Q3 2022 PTC Inc Earnings Call
Full year was designed to drive a more aggressive and efficient SaaS strategy.
At the time it was announced we viewed the charges as short term pain for long term gain.
Now we're at the inflection point, where most of the pain is behind us, leaving us with a cost structure. That's in great shape, while the operational changes continue to generate the positive results we expected.
I'm going to circle back on the margin topic in a few minutes when I reflect on macro scenarios.
Moving to slide five despite the scary headlines we read every day, we've continued to see solid global demand for our offerings.
We did see some minor indications of macro related softness in smaller European reseller accounts and in China due to Covid related lockdowns, but this proved immaterial.
Organic bookings were up 29% year over year, roughly double the organic <unk> growth rate.
Europe bookings grew 20%.
As I mentioned renewals were also strong and we're raising our FY 'twenty two organic churn guidance as were trending slightly better than expected.
Growth was strong in both digital thread and velocity units and across all three geographies Q3 was the seventh consecutive quarter that bookings have grown faster than <unk>, which together with improving renewal rates is driving the accelerating <unk> growth, we've been delivering all year.
To help you appreciate the resilience of PDC as you think about any potential macro volatility that may lie ahead on slide six I'd like to briefly again review our business model dynamics to help investors understand why despite the uncertainty we have confidence in our financial targets for the remainder of the year.
On the left hand of the slide you can see that the 16% growth. We delivered in Q3 was based not just on our Q3 performance but.
But performance over the prior three quarters as well.
Given our definition of <unk> as the annualized value of the book of active recurring software contracts.
Our growth is effectively a trailing four quarter metric.
When we say <unk> grew 16% in the third quarter, we mean that on average <unk> has now grown 16% over each of the past four quarters.
The entire book of active recurring business is now 16% larger than it was at this time last year.
While this trailing dynamic serves to dampen the impact of bookings in any single quarter, such as the strong results here in Q3, where bookings grew roughly twice the speed of IRR.
It also provides a tremendous foundation of stability for the company.
We are raising our <unk> guidance for the full year because three of the four quarterly results that will comprise FY 'twenty to <unk> growth are already known and we feel sufficiently confident about Q4, Chris.
Christian will elaborate during his guidance reveal.
As you think about macro scenarios and their effect on PTC remember the basic rule of thumb that so long as bookings exceed churn over the trailing four quarters.
We'll grow and so too should free cash flow.
Bookings currently exceed churn by a wide margin roughly three to one.
To demonstrate the resilience of our model I'll quickly review the same big round Directionally accurate numbers I supplied last quarter for you to run scenarios against.
Think of PTC, having around $1 5 billion in <unk> and on a run rate basis, we're adding $300 million in annual bookings, while seeing $100 million in annual churn.
That's the three to one ratio I spoke of.
Over the next year, the $1 5 billion of our.
Would step up by $300 million in bookings and step down by $100 million in churn to grow to $1 7 billion, which is 13% growth.
That's roughly consistent with our current run rate performance.
Our actual 15% <unk> growth level reflects that we're running slightly favorable on both bookings and churn.
Skip the details this time around but on the right side of the slide let me remind you of the hypothetical scenarios I shared last quarter.
The first scenario is booking slow 30% for four quarters like we experienced in 2009 and the second scenario has bookings slow.
30% for two quarters like we experienced in 2020.
In both cases churn has held flat consistent with experience in both periods.
Across those scenarios are grows upper single digits to low teens.
Now to understand profitability in a downturn, let's take a fresh look at slide seven which I borrowed an updated from our December Investor day presentation.
Whether topline growth remains strong as it has been or slows a bit due to macro developments, we expect to see significant margin expansion going forward.
Margin expansion starts with the scale advantages, we get by growing the top line faster than spending.
Fiscal year to date <unk> is up 16%.
While non-GAAP Opex is basically flat.
But we have several margin expansion programs that go further.
The first margin expansion program is reflected in the actions we successfully implemented at the end of FY 'twenty, one which is shown on the left half of the page.
Those changes are worth several hundred basis points of margin expansion once the restructuring is complete and it now largely is.
By the time, we enter FY 'twenty three we have the bulk of the operating costs and the restructuring costs removed from our results.
In addition to that we've also initiated a second margin expansion program, which is shifting resources within our portfolio in a way that addresses key staffing needs, while driving up the profitability of our Jacob businesses as shown on the right half of the slide.
By Reassigning, some sales and R&D resources and I'm talking about the actual people from Iot and AR, where growth has been lower than expected.
Into other parts of the portfolio like cat and BLM, where growth has been exceeding expectations, we're able to accommodate much of the company's resourcing needs, while cancelling more than half of the 800 open positions, we had a quarter ago.
This program will not involve layoffs of restructuring charges, just new assignments for existing employees.
The avoidance of new hires and their previously budgeted cost is expected to yield a couple of hundred basis points of margin expansion over time.
Note that a nice side effect of these resourcing shifts is that the digital thread growth unit comprised of Iot and <unk> now crossing into profitability.
We expect to see further margin expansion that comes naturally as these businesses continue scaling beyond the current $214 million in <unk>.
In addition to the margin expansion programs that are well underway. There is a third margin expansion opportunity. If we were to encounter signs of a significant macro slowdown like the scenarios I mentioned, we would quickly implement new hiring restrictions against the balance of the open positions, we have as well as other spending restrictions.
Actions this too would further help margins.
The summary is that our cost structures in great shape as we contemplate scenarios of what might lie ahead.
Given the cost lever, we've already pulled with restructuring at the end of last year. The lever, we're pulling now by rebalancing resources within the portfolio and the additional lever remains incrementally available to us if we see signs of a downturn. We're looking at substantial margin expansion drivers that make us confident we can deliver.
