Q2 2022 PTC Inc Earnings Call
Second tier Chief Financial Officer.
Today's conference call is being.
And a replay of the call will.
We are available later today at Www Dot PTC Dot com.
Future operating results.
Because such statements deal with future events actual results may differ materially from those projected in the.
Forward looking statements.
Additional information concerning factors that could cause actual.
The results to differ materially from those in the forward looking statements can be found in Ptc's annual report on Form 10-K Form 10-Q , and other filings with the U S Securities and Exchange Commission as well as in today's press release, the forward looking statements including guidance provided during.
This call are valid only as of today's date April 27th 2022, and PTC assumes no obligation to update these forward looking statements accepted accounting principles.
A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press.
Alright.
With that I'd like.
Executive Officer, Jim <unk>.
Thanks, Matt good afternoon, everyone.
Thank you for joining us.
To simplify things. Please note that throughout my commentary.
I will be discussing all growth rates in constant currency.
Turning to slide four I'm pleased to share that PVC delivered another strong financial performance in fiscal Q2.
All of our metrics came in above our guidance and the strength was broad based across all segments and geographies.
Of particular note, we saw organic <unk> growth accelerated to 13%. Despite the self ended Q2 with $1 five $6 billion of IRR.
Bookings grew faster than <unk> and renewals were very strong.
We also continued our track record of translating topline growth into even better bottom line growth in Q2, our adjusted free cash flow performance was strong at $158 million up 22% year over year and ahead of our guidance.
The non-GAAP operating margin of 42% in the quarter was the highest we've seen.
The margin expansion strategies, we outlined at our December Investor day are generating the results we expected.
Moving to slide five geopolitical situation carefully we continued to see strong global demand.
Demand environment for our offerings.
Driving digital transformation across the product lifecycle remains an important priority for our customers.
Bookings were up mid teens year over year over year and dependent.
And <unk> was broad based.
Growth was strong in both digital thread and velocity and across all three geographies.
Q2 was the sixth consecutive quarter that bookings have grown faster than <unk>, which together with improving renewal rates creates an acceleration bias for our growth.
To help you understand the resilience of PTC as you think about any potential macro volatility that may lie ahead, I'd like to expand on our business model dynamics to ensure you appreciate why our business model provides us with confidence in our ability to achieve our financial targets in the back half of the year, let's take a look at slide six.
On the left hand side of the slide you can see that the 13% <unk> growth. We delivered in Q2 was based not just on Q2 performance, but also on the momentum we built over the previous three quarters as well.
Our growth is a rolling four quarter metric. So when we say <unk> grew 13% in the second quarter. We mean the entire book of recurring business is now 13% larger than it was at this time last year.
While this rolling dynamic dampens the impact of bookings in any single quarter, such as the strong results in Q till it also provides a foundation of stability and resiliency for the company.
Remember that so long as bookings exceed churn <unk> will grow.
Bookings currently exceed churn by a wide margin.
To help you run your own scenarios, let me simplify the math by giving you some big round directional numbers to work with.
Let's say PTC has around one 5 billion and IRR and on a run rate basis, we're adding $300 million in annual bookings, while seeing $100 million in annual churn.
Over the next year, the $1 5 billion of IRR would step up by 300 and stepped down by 100 million to grow to one 7 billion, which is 13% growth that's consistent with our run rate performance.
2020 shows renewals remained steady through a macro downturn.
To better understand the sensitivity then of <unk> to macro changes, let's start with a hypothetical scenario flat indefinitely at $300 million.
In that case with <unk>.
For a more years after that.
If you are concerned about a downturn in Europe , which represents 40% of our business you can create in all.
<unk> declined by 20.
5% for two quarters, and then bounce back.
In which case, we'd still delivered 12%.
Our growth over the forthcoming year.
If you want to run a more draconian global macro downturn scenario, you could model at 25% reduction quarters in which case, you still get 8% <unk> growth over the next year.
Frankly, no matter what.
What scenarios you might model Youll consistently see that PTC has a very resilient business.
Keep in mind that those were hypothetical exhibitor.
When bookings grow faster than <unk> as we've seen.
Quarterly since the Covid rebound it creates an acceleration effect for <unk>.
