the operator, and we can begin the Q&A.
And.
As a reminder to ask the question you will need to press star 1 on your telephone again that is star and the number 1 on your telephone please limit yourself to 1 question only.
You have additional questions. Please return to the queue.
All part of your question press the pound key.
Standby, while we compile the Q&A roster.
Hi.
And.
And your first question will come from second and Calia with Barclays.
Excellent Hey, guys.
Hey, guys good afternoon and.
So we drinks for taking my questions here.
I'll keep it to 1 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 and.
Intra quarter. So I was wondering if we could get maybe your perspective on how some of those changes may be.
Sort of impact of the economic relationship between Q2, and how if at all of it maybe impacts long term ptc's long term strategy and.
And in your view does that makes sense.
Yes, sure well the biggest piece of news of course was.
Rockwall acquiring flex.
For the $2.2 billion or so.
So I would say first of all everybody should know that flex is 100% complementary of the PTC, we have never ever competed with flex at all.
And in fact.
New flex pretty well because it is run by Bill <unk>, who is 1 of my better friends and life and reported the need for a dozen years yourself.
So flex 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.
And Rockwell acquirer of them and I think theres actually some opportunity for.
Synergies between what <unk> does and what PTC does and you might almost think of it rockwell's, adding flex and away from my perspective to the innovation suite, we built together.
So I don't see any conflict at all.
I think Rockwell will be probably.
Really sharing some attention and cycles.
With flex that maybe had been previously committed the PTC. So we'll have to see how that plays out but and.
And general Rockwell is an important partner they want a partner of the year of award.
After the acquired blacks.
So I think the partnership is important it's sort of built into the business.
As we run of today and I don't see anything dramatic changing there.
Going forward.
There was also a question somebody else asked me is rockwell going to sell their PTC shares and I.
I'd say, you probably should ask Rockwell, but certainly they have not suggested to us theyre going to and I think the Republic announcement said they were going to fund the <unk> acquisition.
With new debt and cash on hand, so I don't think anything really changes and the relationship other than something new came in and.
On 1 hand, it's bringing new capabilities that might help us against competitors collectively.
And on the other hand, and we will have to share of attention cycles of it so that would be my thought their socket.
Got it very helpful I'll hop back in queue. Thanks, Tim.
Thank you.
And your next question will come from Matthew Broome with Mizuho.
And sorry, Marc Hi, Hi, Jim and Kristian.
I guess.
From that that general theme.
And I'm going to get your sort of updated thoughts on M&A and in particular given.
The recent market events.
Do you view, the electrical cat market and some adjacent opportunity clearly you did make the acquisition in that space yourself last year.
Yes.
So you're probably referring to some activity between autodesk and all of them I'm guessing.
So all of the M is 1 of 3 main printed circuit board of designers does that you know and software companies and then of course there are other companies that provide integrated circuit software.
And the integrated circuit software.
It really doesn't have a touch point with our world of Cat and BLM, but the printed circuit Board design software does.
And we have a partnership with all of them.
And I'd like to find ways to strengthen that partnership I don't really see us trying to acquire them.
For 1 thing we'd have to top of it.
The price, which I don't.
I don't know that 1 of them.
We're in the.
And then secondarily I don't think they want to be acquired so I feel like there's a good opportunity there for us to do more and the partnership.
Both.
On 1 hand, with Han shape, and arena, which are a nice fit in the lower part of the market with LTM, but also with <unk> and Wenzhou, which are.
And we did a nice fit and so there are many <unk> and windchill customers, who puts circuit boards in there otherwise mechanical products and the same would be true of <unk>.
<unk> and arena, so there's lots and lots to do there in terms of of partnership.
And see us.
Trying to acquire them in the near term given.
All circumstances as I know them.
We did make a small <unk> acquisition of and actually a company called E and M CAD, but it really was a very.
Small deal and and it really was at the interface of EQECAT and MTN was not <unk> capabilities, but it was the ability to import and real time synchronization.
And is between and <unk> product like Unshapen and began product like all of them. So it is actually going to prove useful in.
And some of the integration activities that we want to do.
But anyway I'll, Tim is a good company and <unk>.
Perfectly happy of they remain stand alone and.
And with PTC and look forward to strengthening our partnership because there is.
Lots of synergy on both sides of that partnership.
Okay got it it makes it makes sense and then I can maybe just quickly ask about.
General and check and demand for generative design within your customer base and have you.
Have you seen adoption within <unk> and and how close are we to the things with GDP.
And integral part of any sort of the mainstream design protests.
And planes and so on.
Yes, I think there's a lot of companies exploring it and trying it out doing what else and proofs of concept.