Free cash flow growth.
In the mid Twenty's or better at Q3, FX levels and across most plausible.
Growth scenarios.
Mid Twenty's free cash flow growth rates supports the longer term free cash flow guidance. We currently have out there.
So we continue to feel good about that even in this shaky environment.
Because we have products that are compelling and sticky sold into good markets using a recurring revenue model coupled with our longstanding reputation for spending discipline ptc's in a good position to drive differentiated free cash flow growth no matter, what macro scenario plays out.
Getting back to Q3, let's take a quick look at our performance by geography on slide eight before turning to our business units.
In Q3, we again saw strong growth across all geographies.
Our growth in the Americas was 14%.
In Europe , our growth was 17% despite the Russia exit in Q2, which still affects the growth rate given the trailing nature of our <unk> metric.
Our our growth in APAC was 16%.
Knowing that investors are concerned about the macro environment I'd like to reiterate that we are continuing to see strong bookings and renewal performance globally and in Europe , and giving our recurring business model.
<unk> is likely to grow in all but the most extreme downturn scenarios one can imagine.
Next let's take a look at the performance of our business units, starting with digital thread on slide nine.
In our largest product segment digital thread core we delivered another strong double digit growth performance in Q3 with 14% growth.
Within this once again cat grew low double digits, while <unk> grew 17%.
Bookings grew faster in both cases Q.
Q3 was the best performance yet across the now 19 consecutive quarters of double digit <unk> growth, we've seen in the core CAD and <unk> business.
On the SaaS transformation front windshield pluses and it's early days, but we had a solid SaaS quarter for windchill.
Primarily on a good mix of SaaS in new projects.
We continue to expect to see a growing SaaS impact from lift and shift conversions as that phenomenon ramps in FY 'twenty three and beyond.
A reminder to that winter plus is the tip of the iceberg of a bigger plus strategy and Youll see us follow with <unk> similar premium SaaS offerings in FY 'twenty three and beyond.
In digital thread growth, which is Iot NAR, we were pleased to see <unk> growth accelerated to 19% in the neighborhood of that two handle growth rate we're targeting.
Thing works DPM had a solid quarter, including a multimillion dollar ramp deal with a leading global contract manufacturer for 30 factory DPM rollout following a successful proof of concept.
With thing works DPM, we believe we have a turnkey Iot solution with strong product market fit and this deal represents an excellent proof point.
SSG posted great results again in Q3, accelerating to 9% <unk> growth organically and growing 17% inclusive of code Beamer.
Within SSG retail PLO Arbor text, and <unk>, all performed notably well driven by solid results in terms of both bookings and renewals.
Let's turn to slide 10, and Doubleclick encode beamer.
As the driver of the inorganic growth of SSG code Beamer had an outstanding quarter, beating its plan, even before landing a mid seven figures ramp deal with a European automotive supplier that standardizing on <unk> across its thousands of software engineers.
This transaction was actually the largest order PTC booked in the third quarter, which is quite an accomplishment for a business that currently represents 1% of our AR.
The code Beamer product has best in class <unk> capabilities and is seeing high demand because these capabilities are critical to manufacturers whose products contain embedded software.
That's especially true in industries like automotive and medical devices that are regulated because an errant software chain change somewhere in the supply chain could lead to an unexpected product behavior that might kill people.
<unk> is off to an amazing start in early returns are very encouraging.
We have combined <unk> with our previous ASM offering called integrity.
And elevated this consolidated <unk> business to be a key product line alongside CAD, BLM, Iot and AR and the digital thread portfolio.
<unk> will continue to be sold stand alone.
We will sell it with BLM as well.
In addition to the strong Standalone <unk> sales that <unk> has been experiencing.
Adding it to Pdc's portfolio is expected to drive incremental revenue and cost synergies.
To keep our reporting simple in the near term we will continue to report the <unk> business in the <unk> line item.
Placing the high growth <unk> business in the <unk> reporting line item should take MSG from being a low single digit grower to a sustainable mid single digit grower going forward, which of course helps to elevate ptc's overall growth rate as well.
Before I turn to our velocity business unit, let me run through a customer story on slide 11 that illustrates how customers are leveraging our digital transformation capabilities.
With more than 29000 employees vest us is a key global provider of sustainable energy solutions to the energy industry.
<unk> is a great PTC customer and they use our software across their digital thread as they design manufacture install and service onshore and offshore wind turbines around the globe.
To meet the unique needs of each customer in each deployment Vestas has embraced digital transformation.
<unk> has literally taken an electrical mechanical wind turbine and turned it into a highly tailorable software controlled connected powerhouse of clean and affordable energy.
<unk> is the first step was to establish a strong foundation in engineering.
Now Vestas is leveraging the end to end configuration management capabilities of <unk> Windchill and thing works to drive process improvements across engineering and manufacturing.
By eliminating manual Handoffs and redundant work Vestas is unlocking a step function improvement in product and process quality, while shortening lead times.
Vince This is driving closed loop innovation using data from a large number of connected wind turbines in the field to generate engineering insights.
<unk> unique portfolio is well aligned to support vest us along their digital transformation journey and our future plans include increasing use of thing works and before you as they continue to develop their best in class wind power solutions.
Turning to the velocity business unit on slide 12 year over year <unk> growth for our velocity unit accelerated slightly to 29% in Q3.
With Unshapen arena again growing multiple times faster than their market.
These cloud native businesses each of pioneering leader in its respective category continued to give us proof points that suggest the future of the product lifecycle software market will be SaaS.
With velocity PTC has the best pure play SaaS strategy in our market. It really is the industry benchmark for how SaaS should be done.