Improvement in renewal rates, which were also been seeing are helpful as well.
PTC is experiencing the benefit of these dual acceleration of X right now, which is why we are raising our guidance for the full year.
In summary, while the company is in position to accelerate our growth assuming conditions remain as they have been we're also in good position to power through any potential macro slowdown with strong results as we did in 2020 when bookings design declined sharply for several quarters due to the pandemic before rebounding again.
Ptc's FY 'twenty <unk> growth of 11% compared very favorably to our more cyclical industry peers, who don't have the same recurring business model.
Some of them even experienced top line declines in their comparable business lines.
The takeaway from this discussion is that our subscription model, which took us years of hard work to put in place is a wonderful thing and it will keep PVC and a growth leadership position in our industry for years to come.
Moving on let's take a quick look at our Q2 performance by geography on slide seven before turning to our business units.
In Q2, we saw strong growth across all geographies.
Our growth in the Americas was 12%.
All product segments grew with the main growth drivers being continued strength in our core <unk> and <unk> segments and another strong contribution from our velocity business.
In Europe , our <unk> growth was 15% despite the Russia exit we saw strong results across the board in Europe with growth, primarily driven by our core <unk> and <unk> businesses and strong growth in the Iot and AI segment.
In addition, our velocity in SSG businesses delivered solid growth in Europe in Q2, Europe has the largest mix of channel versus direct and the resellers continue to perform well.
I know that investors are concerned about exposure to Europe , and the macro environment. There. So I'd like to reiterate that first we're continuing to see strong bookings performance in Europe and second as I demonstrated quantitatively our model is highly resilient.
Our <unk> growth in APAC was 14% with our core CAD and <unk> businesses again being the main drivers.
Next let's look at the performance of our business units, starting with digital thread on slide eight.
In our largest product segment digital thread core we delivered another double digit growth performance in Q2 with 13% growth.
Within this CAD grew low double digits, while <unk> grew mid teens.
Bookings grew faster in each case.
Reflecting on Q2 across the now 18 consecutive quarters of double digit <unk> growth that we've seen in the core CAD and <unk> business.
This was the best performance, yet, which I attribute to a combination of strong demand for digital transformation best in class sticky solution sold in a recurring revenue model with low churn rates and.
And the growth tailwind from our SaaS initiatives.
In our core business, our solutions are very strategic and we're executing well and taking market share.
You May have noted we also launched windshield plus during the quarter, which is our next generation differentiated core SaaS CRM solution win.
Windchill plus contains the technology and operational improvements that enable higher profitability.
And is now becoming our lead windchill sales play.
<unk> plus is just the tip of the iceberg of a bigger plus strategy and Youll see us follow with <unk> plus in similar premium SaaS offerings in FY 'twenty three and beyond.
And digital thread growth, we saw a growth of 15%.
While the sequential acceleration was modest we made good operational progress and remain on track to get growth to a two handle by the end of the year.
Following the launch of our New thing works digital performance management solution, which we abbreviate as DPM in Q2, we landed our first nine deals across various different industries, including aerospace and defense high Tech automotive and food and beverage.
So these were started deals average initial deal size with six figures.
Rockwell brought in several of these <unk> deals and the DPM pipeline for both companies looks good going into the back half of the year.
<unk> had a great Q2 with 8% growth.
<unk> retail <unk> and Arbor test all performed well, helping to drive solid results in terms of renewals and churn.
Growth was particularly strong in the Americas and Europe .
With SSG, our strategy is to keep delivering value to customers by having dedicated focus on each of these products and I am pleased to see that strategy produced another strong quarter.
Before I turn to our velocity business unit, let me run through a couple of quick customer stories that will give you a taste of how customers are leveraging our digital transformation capabilities.
I'll start with Bosch on slide nine.
Flash is a massive global supplier of technologies and services with 400000 employees, including 75000 Engineers a key challenge for Bosch is how to drive end to end digital transformation at scale <unk>.
Flash is leveraging their windchill BLM system as a backbone in combination with <unk> to enable new and improved workflows.
This specific example is about vast using model based design capabilities of <unk>.