And frankly, they get some pretty good results, but it is a very.
<expletive> Wei of.
The.
Of doing the engineering, we always thought of computer aided design.
But actually the computer wasn't so much aiding the designer and it was simply.
Documenting the ideas, but this really is computer aided design, where where the software is.
Providing ideas to the engineer as opposed to just capturing the engineers ideas.
That's a different process that people will have the wrap their head around.
And ill follow AI around but like I said the results of pretty spectacular sometimes so.
And there's definitely a lot of interest I think it will take a while the mainstream.
But certainly.
It's going to be.
And it's going to be a wave of growth and <unk>.
Mechanical CAD over the next 5 years I, just I don't think it will come on the Super strong and the near term.
Alright, perfect. Thanks very much.
And your next question will come from Jason and Selina.
And certainly at Keybanc capital Your line is open.
Great. Thanks for taking my question.
Tim.
And Youre doing great 40 bps and growth very impressive and our.
Business thing and also quite well.
But the growth segment did decelerate a bit to the 23% organic constant currency growth level.
And the overhang still on the Iot side, well get that that the China.
Yes.
And you look at scale, Jason about 75% of that growth segment in terms of scale as Iot Iot the much bigger business, because we started the sooner and and really had a lot of success of it.
So in a way right now as Iot goes and it has the 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 from Covid.
If we if we kind of look at.
Whats happening on the sales front with the.
And with Iot I mean sales have improved year over year. They are still not back to where we want them to be.
But in general and what we're seeing is of good quantity of deals, but smaller deal sizes, which I just attribute really to conservatism around the.
People do.
And Iot projects and factories and in general as they come back the speed following COVID-19.
And you might remember to that.
And we mentioned clearly at the beginning of the year that we had a 2 point.
Headwind to growth.
And our deferred what we at the time called backlog, but deferred <unk> was the 2 point headwind.
And while a lot of that headwind landed in the Iot because thats the place where our sales were soft this last year. So some of that is now coming home to roost now.
It's not just what did we sell and the quarter, but it is how much backlog did we also take advantage of maturing and the quarter and thats another pressure that will.
We'll work our way out of as.
As we kind of round trip the COVID-19 impacts of.
The first or the back half of fiscal <unk>.
'twenty and the front half of fiscal 'twenty 1 let's.
And let's say, most mostly and physical play right.
Okay, great excellent. Thank you for the color on getting.
Back in queue.
And your next question will come from Andrew Andrew <unk> with Bank of America and your line is open.
And good afternoon.
Hey, Andrew Hey, how are you.
Jim Kristian question about actually a question about onshore.
You sort of talked about.
More mature of model and sort of approaching <unk>.
Larger enterprise customers.
Can you just talk about.
About where we are and sort of.
And how larger larger enterprises, and where are you and sort of transitioning the product towards.
So you're more of core customer base away from small and medium business of them.
If I understood you correctly frankly, thank you.
Yes, Okay. Andrew those are good questions. So first of all when I use the term enterprise and I was using it as defined by the <unk>, which generally means and accounts that would take 15 seats or more okay.
And it's kind of a small definition of enterprise.
For the rest of us at PTC, but.
Their definition, so I would say the definition of enterprise used by on shape as of medium sized company and.
And the commercial business and small companies now.
I would tell you that it's just the different buying.
Buying market and our <unk> software and our windchill software for that matter does not participate effectively and the market where on shape and arena are making hay right now.
So it is all complementary and in fact honestly, we're borrowing a page from the <unk> strategy of 20 years ago when they had.
Solid works and the mid.
And the tea and the Nova and the high end of the market and those 2 products prospered and side by side for 20, some years until they both grew a bit of old and tired.
But it's the strategy that works its market segmentation and so I don't think that youre going to see.
Bond shape and arena put a dent into Korea.
<unk> and windchill because of amongst other things krill and windchill are adopting the SaaS technology called Atlas that makes on shape, So special and so when non shaved stealing larger accounts, it's basically by and large doing them from solid works.
And then cherry pick and a few others here and there, but they are starting to get some <unk>.
From accounts, whose brands you.
Recognized and you might remember we had.
Garrett.
<unk>.
Present that in the Investor Day, I believe it was a pretty large company, who went from Kitty at on shape and really went for all of the qualities of SaaS that they loved and of course ease of use and other things and launch it and so I think on shapes and attractive product.
And it.
And mature more before it really could be of viable replacement for the high end products generally speaking, but I think it will start to pick off a lot of medium sized accounts and and an occasional larger accounts, who maybe is over served by the <unk>.