And with the Atlas platform born of on shape, and now powering windshield plus in the broader plus strategy, we are implementing SaaS across the entire portfolio.
We expect the SaaS strategy to create strong growth tailwind in the core business for years to come.
Let's move to slide 13, where I would like to take you through a velocity customer story.
<unk> maker labs is a product development accelerator known for product development excellence in the automation applications.
They have a portfolio of companies and they help these companies build disruptive technologies.
Photo you see on the slide is the flip it to automated frying robot from MISO robotics, which is one of wave makers' portfolio companies.
<unk> robotics is leveraging automation to revolutionize commercial foodservice and their customers include Jack in the box Chipotle and White Castle, all favorites have kristian Talvitie I'm sure.
To help MISO robotics and their portfolio companies drive high velocity product development wave maker labs has chosen on shape and arena.
Speed agility and flexible scalability, our top priorities for wave maker labs.
Making unshapen arena, a natural fit.
The unique analytics and management reporting capabilities of Unshaped helps wave maker labs to better understand the efficiency and the engagement of their engineers.
Also with their high velocity mindset wave maker labs is focused on driving frictionless collaboration from start to finish.
Theyre looking forward to being one of the first customers to deploy the new on shape Arena connection feature which is in customer test now and will be released shortly.
This connector will launch the industry's first integrated pure SaaS, CAD, and Pls suite, which enables improved collaboration and a seamless flow of product data across engineering supply chain and manufacturing our contract manufacturing activities.
For our final topic, turning to slide 14.
Our two upcoming investor events I want to raise to your attention first we plan to hold a virtual FY 'twenty three investor day event on November 17th where we'll give you a deeper view into Pdc's financial plans for FY 'twenty three and beyond.
Second we plan to host a large live works ecosystem event on May 15th and 16th of 2023 that assuming Covid cooperates. We expect we will bring together thousands of customers partners investors and employees in a live event at the Boston Convention and Expo Center.
Neuro Seaport headquarters.
We're hoping that many of you will attend the LIBOR event, where we will have a dedicated investor track that allows you to participate in keynotes and Investor sessions, plus gives you ample opportunity to interact directly with management customers and partners across the PTC ecosystem.
To make it easier for you we plan to make the November event, both shorter and virtual with the intention to give you what you need for your models to tide you over to the bigger live works event in May where you can get a full dose of strategy and customer exposure.
Please watch for our hold the date invitation from our Investor Relations team regarding both events.
To wrap up on slide 15.
Demand remained strong in Q3, and we've seen only minor signs of a macro slowdown.
But we're watching diligently and we're well prepared for whatever lies ahead.
Because of our resilient business model and spending discipline, we expect to deliver solid top and bottom line growth across any of the more plausible macro scenarios.
Overall, I'm very pleased with Pdc's position, our strategy is working well, we've driven both our growth and profitability to levels that are near the top of our peer group and I am excited about the opportunities to do even better as we push ahead in parallel with our growth and margin expansion initiatives.
Throughout the first three quarters of FY 'twenty, two bookings and renewals have been very strong growth has been accelerating all year, which is why we are raising our guidance for the third time.
And we're entering the fourth quarter of what will be our fifth consecutive year of double digit organic <unk> growth.
I think the company has never been in better position to create shareholder value and with that I'll turn it over to Christian for more details on our financial results.
Thanks, Jim 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 17, as a reminder, when we provided guidance last quarter, we specifically excluded the coat beamer and DXP transactions, which had not closed at that point.
<unk> contributed $16 million of <unk> in Q3.
On an organic constant currency basis, our <unk> was 161 billion up 15% year over year and ahead of the comparable guidance range, we provided which was 158 to $1 $5 95 billion.
Including code Beamer, our constant currency was 162 5 billion up 16% year over year.
Aside from a non operating cash inflow the DXP transaction did not impact our results as most of the in flight services contracts are still on our paper, we expect the transition of the services contracts that happen gradually over time and will be reflected in future guidance as we provided.
However, we expect the impact to IRR and free cash flow to be de Minimis.
As Jim explained our topline strength in Q3 was broad based we are executing well against our strategy and we're continuing to improve upon strong market position.
Our SaaS businesses across our digital thread in velocity groups saw continued solid growth in Q3.
On an as reported basis, we delivered 9% IRR growth, 8% organic due to the impact of FX headwinds, which were approximately $81 million substantially higher than the $32 million of FX headwinds, we estimated a quarter ago, using Q2 ending exchange rates.
Despite the FX headwinds our cash flow results were strong coming in ahead of our guidance increased a solid collections performance slower hiring and above planned perpetual license revenue from <unk> helped to offset the incremental headwinds that materialized in Q3.
When assessing in forecasting our quarterly cash flow. It's also important to remember a few things the majority of our collections occur in the first half of our fiscal year Q4s, our lowest cash flow generation quarter and free cash flow is primarily a function of a rather than revenue.
Q3 revenue of $462 million increased 6% year over year as we've discussed previously revenue was impacted by ASC 606. So we do not believe that revenue growth rates are the best indicator of our underlying business performance, but we'd rather guide you to IRR as the <unk>.
Best metric to understand our topline performance and cash generation.
FX impacted revenue by $18 million in Q3, so our revenue on a constant currency basis was $480 million up 12% year over year.
Yes.
Before I move on to the balance sheet I'd like to provide some color on our non-GAAP operating margin as I did last quarter.
We continue to caution that because revenues impacted by 606 other derivative metrics such as gross margin operating margin operating profit EPS are all impacted as well.
It's worth mentioning that we're benefiting from the work we've done to optimize our cost structure. Following our restructuring announcement last November .