By moving beyond the world of <unk> drawings, and leveraging enhanced <unk> trio data across engineering manufacturing and inspection processes flash is driving improved productivity and bringing products to market faster.
Next on slide 10, Cummins as the world's largest independent diesel and gas engine manufacturer.
And an interesting ESG story that we help enable.
Cummins has long made a company goal to reduce their environmental impact and digital transformation is a critical part of their journey.
By using generative design and answers powered simulation upfront in their career based design process Cummins has been able to reduce material usage create better products and accelerate time to market.
Turning to the velocity business on slide 11 year over year growth for our velocity segment was 27% in Q2 with both on shaping arena growing growing multiple times faster than the market.
Which demonstrates there is a distinct and vibrant segment of the CAD and <unk> market.
Prioritize SaaS and agile product development is the number one buying criteria.
With Unshapen Arena PVC has a unique ability to serve this market segment and we're continuing to ramp both our velocity product and go to market investments.
Let's move to slide 12, where I would like to take you through a velocity example, showing how arena is empowering <unk> global team to deliver innovative products faster.
<unk> is using arenas SaaS BLM solution to control of product design, and supporting documentation and to enable collaboration across globally distributed teams.
The benefits of providing complete visibility into critical product and quality processes are significant for example, engineering change cycle time was cut by 50% and the issue resolution time has been cut in half as well.
Turning to slide 13, we announced two transactions last week and I'd like to recap, both and provide some additional context.
First we announced an agreement to acquire inland software and next generation application lifecycle management or <unk> company for $280 million.
For background PTC entered the market a decade ago, when we acquired MKS and their integrity suite.
<unk> has become an important and well established offering within Ptc's portfolio and is sold both stand alone and as a key sub system of our windshield <unk> offering.
The <unk> family of software products from inland is our next generation <unk> suite that is fast becoming the new standard in safety critical in regulated industries.
Especially in the large automotive industries, where products are increasingly differentiated by the software.
Bringing <unk> into our <unk> suite will bolster both <unk> and pls growth potential by significantly increasing our product strength and market momentum.
England's a great company, who matches their strong product with strong growth and surprisingly good profitability for their size.
We expect to achieve both revenue and cost synergies with this acquisition.
When it closes the acquisition is expected to add roughly a percentage point of inorganic growth to our FY 'twenty to our results.
Inland will join our existing <unk> unit, so cold Beamer IRR will be reported as part of our <unk> segment.
We expect this acquisition will increase the growth rates of FSC going forward, which we now expect to be consistently growing in the mid single digit range.
Second services business to longtime partner ITC Infotech to further power our SaaS strategy.
Ptc's efforts on high margin software, while we look to our partner ecosystem to deliver the professional.
Value of that software and the customer setting.
As we ramp up the SaaS initiatives, we described.
At our December Investor Day, a key component of the program is the lift and shift efforts required to move.
On premise customer deployments into our SaaS cloud.
With a large installed base, we're looking at the need for potentially PTC needs to play a direct role because at the end of each month.
For the running system and carrying it.
To put our own professional services organization.
Position.
Back onto a growth vector as we scale up the perform these projects.
We're instead planning to transition some of our key pls talent into our new ICI unit called DXP services.
Thereby allowing the lift and shift capacity to scale on itc's P&L rather than ours.
This new DXP services unit will be our partner to run joint lift and shift projects with DSP doing the upgrade D. Customization work that happens at the customer site and.
And PTC, assuming the resulting system into our centralized SaaS operations.
This is a professional services transaction. So it has no bearing on IRR.
Christian will comment further on the expected financial impact of these two.
Two transactions, we expect both will close in Q3.
To wrap up on slide 14, I am very pleased with Ptc's position and the opportunity that lies ahead our portfolio of products is unique and compelling and it aligns well to customer demand.
About the first half of FY 'twenty, two bookings and renewals have been strong and growth is accelerating as we enter the second half of what will be our fifth consecutive year of double digit <unk> growth.
We are poised to further accelerate growth SaaS tail winds blow harder in the coming quarters, and as we gain momentum with DPM and other Iot and <unk> initiatives.
Our profitability continues to expand following the changes we implemented at the start of the year and as our startup businesses continue to mature after the J curves.