More expensive more complicated technology, there otherwise using.
That's great and thanks, so much.
And it needs that from the queue.
Thanks.
Operator.
Operator are you muted.
And your next question will come from Ken Wong with Guggenheim. Your line is open.
Operating profit I guess and time.
Thanks for taking my question I, just wanted to circle back on Rockwell real quick.
And I saw you guys.
And I'll get about Rockwell and became the largest Iot reseller of just wondering is that as that of new dynamic there and.
As we think through some of the kind of the earlier.
A discussion of <unk>.
If I get the question is that the position that you think kind of sustains going through the kind of <unk>.
Based on what we know.
Yeah.
Yes, well.
As mentioned the Rockwell as a reseller has been growing and growing and growing and most of the reselling is in the field of Iot and they are let's be clear on that and you know we have many other resellers, but they're largely and cat and BLM. So.
Rockwell and has become an important reseller for share of Iot and AR and I don't see that ending.
When I talked to Blake.
About how this fits in with his strategy even.
Post Plex, Blake says, hey, I need and Iot platform I need and they are platform.
And I, even want to have occurred and BLM platform available to me when required because of his competitor Siemens and that stuff, but not.
And not all of Iot and ear, but some Iot and lots of cat and P alone. So we remain important the Blake and Theres nothing he acquired and the <unk> acquisition that supplants any of the capabilities of PVC brought them and the fact youre talking innovation suite. So I think it's Blake and Rockwell of strategy as I understand.
And it too and 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 and just noted that.
We're going to be sharing some mind share.
With Rockwell, who now has kind of another another child and the family and let's say that's.
Some attention Tim So I don't think it's going to materially change of our partnership.
Got it thanks for the insight.
Yes.
And.
And your next question will come from their Abernathy with Rosenblatt Securities.
Hey, Blair Thanks, Tim.
Hi, guys.
Jim Nice quarter guys.
Just.
Wanted to dig in a little more on the arena 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 and as you know the visa.
The on shapes.
The pipeline of U B work.
And the those 2 and parallel.
All of it coming together, what's sort of your thoughts there and as we've kind of moved through into next year.
Yes, Okay. Great question. So first of all we're very pleased with the performance of.
Arena and it has in fact accelerated since the requirement.
Now there are several things we're doing.
<unk> net I feel like arent fully and the game yet 1 of them is the linked township and in fact, we built some technical integration between the 2 products, which is easy to do because they are both the 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 PNM.
They have the religion.
And he really wants to ask for everything including cash and vice versa. So we do think there'll be some cross selling there.
And that might net benefit might accrue more to the on shape and the near term because arena accounts tend to be a little bigger like 1 and to see.
Accounts net might not need PLO.
But the arena accounts could generate a fair number of Gantries 15 or more.
I think there'll be some benefit in both directions and might help on shape first but then the thing we can really do for arena is the globalized the sales force because of arena really is a U S based.
Kent business.
Tiny bit of business, and Europe, and essentially none and Asia other than sometimes and American company might have some users and Asia, but then that Asian companies.
So we PTC of course are much more globally balanced and we have the capabilities to help them kind of spread there operation around the world pretty quickly and thats underway and in.
And I mentioned, we opened the European sales operation by the way Arena and.
Unshaped, both have basically inside sales go to market operations and they don't have sales reps all over the place you still need the European operation and the right time zones and all of that but.
It's a cost.
The effective go to market model.
And as opposed to kind of the PTC larger accounts, where we have outside reps and the living and all of the different countries around the world mixed of the customers and so forth.
I think we're going to be able to generate some some acceleration for arena to even higher levels next year, but we still need the plan all of that out but we.
Certainly it's something to work with.
Great. Thank you.
And your next question will come from Adam Borg with Stifel. Your line is open.
Great and thanks, a lot for taking the question maybe just first on the Iot business can you talk a little about there being a hangover.
And just curious if you could comment a little bit more about the pipeline of you head into the important fourth quarter.
Yeah, well I think if you look at.
Any AOR scream of 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.
And then held back is kind of and deal sizes and new bookings and then.
And sort of a softer.
What we used to call back line and backlog now called the <unk>.
So when we looked at the pipeline and the forecast I mean, we feel pretty confident and it looks pretty good.
So I think we're going to end the year on a strong note I certainly expect that based on the forecast and the pipeline and I think we're in a better position going forward into next year bookings certainly are up year over year.
And like I said, just not back to where we want them to and that's more deal sizes and the transaction count.
Super.