In Q3 22, our non-GAAP operating expenses were slightly less than in Q3, 'twenty one yet we delivered significantly higher IRR free cash flow and revenue and our margin percentage also expanded compared to our full year ago.
As I indicated last quarter, we believe the improvements we've driven are sustainable and we remain on track to deliver operating margin expansion for the full year and expect to end the year with operating margins in the high 30% range.
Moving to slide 18.
We ended the third quarter with cash and cash equivalents of $322 million. Our gross debt was 143 billion with an aggregate interest rate of three 5%.
During Q3, the amount drawn on our revolving credit facility increased by $159 million on a net basis to $434 million.
This was due to the financing of the <unk> acquisition, partially offset by paying down $105 million on our revolver.
Regarding our share repurchase program as we've communicated the previous two calls we've completed $125 million in repurchases in fiscal 'twenty two or.
Our long term goal, assuming our debt to EBITDA ratio is below three turns is to return approximately 50% of our free cash flow to shareholders via share repurchases. While also taking into consideration the interest rate environment and strategic opportunities.
Next slide 19 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.
As a reminder, when we calculate constant currency figures, we use our current year plan FX rates, which are as of September 32021 for all periods.
You can see on the slide how FX dynamics have resulted in differences between our constant currency.
And as reported over the past seven quarters.
Based on exchange rates at the end of Q3.
Reported <unk> for fiscal 'twenty, two will be approximately $85 million less than our constant currency guidance.
This is important to consider in the context of our guidance because we provide <unk> guidance on a constant currency basis.
If exchange rates fluctuate significantly between the end of Q3 and the end of Q4.
The impact to our as reported <unk> would also change.
We believe constant currency is the best way to evaluate top line performance of our business because it removes FX fluctuations from the analysis positive or negative.
As a reminder, as we said our <unk> guidance for fiscal 'twenty three on our next call, we'll be providing that at the September 32022.
Foreign exchange rates and restating history, assuming those rates.
Moving onto the next slide.
Given the sharp moves in FX that we've seen recently I thought it would be useful to provide an updated.
Sensitivity rule of thumb, so to speak here on slide 20.
Okay.
In addition to the U S dollar Retrans Act in Euro yen and more than 10 other additional currencies using our Q3 FX rates the impact of a 10% change in the euro to USD rate would be $38 million positive or negative.
And the impact to a 10 yen change in the U S dollar to yen rate would be about $8 million of course, the estimated dollar impact is dependent on the size of the <unk> base.
Turning to slide 21, we're pleased to have closed both the <unk> and DXP transactions in the third quarter.
Let me explain the financial impact starting with <unk> at the end of Q3, <unk> was 16 million reported as part of MSG, We expect solid <unk> growth from code Beamer and this should help SSG can grow consistently in the mid single digit range going forward.
DXP transaction will not impact <unk>.
But it is instead expected to result in lower professional services revenue. This will happen over time as the services contracts move to DXP from PTC.
In Q3, the impact was de Minimis and since our services business is not high margin, we do not expect a material impact to our profitability as the business gets smaller over time.
Next from a free cash flow perspective, we expect could be marine DXP to have an immaterial impact in fiscal 'twenty two.
And to be accretive in fiscal 'twenty three.
In fiscal 'twenty, two the incremental operational cash flows essentially offset incremental transaction related fees and incremental interest expense.
With that I'll move on to guidance on slide 22.
I'll start by pointing out that our previous guidance did not include the financial impact of code Beamer or DXP and our updated guidance now does.
As I just explained this positively impacts <unk>, but immaterial for our other guidance items.
We are raising our fiscal 'twenty to constant currency our guidance based on our strong year to date, new and renewal bookings performance. The addition of code Beamer.
And despite our exit from Russia in Q2 of this year.
The new range is now 166 to $1 69 billion, which translates to constant currency growth of 13% to 15% for fiscal 'twenty two.
At the midpoint, we're raising our guidance by $23 million approximately $16 million of the raise is attributable to the addition of <unk> with the rest being driven by our strong business performance.
Given the macro uncertainties, we are providing a wider range for IRR than we usually would at this point in our fiscal year.
The low end.
Contemplates a 2020 recession kind of scenario, where bookings would be down 30% and we'd see a modest increase in churn.
This is primarily to illustrate the resiliency of our model as Jim mentioned, we did not really see any material impact from the macro environment. In Q3. So if that trend continues we would beat the low end handily.
It's also worth noting that we're increasing our expectation for organic churn improvement in fiscal 'twenty two from approximately 100 basis points of improvement to approximately 150 basis points of improvement excluding the impact of our exit from Russia.
Even including <unk>.
Inorganic arena churn and additional Russia related churn, we're expecting approximately 100 basis points of churn improvement.
And while we don't guide to bookings I know that we sometimes reference bookings performance and Jim mentioned earlier that our bookings growth has outpaced our IRR growth for seven quarters in a row.
This will not continue in the fourth quarter given the exceptionally strong bookings performance, we had in Q4 of fiscal 'twenty one.
As Jim also mentioned in our digital thread growth segment, our Iot and AR product lines accelerated again in the third quarter as we achieved 19% year over year growth.
We expect fiscal 'twenty two.
Growth for this segment to be 20% plus or minus.
Next on cash flows we are raising our free cash flow and adjusted free cash flow guidance for fiscal 'twenty two.
Our strong year to date execution includes growing <unk> at the high end of our guidance range, especially in the first half of the year, which helped us to generate the majority of our FY 'twenty two collections when FX rates were more favorable.
Additionally, caf where it continues to perform performed very well in our perpetual license bookings were also above plan.
Given our operational discipline.