Our model has proven to be highly resilient, even in the face of a slowdown like during the pandemic in 2020.
We're raising our guidance for the second quarter in a row and I think the company has never been in a better position to create shareholder value.
With that I'll turn it over to Christian for more details on the financial results Christian.
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 and our references will be in both constant currency and as reported.
Turning to slide 16.
At the end of Q2, our constant currency <unk> was 156 4 billion up 13% year over year.
Our SaaS businesses groups.
We saw continued solid growth in Q2 and represented a larger mix of our overall business both year over year and sequentially.
We delivered above the IRR guidance range, we provided for Q2, which was for constant currency <unk> of.
154 to $1 $5 5 billion.
On an as reported basis year over year <unk> growth was 11%.
Foreign exchange was a $32 million headwind and our as reported <unk>.
In Q2 was one five to $3 2 billion.
In March following the Russian invasion of Ukraine, We announced that we would discontinue business operations in sales in Russia.
Existing Russia had a $4 million adverse impact on our Q2 <unk>, we've accounted for the $4 million of impact as churn in Q2.
Cash from operations of $142 million in Q2 was in line with our guidance.
Considering the $32 million.
Foreign exchange headwind to IRR. This was a strong outcome, reflecting expected expected seasonality and another quarter of solid collections performance.
In Q2 free cash flow of $140 million grew 21% year over year and included $18 million in restructuring and other related payments adjusted free cash flow was $158 million up 22% year on year.
Free cash flow and adjusted free cash flow were both ahead of our guidance due to strong cash from operations and also because capex in Q2 came in slightly lower than we'd anticipated.
The main takeaway on cash flow is that despite the headwinds related to foreign exchange, we've been executing well and delivering on our targets.
Q2 revenue of $505 million increased 9% year over year.
As we've discussed previously revenues impacted by ASC 606, So we don't believe that revenue growth rates are the best indicator of our underlying business performance, but we'd rather guide you to IRR is the best metric to understand our topline performance and cash generation.
FX impacted revenue by about $6 million in Q2, and our revenue on a constant currency basis was $511 million.
Before I move onto the balance sheet I'd like to provide some color on our non-GAAP operating margin, which expanded to 42% in Q2 as Jim noted earlier. This compares to 37% a year ago.
Revenue is impacted by ASC 606, or other derivative metrics such as gross margin operating margin and EPS are all impacted as well still it's worth mentioning that our cost in Q2 benefited from the restructuring we announced in Q4.
Six months ago, we set an expectation that we will be eliminating some duplicative functions and our field organization and that our operating expense mix would shift towards R&D and alignment with our SaaS acceleration strategy.
You can see the progress we've made in our Q2 results.
We now have a more optimized operating structure.
And we believe the improvements we've driven are sustainable and will enable us to deliver non-GAAP non-GAAP operating margin for fiscal 'twenty to roughly in line with our year to date performance.
Moving to slide 17.
We ended Q2 with cash and cash equivalents of $307 million. Our gross debt was 128 billion with an aggregate interest rate of about three 4%.
During the second quarter, we generated cash proceeds of $43 million through the sale of our equity investment in matter Port. This in conjunction with cash from operations, we used to pay down $175 million on our revolving credit facility.
In the second quarter.
Regarding our share repurchase program as we communicated last quarter, we've completed our planned repurchases for fiscal 'twenty, two with $5 million settling in Q2 and for the remainder of the year, we will focus on Delevering.
Looking forward to fiscal 'twenty, three and on a go forward basis, assuming our debt to EBITDA ratio remains below three times our goal is to return.
Approximately 50% of our free cash flow to shareholders via share repurchases.
Next slide 18 shows our IRR by product group.
We posted a set of financial data tables to our IR website that has our financial statements as well as details in that file we share both constant currency and as reported.
Yes.
As a reminder, when we calculate constant currency figures, we use our current year plan FX rates for all periods.
Our fiscal 'twenty two plan FX rates are based on foreign exchange rates as of September 32021, we are using these rates to calculate constant currency figures for all quarters in fiscal 'twenty, two and for all prior periods as well.