And maybe because of the quick follow up you talked to an earlier question about the re platforming efforts of clear what the wind chill and obviously, that's not the non trivial undertakings and so just curious kind of how is that going and what percentage of your R&D efforts are really focused on the re platforming today and how much of the model. Thanks again.
Yes.
And this is not growing.
Super helpful not going to be of Big Bang approach is going to be kind of a systematic module by module approach and then and the and we will have it all re platform, but if you look at what we did with the.
And the generative design extension and that's a good.
Model to explain what we're trying to do and that is we want to be able to take key sub systems from <unk>.
In particular and build them on Atlas and deliver better value and more capabilities better cost profile to customers through SaaS and then take another module and so of customer might incrementally by more and more of a SaaS from us over time and we envision is taking a few years and then at some point just flip.
And the switch and say I'll just take it all of the SaaS.
So again don't think of it as big Bang think of it as incremental yes, it's a big.
It's a big development effort. The good news is we're not trying to invent the platform. We're re platforming onto that platform has been under development for 7 or 8 years, but of the unshaped guys Thats Atlas and it's a fantastic platform I mean really.
Great So I feel like.
Time will tell but.
And the and the non shape, we're going to get.
Really great.
<unk> based CAD system, but we're actually probably going to get something even bigger which is the the singular platform that powers <unk> next generation of software that is going to breathe and other.
Decade or so.
And do our credo and when shall product lines.
Excellent. Thanks, so much.
Your next question will come from Matt Hedberg with RBC capital.
Yeah.
Okay. Great. Thanks, guys. This is Matt Swanson on for Matt.
So Jim.
And really appreciated the commentary around the secular tailwind towards digital transformation, but we're starting to think about your customers is there presumably returning to on premise have you seen any changes and conversations around the SaaS more broadly and I guess thinking more about like what's driving.
5 and your customers towards SaaS, and especially from the enterprise segment and that might not be a good fit for Erie and our on ship what those customers are kind of doing right now as maybe a long term plan as they watch what you're developing on the arena.
Yes, Matt.
This is interesting.
It's a good question and the interesting survey, we do where we reach out to our <unk> and windchill customers and.
Tests, the 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 SaaS now if you think.
About at <unk>, and Windchill are very sticky products, so theyre, saying like I want SaaS, but I don't want to switch.
Because switching CAD systems, especially when you are a big user of our high and CAD system, and you've got years and years worth of data I mean, that's a project, but if I could.
Within Korea go to SaaS that would be wonderful if within.
<unk> I could go the SaaS that'd be wonderful, but why do they want to go the SaaS, while they realized first of all of <unk>.
Mobile work force and everybody has some hybrid and working.
Office strategy going forward. The thing is if the software if youre of CAD software for example, rundown of Big desktop computer and the office will then how do you work from home.
You set up of another big desktop computer at home and and how do you shuffle the files back and forth I mean, it's just hard and be better. If all of this data was never on the desktop it was always in the cloud.
Some of the application. So for example during.
During the Covid initial shutdowns windchill work, the great because windows web based and.
And the data actually is and some web server somewhere.
So you just go home and the jump on whatever computer you have there, even and even a phone or tablet and you log into your web browser and you do and windshield stuff.
<unk> and everything like Accredo and the markets of different story, that's a big what we'd call of fat client executable.
Typically with a whole bunch of modules installed typically integrated the other <unk>.
Software on that same computer it might be stimulation might be cam software or whatever so there's a whole ecosystem of software set up on the computer how do you recreate that at home, it's hard and there's licensing obstacles and whatnot, so and a lot of people did.
<unk> the used virtual desktop infrastructure that is from a computer at home you logged into the computer at work ran the software and 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 work day. This is not really the way to do things.
Is that cat is optimized for graphics performance and so forth and all of that optimization is completely lost when your pipe and the display across the internet.
So you really want something that's designed to never put the data and and ideally don't put the application on the desktop computer and the first place because if it's not the.
Like J&J can move around so the winter you can move around but people like the.
<unk> more of the cost. These are complex systems. So mobility is 1 thing they want and work from anywhere anytime.
The work from from the office 3 days of work.
Weak work from home 2 days of week, but the second thing is cost.
There that we'd like to get rid of the system administrators they'd like to get rid of the servers and you'll file servers.
There's a lot of cost tied up and that stuff and they are saying if you guys could just let me pay for the value I get from the software and not for and infrastructure and the care and feeding of it would be great.
The third thing we talk about is.
Real time collaboration.
Again, CAD systems are kind of based on the premise of check in and checkout that means I'll take the file lockett.
So you can look at it but you can't change it until I declare I'm done changing it well there is a lot of IP and 1 file and a lot of times people are saying well.