And the macro environment, our hiring has also been somewhat slower than anticipated.
And as we think about Q4, the internal resource reallocation, Jim discussed earlier will also further slow hiring.
These tail winds are helping us to offset various headwinds, including FX, our Russia exit modestly higher compensation and incremental acquisition and interest related costs due to the code Beamer and DXP transactions.
Finally regarding Q4, we continue to expect our normal seasonal pattern.
Cash flow generation, primarily driven by invoicing seasonality.
Moving to revenue because of the sharp moves in FX over the past three months, we are reducing the midpoint of our full year revenue guidance by $15 million. So for fiscal 'twenty two our new revenue guidance is $1 9 billion to $1 95 billion in the year over year growth. We are guiding to is now 5% to 8%.
ASC 606 makes revenue very difficult to predict for on premise subscription companies. Hence the wide range note that revenue does not influence.
<unk> or cash generation as we typically build customers annually upfront regardless of contract term lengths.
I'll close out my prepared remarks today by taking you through an illustrative constant currency a model on slide 23.
Here, we're showing our IRR progression over the past seven quarters and an illustration of what is needed to get to the midpoint of our constant currency guidance for fiscal 'twenty two.
Focusing on the last line in the chart organic sequential growth the trend that has developed in fiscal 'twenty two shows better organic <unk> growth year to date compared to fiscal 'twenty one.
Next calling your attention to the Green box this model shows targeted.
Ending.
At 167 billion.
<unk> for Q4 to the midpoint of our guidance range as you can see to hit the midpoint of guidance, we need to add $50 million of organic.
In Q4.
This is less than the 63 million, we added in Q4 of fiscal 'twenty one.
We believe we're well positioned to do that given our pipeline and forecast and also in part because we have more deferred <unk> starting in Q4 of 'twenty two than we did last year.
And with the context of macro concerns we've set a low and that contemplates a severe downturn in the global economy.
Putting all this together we believe we have set our guidance prudently.
With that I'll turn the call over to the operator to begin Q&A.
Thank you and if you would like to ask a question. Please signal by pressing star one.
Lastly, please limit yourself to one question only.
Thank you for additional questions.
Our first question will come from Matthew O'brien.
Please go ahead.
Thanks, very much hi, Jami so.
So congratulations on the large DPM ramp deal.
How would you characterize the pipeline for that particular solution.
The pipeline is quite good I mean, there's a lot of interest in this solution.
And in fact.
We've already had a couple of follow on orders from some of the earliest orders we received.
I think it's a good solution.
There's a lot going on in the world of manufacturing. These days so there's a lot of competition for mine share.
But I think we have a very good solution and there is a lot of interest in it.
Thanks.
Our next question will come from.
With Barclays.
Please go ahead.
Okay, Great Hey, Jim Hey, Christian Thanks for Thanks for taking my questions here question.
Christian maybe maybe I'll direct this one to you can you just talk a little bit about any pricing changes.
PTC has done in the last year or so how you've sort of approached pricing.
Yes.
As part of this year's guidance and just any anything on pricing that you would say with respect to this year's AOR guidance.
Yes sure.
Second.
Thanks for the question.
No.
Like most.
Of our peers, we evaluate pricing typically on an annual annual basis and generally.
Contemplate price increases.
Around the October November timeframe.
That's been our pattern here for the past past few years, depending on the overall macro environment.
In a competitive environment, we try to take those things into consideration.
As we think about price increases so for example.
During COVID-19, we actually did.
Much smaller price increase than we normally would.
And.
And this year, we actually.
Given the macro environment, we actually pulled the price increase forward a little bit so.
Effective in May we did a price increase that was also slightly larger than normal reflecting the <unk>.
Macro economic situation that we're all in right now in terms of its impact to this year's.
Guidance and performance.
I would say it's been.
A modest if you will at best.
<unk> for fiscal 'twenty, two but we think that it's one that will persist into fiscal 'twenty, three and I think the way to think about that is if the price increase was effective.
Effective in May and he quotes that were already in play would've had oil pricing and so on so youre really talking about quotes that are going out.
After the price increase so primarily impacting Q.
Q4, and beyond and maybe to add on renewals.
As we've discussed our average term lengths around two years, which would mean each quarter on average an eighth of the renewals are up.
And and then actually a majority of those have contractual price increases uninfluenced by inflation or by price increases we did to the product. So it was not a major factor in fact, it was a pretty de Minimis factor in Q3, but it will be helpful. As we as we get into next year.
Okay got it very helpful guys. Thank you. Thanks, Thanks Pam.
And our next question will come from Andrew <unk> with Bank of America.
Good afternoon, and good luck.
Alright.
Alright, Christian just a question on Winchell SaaS transition sounds like Winchell, Costa is more attractive to new logos versus lift and shift existing clients. How does the pipeline for lift in shipbuilding relative to your expectations.
I am quite pleased with it there is a lot of interest.
It's a project that has to be sold and planned and so forth.
Sometimes I call. It the last upgrade because theres a process to D. Customize this system and upgraded and then merge it into the running SaaS system. So there's a lot of interest, but I think we never really didn't feel like that will be fast out of the blocks.
Whats easier to do is if a new customers buying <unk>, we say well would you like SaaS and they would say sure why not.
So it's a lot easier for us to get out of the blocks faster with new projects, then with these lift and shifts but the interest level I assure you is quite high and in fact the the.
The growth rate in <unk> strong overall, but it's stronger as you would expect on the SaaS side than on the on premise side.
Thanks, a lot. Thank you.
Yeah.
And our next question will come from Blair Abernathy with Rosenblatt Securities. Please go ahead.
Thanks, very much good afternoon gentlemen.