To illustrate you can see on the slide that we expect to report we expect as reported <unk> to be lower than constant currency for Q3 and fiscal 'twenty two.
This is because of the FX headwinds and rate movements, which have moved significantly since September 32021.
Based on exchange rates at the end of Q2, we expect as reported for Q3 to be impacted by $32 million.
And for fiscal 'twenty, two we expect the FX headwind to be approximately $34 million. This is important to remember in context of our guidance because we provide ALR on a constant currency basis, and if the exchange rates fluctuate significantly between now.
And the end of Q3, the expected impact to our reported <unk> would also change we do believe constant currency is the best way to evaluate the top line performance of our business because it removes foreign exchange fluctuations from the analysis positive or negative.
With that I'll move on to guidance on slide 19.
We're raising our fiscal 'twenty to constant currency our guidance based on our strong performance in the first half and despite our exit from Russia.
The new range is now 164 to 166 5 billion, which translates to constant currency growth of 12% to 13% for fiscal 'twenty two.
For Q3, we're guiding constant currency <unk> to be 158 to 1.595 billion at the midpoint would expect Iot and <unk> are.
To reach IRR growth of 'twenty.
All said the main driver of.
For our fiscal 'twenty two guidance ratings raise is the strong customer.
Customer demand, we're seeing in our core CAD and <unk> offerings, which represented 70% of our <unk> in Q2.
<unk> cash from operations at approximately $430 million as our.
Are helping us to offset FX headwinds.
And the Russia exit.
Free cash from operations of approximately $110 million.
We've updated our capex guidance for fiscal 'twenty, two to approximately $25 million.
Which is down from about $30 million that we said at the beginning.
Expecting approximately $5 million of Capex spend.
For Q3.
Therefore, we are raising our full year free cash flow target to approximately $405 million and guiding for Q3 free cash flow.
We continue to.
We expect our normal seasonal pattern in our fiscal 'twenty, two cash flow generation, primarily driven by invoicing seasonality.
The majority of our collections occur in the first half of our fiscal year and we continue to expect expenses to increase in the second half of fiscal two fiscal 'twenty two.
As we ramp hiring in our SaaS investments.
Okay.
For fiscal 'twenty two includes.
Structuring payments compares.
To our expectation.
A quarter ago of $45 million to $50 million.
PTC and some employees that were expected.
New roles, where we've been looking at.
Both of these are good things, we have less restructuring payments and have enabled.
Rolls with good people and a channel.
In addition, our fiscal 'twenty two guidance assumes approximately $5 million of transaction.
First half of fiscal 'twenty two.
Therefore, consistent with raising our free cash flow guidance. We're also.
Hello target.
Sure.
To approximately $455 million.
For Q3, we expect.
Approximately $10 million of restructuring payments and approximately $5 million of transaction related payments.
Which were incurred in the first half.
Bringing our adjusted free cash flow to approximately $120 million.
Moving onto revenue, despite foreign exchange headwinds and our Russia exit we're taking the low end of our full year revenue guidance up by $25 million based on our Q2 beat and forecast for the remainder 75 billion a year over year growth. We're guiding to now is five <unk>.
Those fixed mix revenue.
Subscription company, hence the wide range.
Note revenue does not influence IRR or cash generation as we typically build customers annually upfront regardless of contract term lengths.
Turning to slide 'twenty, Jim provided some highlights earlier in terms of the financing.
And software and ITC Infotech transactions, we announced last week.
Both transactions are expected to close during Q3, we have not incorporated the expected financial impact to our guidance because the deals haven't closed yet update all financial metrics.
Guidance, when we report our Q3 earnings.
In the meantime for constant currency <unk> expense.
These transactions to have a positive impact of approximately $15 million in fiscal 'twenty two.
We will report our inland in our <unk> product group, along with our other assets.
Assets.
Okay.
Okay and actions to have an immaterial impact to free cash flow in fiscal 'twenty, two as incremental as incremental operational cash flows are expected to offset the incremental transaction related fees and increased interest expense in the second half.
And we expect these transactions to be accretive in fiscal 'twenty three.
Going forward as Jim explained we.
We expect these two deals to help us drive the adoption of our SaaS offerings.