Good.
Any other kind.
Kind of software I'm used to we're working and the same stuff at the same time, how come I can't do that with <unk> again, you can lasalle. So I can go on their more qualities.
That are important to people, but let's just say what creel and windchill customers really want is all of the benefits of on shape and arena without switching from Grail and wisdom and.
We're trying to bring to them.
Yes, no that makes a ton of the scientists and it's a really compelling value proposition. If I can add 1 more on digital transformation, you mentioned and P. L. M as kind of part of that of that growth group. There could you talk a little bit about the progress of moving deeper into the customer.
And Thats why <unk>.
And kind of beyond the traditional use cases, it's something we've been talking about for a long time and I think it's always seemed earlier interesting.
Yes, I think.
I think what's what's really come into light. It always was true, but it's really much more appreciated now is the <unk> as the system of record from products.
So <unk> and an industrial company, it's absolutely as important as your CRM system, which is the system of record for your customers of yours.
<unk> system for employees or whatever so when companies think I really want these processes to be digitized and mobile and you become mobile and global and and all.
<unk> you realize we need a reliable source of product data and everybody and engineering manufacturing service marketing sales whatever contracted transact against so we need 1 single system and and we all need access to it and so we're starting to hear that more and more of and it's not about making the engineers.
All of that issue, which was kind of the first generation of BLM and this is more about making sure that everybody across the company has access to the right product data because everybody is 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 Thats, what <unk> 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, we have a system of record for our products.
And honestly the product companies. So I think <unk> 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 chips and the systems they contain support data.
And so we're using pls concepts to support the operation of ship.
The engineering and manufacturing, but actually the operation of ships that were engineered manufactured years ago and it.
It's kind of a good example of digital transformation versus engineering productivity.
Hi, Thanks for the kind of guys.
Thank you.
Andrew.
Our next question will come from Jay Li shower with Griffin Securities. Your line is open.
Good evening.
Yes.
Jim at your partner Conference last week.
Aside from the sessions on.
Sales programs and plans and the likelihood of bear into roadmap session, which is the thing I wanted to ask.
Yep.
It noted that as part of your pre of strategy you have what was called <unk>.
5 dimensions and for unsafe 6 dimensions to the strategy.
Various dimensions of the strategy for <unk> and of course, the question I have about the cryo and <unk> strategies is that the fairly good.
Good list of executable. So how do you think about the ones that are perhaps most important all of those lists for you to achieve of perhaps the most difficult to achieve.
And which aren't necessarily the same thing and then.
And secondly.
Referred to Microsoft and number of times.
They are on the cusp of launching there.
Ask about factor and cloud and I'm wondering how you're thinking about.
And the opportunity for you.
In terms of drafting along with what they do with manufacturing cloud.
Okay. So first on the on the priorities Gee I don't have those list in front of me and I hate the off the top of my.
I had sort of represent them all back to everybody.
But what you should think of as you know there are a large engineering teams behind these products in the case of krill.
400, plus people working on it.
In the case of unshaped, not near that many because it's the smaller tighter product yet younger product.
But there.
His room with the level of resources, we have and these products to have 4 of 5 priorities. That's down from 20 or 30 that they would otherwise do theyre trying to narrow down and focus on the key ones. So I think we have the capacity to execute 4 of 5 initiatives at a time and both of these products, we can't execute 10 of 20.
But certainly 4 or 5.
Big ones and you know.
I guess you were wearing your head is the partner that day and the conference but.
And we're just trying to share with our partners, where we're going and what we think is important and frankly, where we think the money and so that's what's going on there with respect to Microsoft and the manufacturing cloud there's a lot of.
The conversations going on between PTC and Microsoft.
To align PTC with the manufacturing cloud they want us to we want to assist the question now of figuring out what to do to make that happen.
And the fact that.
Our former Chief strategy Officer, Kathleen metric just went over there is actually quite helpful. Because Kathleen and I are quite close and.
We've had some conversations since she's gone over.
The boat.
She is now able to help me, let's say coach me and the culture to make the company is 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 in line with it.
Yes.
Thank you James.
And that is all 4 of our question and answer session for today, and we'll now hand, it back over to Emily Wolf for the quality and content.
Thanks, Peter I'd like to thank everyone for joining us on the call today will.
And we'll be participating in.
And the number of virtual investor events of this quarter and you can find all the details on our Investor website and look forward to seeing you on the circuit and the coming months and again. Thank you for your interest and PTC and have a great evening.
Thanks, everybody. Thank you every day.
This concludes today's conference.
Carl Thank you for participating you may now disconnect.
[music].
Thank you.
And.