Jim I just wanted to maybe dig in a little more on the digital thread growth you sort of mentioned that the Iot business.
Our business.
Maybe not.
Not quite where you want them to be yet can you just talk a little bit about what's kind of happening in those end markets.
And sort of what.
What the competitive landscape is looking like for you guys. These days.
Yes sure Blair.
Yes, I mean, I think all year.
Over performed in a long list of things and there is and there is one part of the business.
A little bit underperformed, even though it's growing at a rate that is accretive to company growth.
But thats Iot NAR and I think it's really mostly a market issue not a competitive issue in fact, I'd say, it's not at all a competitive issue.
There is this factor that I call the hair on fire factor, which is a lot of this stuff is sold into environments that are in chaos right now.
We're on a factory and we're trying to tell you how we can make it more productive you say well it's shut down.
I don't have any inventory or.
Im in a lockdown mode or.
I have too much inventory or there's just a lot of noise right now that again is competing for mind share and it's not just competing for Pdc's mindshare, it's competing for competitors mindshare too. So I'm unaware of anybody we compete with who has higher performance than we do in this environment.
This environment will pass and we will get more momentum down the road, but Meanwhile, what we said is we have week, we've put our resourcing plans in place according to our growth plans.
And the places that are surpassing their growth plan need more resources in the places that are behind I mean honestly, we have too many resources snacked in there. So we're just moving them around doesn't mean, we're giving up on anything we we hope to get to and achieve this 20% growth rate, but I think as we look to next year I think we feel like 20% would be.
A pretty good growth rate for next year I'm not guiding to that here, but I'm, just saying I don't think the market supports more than 20% growth rate at this point in time because of those hair on fire issues I'm talking about.
Okay.
Great. Thanks, Thanks for the color Jim.
And our next question will come from Adam Borg with Stifel.
Please go ahead.
Yeah.
Great. Thanks, a lot for taking the question maybe just to follow along.
Along with the threat to the last question. So as you allocate these resources from Iot NAR and presumably to cat Mpls.
Do we think about the ramp on the sales and marketing perspective to get these guys productive I'm, assuming it's a hell of a lot easier to be more productive.
Given the already are familiar with the technology and the company versus a brand new reps love to hear more about the <unk> of those restaurants as you make that transition.
Yes for sure I mean, I think it's the absolute most effective and efficient way to bring more resources to bear because these are people who are already in the PTC sales organization. They already know the management team they already know the customers.
We're just saying hey sell this product instead of that one to the same people in many cases.
Every case, but certainly to the same types of people in every case. So I think it's quite it's quite.
Effective way to ramp new capacity and Meanwhile, I don't see much risk on the Iot and AI side, because we have ample capacity left to keep up with the demand. We see we simply have too much capacity to be Frank in Iot and AR are selling and so we're shifting that over putting a couple of different products in their bag and send them back onto the playing field. So.
I think it's.
It's smart I think it's going to work well and I think there is very little risk.
Great. Thanks, so much.
Okay.
Okay.
Our next question comes from Jay <unk> with Griffin Securities.
Go ahead Doug.
Thank you.
Jim a question.
Jim you alluded in your comments too.
Share gains in your core CAD and <unk> businesses, and I think that's a reasonable observation.
In addition to which you noted the.
Shrink in <unk>.
With the acquisition and this perhaps raises.
Larger question of technical software market is evolving yet again.
Perhaps moving beyond what has historically been very concentric.
Industry to increasingly now.
I think its simulation centric industry.
In terms of revenue and process.
So.
If that evolution continues where we will become simulation driven.
Plus CAD and <unk>.
How do you how do you think that positions are leaves PTC in terms of.
Your growth your competitiveness, you'll resource allocations et cetera.
Yes, well.
I sort of agree with you, but I am not sure I agree with every piece of it but let me let me just talk about a few of them. So.
So first of all on taking share.
Clearly PTC so had their earnings report yesterday and you can go line item by line item in the cabinet BLM World.
And our results are better than theirs, and I think the <unk> business grew 8% and our velocity business grew 29, if I remember correctly.
<unk>.
<unk> business grew 11% and ours grew 14, so certainly on a dollar basis, we're taking share now I've always attributed some of that to a better business model.
So I think we're monetizing customer relationships better and we may be taking more wallet share then seed share, but we're certainly not giving up any share theres just no math that would get you. There. So I think we're doing well now.
As stimulation important absolutely.
But so too is BLM.
I mean, I don't know do you know what stimulation company Thats growing like our windchill BLM business at 17% I'm not really aware of one so I think that <unk> is a much more strategic prana.
Product and then people have given it credit for its sort of the age of Pls right. Now now it may also be the age of stimulation and you know we have a great simulation partner and answers fantastic partner and.
When a customer says stimulations important we say great. Let me tell you about our best in class.
Simulation capabilities built right into krill that come from answers so.
I'm happy if the customer thinks simulations important, but but I think at least as frequently they think <unk> important and <unk> and Thats really our strong suit where absolutely best in class at BLM Barnett.
Okay.
Thank you Tim Thank you Jamie.
And as a reminder, that in Darwin as you'd like to ask the question and again, we do ask that you limit yourself to one question and rejoin the queue for.
Our next question will come from Joe <unk> with Baird.
Please go ahead.
Great Hi, everyone, yes.
Yes, Jamie brought up but I think.
The topic has extended beyond not just the strength a lot of your peers are seeing with the enterprise type buyer and actually.
That type of account bonding to forge ahead, with making new commitments and actually may be pursuing things that are newer and more strategic cloud adoption has been coming up at the enterprise level.