And over time ITC. The ITC Infotech transaction is expected to result in lower professional services revenue, but not expected to have a material impact on our profitability.
Again, we'll provide a lot more detail at Q3, when we report our results and update all guidance metrics at that point.
I'll close out my prepared remarks today by.
By taking you through an illustrative constant currency <unk> model on slide 21.
Here, we're showing our IRR progression over the past six quarters and an illustration of what is needed to get to the midpoint of our constant currency guidance for Q3 and fiscal 'twenty two.
First of all recall that in Q2 of fiscal 'twenty, one our growth benefited due to the acquisition of arena, so taking that into consideration in the first half of fiscal 'twenty, two we added approximately $25 million more.
On an organic basis compared to the first half of fiscal 'twenty one.
Next calling your attention to the Green box this model shows.
Targeted ending IRR at 158 8 billion for Q3, and 165 3 billion for Q4, both at the midpoint of our guidance ranges.
The illustration shows is sequentially IRR, that's needed in Q3, and Q4 to hit the guidance mid points.
As you can see in the second half of fiscal 'twenty, two we need to add about the same amount of new HCV as we did in the second half of fiscal 'twenty, one in order to hit the midpoint of our constant currency guidance.
We believe we are well positioned to do that even given some of the macro concerns.
And noting that we also have more deferred.
<unk> started in the second half of fiscal 'twenty two than we did in fiscal 'twenty one.
Hopefully that's helpful and with that I will turn it over to the operator and begin the Q&A.
Thank you and as a reminder that at Darwin question.
Please limit yourself to one question on <unk> you have additional questions. Please return to wholesale.
Okay.
And our first question will come from Joe very well Thank you Eric.
Please go ahead Hello.
Yeah.
Hey.
Hi, everyone.
I guess I'll start with a question on macro.
I appreciate the backdrop of dynamic in your model at this point as well.
With that a lot of what I'm about to ask.
Can you maybe.
<unk> our customers are may be talking to you about strategic investment plan.
More complex implementation areas like <unk> or Iot maybe contrast.
Different today than it would've been mid 2020 or.
There are periods that may be unparalleled in the past that does it.
It seem like customers are kind of separating strategic from a macro appreciating that there.
They are committing to today do have longer term benefits and so that does kind of scope and conversation is different than it has been on the call.
Yes, I mean, absolutely Joe Jim here.
Keep in mind that PTC is really helping customers.
Plan, an engineer and plan the production processes for products were not helping them to actually by and large we're not helping that much to produce the product. So the supply chain problems really our production problems and if youre, having production problems most companies don't see that as a reasonable.
Planning the next generation of products.
Suddenly production problems to be solved at some point and then you'll be competing for who is the best next generation product and I Hope you didn't take the Iraq.
So.
We don't really see any connection and frankly, we didn't see much connection in 2020 either.
In that in that particular way so.
I think the <unk>.
<unk> in 2020.
Put a lot of momentum into digital transformation.
People realized you can't execute a hybrid workforce for example, without a system.
Record for product data just doesn't work so that momentum is carrying through and people are forging ahead with their strategies to implement for example, <unk>.
<unk> and CAD to advance their digital transformation.
Even if their factories are idled because they're waiting on.
Semiconductors or or in some cases wire harnesses that used to come from Ukraine, and all that type of stuff. So actually I was in Germany in the last week of the quarter and the customers I've talked to are full speed ahead as it related to the PTC project.
And.
And we mentioned that.
We had a very strong bookings quarter.
In Europe , and again Thats net of.
A fairly.
If you put all that churn from Russia.
In Europe materials like is probably a point of growth I'm guessing for Europe .
So.
I think we're doing well and sort of feel like actually conditions look pretty good and at the same time, we can withstand a lot and still really deliver some impressive growth and free cash flow numbers.
Okay, that's great.
Follow up.
Hi.
<unk> windchill transition.
<unk>.
Might be evolving.
<unk> publicly announced that now.
Has the conversations.
It seems like a lot of your peers are talking about fixed up and their own cloud migration efforts one.
Thanks.
Accelerated recently.
I know youre kind of getting the implying that that could play out for PCC.
<unk> dedicated to <unk> quite honestly.
Yes.