I'm just wondering is that true at PTC as well and if the divergence is maybe happening enterprise versus SMB does that cause PTC to navy deviate some of the strategies that the company has been talking about and pursuing recently.
Yeah.
Well first of all I think Joe that your thesis is at least Directionally correct that there certainly is a lot of interest amongst the larger enterprises in digital transformation and cloud and those are places where PTC is well positioned.
Historically, we have had more exposure to the enterprise market then to the SMB market.
<unk> and windchill kind of don't have near the representation in the SMB market that other product Sam from say.
So or autodesk or whomever.
Now with with our velocity unit, that's really an SMB business and that's doing pretty well and I think thats all cloud driven you know what I mean, that's that's a subset of the market, who says I really want to go to cloud and Ptc's on shaping arena solutions are virtually unmatched.
For those types of customers, but I think in general yes. The enterprise market really is leaning into digital transformation I think COVID-19 was very helpful. For this and I think it's most helpful to BLM because.
You just really can't have a hybrid work for us if people working at home can find the data they need to do their work today and they can't walk down the hall to talk to somebody because they're not in the building and even if they were in the building the person they want to talk to is not in the building. So you really need a system a system of record and a system of engagement.
To allow you to do.
Do your job from anywhere in the office today from home tomorrow, or whatever and in <unk> as that system. So.
<unk> results were pretty good.
Ours are even better and I think thats indicative of a market, that's pretty healthy, which I think was the basic thesis.
Your question.
Great. Thank you.
Our next question will come from Matt Hedberg with RBC capital markets. Please.
Please go ahead.
Yes. Thanks. This is Matt Swanson on for Matt Congratulations on the results for starters and then another really strong guide and in particular the constant currency IRR.
And then obviously accounts for FX, but as you mentioned, Jim a lot of Investor focus going into this earnings season was on the macro and I think a lot of people are going to be surprised that there weren't some greater demand headwinds from that macro. So can you just comment a little bit more on that environment. It sounds like the hair on fire comments in Iot.
Maybe that's a little bit of macro, but you're obviously overcoming a lot of other areas.
Yes.
We are definitely overcoming it and even without <unk>, we did see a nice acceleration in the quarter. So I think.
If you look at our bookings they were up strong sequentially they were up strong year over year.
If I think ahead to our Q4 forecast.
That is up very strong sequentially.
It's not up year over year, because as Christian said, we have a monster comparison in the prior year, but it's up quite strong sequentially from a strong quarter this quarter. So.
Right now our forecast looks good now Christian and I say, Okay. I mean, I hope it comes in like that but if it doesn't we're prepared for that too and.
And Thats, a little bit why I took you through the business model and the margin programs and so forth because we want to win no matter what happens.
But so far honestly the news is all pretty good.
We don't want to be a pollyanna here and say this downturn is never going to touch us I mean, maybe it will and if it does I tried to show you we're ready for it.
Okay.
Thank you.
Our next question will come from Jason <unk> with Keybanc capital markets. Please go ahead.
Hi, Jim Hi, Christian this is actually on for Jason.
Thanks for taking my question.
Want to ask about APAC despite.
Hey, locked down there in certain areas of the region could you see still posted a pretty strong growth of 16%.
I want to ask if there's anything you can call out around sales cycle any changes there.
Particular strength that you saw from our specific customers or product groups.
Yes.
Strength first of all was in our core CAD and BLM business. The so called digital thread core.
Which is doing well everywhere.
And we did see some I mentioned this in the commentary we did see some China lockdown issues.
Sure.
Companies just for whatever reason did want to talk to us.
But nonetheless results were still good we kind of had other good news to offset that I think the key thing in China to know if you don't know this now is it's now 5% of our business, 5% of our <unk>. So we have very little exposure. It had previously been as high as I don't know, 7%, 8%, but.
When President Trump was in office he.
Winter, where as you know with our.
Let's say the battle with our largest customer which was Huawei and by the time the dust settled on that Huawei was a <unk> customer and.
Because they pretty much got the message not to do business with American companies and that's hurt us in China generally all the large amount of the.
Chinese manufacturing market is state owned.
And having watched what Trump was doing with Huawei and the American suppliers like us that was not helpful. But good news is were down to 5% exposure in China is not that material to PTC, which I actually feel good about right now given the scariness in the outlook of what might happen there in the coming.
Years.
Okay.
Our next question will come from Yun, Kim with loop capital markets.
Please go ahead.
Hey, Hey, Jim and Christian Congrats on a strong quarter, obviously from the results and the guide.
<unk> is accelerating it looks like the macro is not really impacting you guys as much.
Given our strong product positioning and our large core customer base that continues to increase our investments in our solutions can you just talk about how aggressively are you cross selling your products, especially if you look down the next couple of years with your <unk>.
Retail Pos migration plan.
How aggressive do you plan to cross sell your Iot AI into your core CAD and <unk> install base.
Yes, well.
Good questions.
So first on the specific question about cross sell I mean, that's actually a pretty well developed muscle inside of PTC, we built our pls business largely by cross selling from Gad and.
And then other things we've sold have kind of been cross sold from BLM. So definitely we're trying to make Iot and AR.
More focused on what we call the digital thread story, which is.
Not only about solving problems with Iot, but it's about solving problems with Iot using BLM Dana.
That would include of course, CAD digital mock ups and visualization and so forth and then our augmented reality of course is a huge consumer of <unk> data because it trains. It's computer vision models against three D. Digital mockup configurations, not to get too technical on you guys, but anyway, there's a great cross sell opportunity.
A big Big focus, but one thing I did want to say.
Your comment at the beginning said that our guidance suggests we're not that affected by the macro.
I actually just wanted to say to all of our investors you need to reconfigure your opinion of PTC, a little bit because we're not a cyclical name anymore and in fact, our guide the low end of our guide.
Contemplates a 30% decline in new sales in Q4, it's just that our model is so resilient that even a 30% decline in new sales still lands with 13% IRR growth.
So like sometimes.
Sometimes I read in the report that PTC is a cyclical name and I say show me a piece of data that supports that because for five years, we've been steady as she goes.
In good times and in bad and I, just feel like we have a business model, that's underappreciated and the worst of the downturn is going to get the bigger performance differential youre going to see between us and people you compare us to particularly in our own industry here.
Does.
Our software is 98% recurring.
Abstentious greater than <unk> than DSO than Siemens then basically any of the companies you might directly compare us against in the same market, let's say.
Okay, great. Thank you so much Jim.
Our next question will come from Tyler Radke with.
Please go ahead.
Okay.
Yeah, Hey, Jim Hey, Kristian.
I just wanted to follow up on.
A couple of points. So first just on the price increase I just wanted to clarify that there was no tailwind to.
To that in Q3.
And then secondly wanted to just hear how come.
Customers, so far are kind of taking that price increase.
Any any pushback just given inflation concerns and then finally for Christian as we think about free cash flow. Obviously, you have been able to maintain if not raised the guide for.
For several quarters here, despite currency headwinds, but but obviously.
Currency does impact they are which drives free cash flow. So how are you just thinking about the cumulative.
Currency impacts on on your free cash flow targets and your ability to to offset those either through slower hiring or other matters. Thank you.
But let me hit the first question and you can take the second one.
The first question was about was there any pricing tailwind yeah sure, but just was not significant so there was a little bit of pricing tailwind, but again to go back through the calculations here.
Only a small amount of our book of business came up in Q3 for renewal and most of these contracts have pre negotiated price increases that we would get.
<unk> whatever level of inflation is out there there is a minority that you can argue.
We have rights to raise their prices higher and some are actually tied to CPI, but most of our contracts are actually pre negotiated fixed.
<unk>.
Fixed price increases.
We'd get them no matter, what the economy and inflation was and then again on the new sales. It's just that our sales cycles are longer than two months.
So when you put a quote in front of a customer and you raised the price you can't take that quote back and stick a more expensive quote in front of them because they get kind of angry.
If they don't take that deal.
Now you can raise it or when you go meet the next customer you can go in with a higher quote.
But it's just that we didn't have enough time to work that.
Price increase through our sales cycle to have it be meaningful too.
What happened in terms of new sales. So like for example, Pepsi raise the growth rate by two points because they raised the price of potato chips and you walk in the store and they're more than they used to be and you pay it but we're not selling potato chips, where selling complex software that has multi quarter sales cycles.
Okay. Thanks.
Hey, Tyler.
Free cash flow.
So yes, it's a function of of <unk>.
As well as some other things and also a function of timing. So as we think about free cash flow for the year.
Again, well over half of our of our collections actually happened in the first half of the year.
When.
FX rates were much more favorable than they are right now.
And as we think about.
The second half of the year there are a number of dynamics that have contributed one we actually had our over performance in the first half.
Some of which shows up in what we'll call. It second half collections. So that also helps that helps we've had slower than anticipated.
Hiring.
Which as well.
We'll call it a cost offset which also helps on the.
On the free cash flow generation.
Then.
We've had modestly better perpetual license performance <unk> performing quite well that's really the only thing that's left that we sell even partially on a perpetual basis.
So thats been.
Another another tailwind.
So you net all those out and we've actually been able to outperform the free cash flow targets here now three quarters in a row and I think we have.
We raised raised the outlook for Q4, and I think we have a good.
Good set up for that as well.
Okay.
Okay. Thank you.
Yes.
And our last question will come from Ken Wong with Oppenheimer. Please go ahead.
Okay. Thanks for taking me in.
Good feedback.
I just wanted to touch on SSG I guess when you guys had a good performance previously it seemed like a one off and now this low single digit business is growing 9% organic just wondering kind of what is the cause of that is it just <unk> there.
And any color on SSG would be would be fantastic.
Yeah.
Yeah. It's a good question, Ken because we did set an expectation of low single digit growth and now it's kind of put belonging.
Pretty high single digit growth.
I think we've just seen better demand than we had anticipated. So for example, if you look at some of the building blocks <unk>.
Service parts management software and they're having a great year.
And then there is what we call flex BLM, which is a special version of windchill that we sell to retail companies Big box stores.
Clothing, and apparel and footwear companies and.
<unk> has been good and the demand has been good theres Arbor taxed on technical.
Documentation.
Type of.
Technology that does structured documents and automated publishing and so forth and Thats performed well. So I think there's actually some good demand and frankly pretty good execution.
The renewal rates in all cases have improved so that's also helpful. So I don't know maybe maybe.
Maybe we shouldnt see that.
<unk> will be able to perform in mid single digits.
Post <unk>, when it's already doing better than that prequel beemer, but.
We will try not to get ahead of ourselves, we're pleased with what's going on.
And with <unk> and there we're pretty sure it's going to be kind of mid single digits at least going forward.
Got it alright, fantastic keep chugging along.
Okay.
Okay is that the last question all right. So Matt has given me the gift.
Give me the signal here I just want to thank everybody for spending time with us today I appreciate you hanging in there.
We look forward to seeing you in 90 days if not before.
Hopefully the economy will kind of macro situation will stay as it has been and we will have some really great news for you and if not I think will be will be okay. Anyway. So look forward to seeing you and have a good evening.
Thanks, everybody.
And that will conclude today's conference. Thank you for your participation and you may now disconnect.
Okay.
Yeah.