You can go back to our Investor Day, I'll remind you that we really feel like we're starting the third phase of our SaaS project.
And the windchill part of it started back in the first phase so for us.
We've had a lot of success with cloud.
And it's one of the growth drivers for windchill. It has been over the last 18 quarters.
I think the difference is we didn't like the profitability of the cloud part of the wind chill and cloud business as we used to do it. So this windshield plus is really our shift to the multi tenant model, which to the customer doesn't look much different.
But the PUC it looks quite a bit different than producing quite a different outcome in terms of profitability. So I think customers like the windshield and the cloud before they still like wind shield the crowd because PBC likes wins around the globe that are now and thats, causing us to open the floodgates a little more because it's.
It's more attractive business for us now.
Great. Thank you very much.
Our next question now.
Adam Borg with Stifel.
Hello, Adam.
Hey, guys. Thanks, so much for taking the question.
Maybe just on <unk>.
Talked about it last quarter, even in the slide deck today, you talked about.
You'd focus on Upselling and cross selling the installed base I'd love an update here on kind of what youre thinking about.
The strategy going forward for upsell cross sell as well.
Just remind us as affinity customers.
Combining <unk> with <unk>.
Thanks again.
Yes, I mean, the key thing lets focused mostly on Iot because it's much larger the key thing is theres two key use cases for Iot.
<unk> use cases actually.
One is smart connected products, which are the products manufacturer. The second one is smart connected factories or we call. It smart connected operations. That's the products you buy and operate in your factories and then the third one is really this navigate strategy of bringing in information from a lot of different systems.
Kind of.
No.
An environment. It just makes lightweight users more productive and so forth, but anyway all of our discrete manufacturers produced product and they all operate factories.
<unk> antibody and so Troy Richardson put in place a stronger focus on cross sell and we're starting to see some let's say green shoots.
Particularly in DPM.
Our Rockwell sold to Rockwell base, but.
All the deals we sold really came from the customer base in PBC that is good.
We think theres something there so.
Keep in mind, when we think about Iot NAR in Q3 and Q4.
This is a couple of things I want to point out first of all <unk> is a rolling four quarter metric. So three of the four data points that say, what's going to happen in Q3 are already in and two of the four data points and say, what's going to happen in Q4 already and so we have some visibility.
But now what we with the rest of it hinges on.
Bookings churn and.
And backlog or deferred.
And so we're looking at all the stuff we look at the pipeline. We're looking to forecast we tried to estimate bookings and we don't have a crystal ball and sometimes we're not perfectly right, but anyway, we have a read on what we think journal <unk>.
That's what we're looking at and we're confident that that's going to get us to that two handle by the end of the year.
That's great and maybe just as a very quick follow up on the great thing here in the early success on EPS and EBIT about the Rockwell partnership as well.
Maybe just two seconds on the state of the Union on where we are with Rockwell overall, thanks again.
Yes.
Coincidentally, Scott General the Chief revenue officer of Rockwell happened to be at PTC today, So I had lunch with them and we talked it over in a better fit for.
Rockwell then is thing works as a platform and Iot platform and so Rockwell is leaning in and their consulting arm Calypso is really leaning in and PTC is leaning in so.
Yet for what both PVC as a solution versus a platform.
Excellent. Thanks again.
Our next question will come from Banco.
Preference Macquarie. Please.
Please go ahead.
Hey, Jim Kristine how are you.
Jim starting with you on the <unk> acquisition.
Could you contrast, the rationale for that acquisition.
And the addressable market from that acquisition as compared with what the rationales you spoke of 11 years ago almost.
For the day will be.
Perhaps putting it in the context of the overall closed loop lifecycle management strategy.
And then secondly to your question.
By the end of the fiscal year, when we net out the effects of the restructuring.
Particularly in the field.
Minus the service head count with the.
ITC transaction the add back from <unk>, where do you think your head count ultimately lands at the end of the fiscal year.
Okay.
I'll take the first one on inland versus integrity J. It is fundamentally the same story.
And I think we've had reasonable success with the integrity product.
But we had some challenges with the integrity product that I think are fixed in this next generation code beam or offering.
Keep in mind that climate as a business.