Q1 2023 PTC Inc Earnings Call
As to future operating results because such statements deal with future events actual results may differ materially from those projected in the forward looking statements actual information concerning factors that could cause actual 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 todays date February one 2023, and PTC assumes no obligation to update these forward looking statements.
During the call PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today's press release made available on our website.
With that I'd like to turn the call over to Ptc's, Chief Executive Officer, Jim <unk>.
Thanks, Matt Good afternoon, everyone and thank you for joining us.
Turning to slide four I'm pleased to report that despite seeing some incremental macro softness PTC delivered a solid first quarter to kick off fiscal 'twenty three.
And the topline metric of <unk>, we came in at 160 3 billion, which was above the high end of our range and up more than 15% year over year.
The strength was broad based across all product groups and geographies.
Yeah.
Yes.
Sorry about that little interference strength was broad based across all product groups and geographies.
Organic <unk> growth was 14% with code Beamer, then contributing that extra point of inorganic growth.
The strong Q1 results put the company in a position to narrow our original 10% to 14% full year <unk> guidance to 11% to 14% as we feel that the 10% outcome has become increasingly implausible with a solid tier one behind us.
Switching to our bottom line metric of free cash flow, we delivered $172 million ahead of our guidance and up 28% year over year.
We raised our free cash flow guidance for the full year by $15 million.
Currency had little impact to free cash flow in Q1, but it is expected to be incrementally helpful. As the year progresses.
On the subject to currency I'll remind you that Christian will cover the ongoing effects of foreign exchange fluctuations later in the call. So to simplify things I'll focus my discussion on constant currency results when discussing top line metrics.
Turning to slide five shortly after our first quarter closed we completed the acquisition of service Max Service. Max is not included in the Q1 results. We reported that we did incur some acquisition related costs that were a headwind to our nevertheless, strong free cash flow results in Q1.
With the deal now closed service Max will be included in our guidance going forward.
To recap the highlights of this business is now part of PDC service Max is used to manage the service processes for high value long lifecycle products think of products like an MRI machine in a hospital a machine tool in a factory or pumping equipment at a refinery. This has always been a sweet spot for BTC and we.
Many customers matching this profile.
Referring referring to the Infinity diagram on slide five many of you know that Ptc's logo represents the interplay of physical and digital and that logo provides a good way to explain the fit with service Max.
The digital part of our logo refers to when products are under development.
At this point they exist in a purely digital form which has authored in Korea and managed in Wenzhou bean.
Being purely digital at this stage products are easy to change and highly configurable.
Each time, our customers get an order their factories take a configuration of the digital product data that matches, the order and use it as the recipe to produce the physical product, which is then delivered to the end customer.
That's where the physical part of our logo fits in there.
Physical products are very different if you want to change them. For example, you need to dispatch a truck to the customer site carrying a technician and spare parts.
Spare parts are managed in our survey <unk> software.
The technician will need access to similar types of digital product information as what the factory used when creating the product. This service information is created using our protest and before you.
High value products are operated by the customer for years or even decades. These.
These products require regular service to keep them up and running and this service is typically provided by the manufacturer who views the touring service contracts and spare parts sales as a highly desirable source of revenue and profit.
Service Max helps them manufacturer manage their entire installed base of physical product instances and orchestrates all the necessary service activities.
By monitoring the installed base of products thing works out a lot adds a lot of value to service Max.
Does it allows service to be more proactive and preventative in nature and sometimes a service can even be done remotely, thereby canceling the need for a truck roll.
As you can see surface Max has great synergy with <unk> and windchill because on one hand, the service process consumes the digital product data created in engineering in the form of parts catalogs and service instructions.
And on the other hand, the service process is the primary source of feedback that drives ongoing product improvements through engineering change orders or <unk>.
Windchill serves as the system of record for the digital definition of all possible product configurations and service Max serves as the system of record for the actual physical instances are products that exist each of which may have a slightly different configuration.
As the Infinity diagram implies there is a digital thread of product information flowing between these key systems in both directions throughout the product lifecycle.
Aligning service Max with Ptc's various offerings will lubricate this flow of data, creating tremendous business value no competitor has a solution comparable to this.
Equally important as the service system of record service Mats knits together, our existing SLM products, allowing PTC to now offer the industry's first truly comprehensive offering for service management optimization.
You can think of our SLM offering as a hub and spoke model with service Max is the hub and PTC is various other service solutions as spokes. For example thing works Iot connects to an monitors the vital signs of installed products to enable preventative remote service architecture dynamically publishes technical service information.
The match each product configuration in the installed base before you Ah enables this.
Technical service information to be augmented and the each install product to make service technicians more productive and serve as <unk> allows customer service level agreements to be met while carrying the smallest possible inventory of spare parts.
With the acquisition now closed work is underway to enable deeper integration between service mix and these various PTC offering.
I am pleased to announce that Neil barilla.
The CEO of service Max is joining PTC and will preside over this expanded SLM business that now exceeds $300 million of combined <unk>.
Neil and team will unveil a broad new SLM vision at our LIBOR ex conference in May and based on the number of inquiries were getting I expect it to be one of the highlights of the conference.
The strategic fit with service Max is excellent and we're excited about the synergies we can generate by cross selling from engineering to service and vice versa.
And also cross selling between our various SLM offerings within the service domain.
The financial fit is excellent too as the transaction is expected to be accretive to ptc's growth rate as well as the PTC is cash flow and this drove part of todays guidance raises.
Service Max also increases Ptc's total addressable market. The service <unk> business has been growing in the mid teens, which is a few points faster than the market, but we see potential for the business to accelerate the high teens growth overtime as synergistic cross sell opportunities are realized.
Turning to slide six given the elevated focus on profitability and investors all share in today's market.
I want to reiterate the margin expansion program that PTC management has been driving.
The organizational realignment, we did at the end of fiscal 'twenty one.
And the resource rebalancing work, we did during fiscal 'twenty two.
Have created an organizational model for PTC that is both highly efficient and fully sustainable.
When we made these changes we were not addressing a problem per se, but simply pursuing margin expansion opportunities that we have identified the.
The actions we took proved prescient as we're now well positioned for a macro downturn.
While many notable tech companies are announcing layoffs to come to terms of bloated cost structures.
To our proactive actions, we're entering this period of uncertainty with a very lean cost structure, and we do not anticipate any need for layoffs or restructuring.
In Q1, non-GAAP operating margin expanded to 36% compared to 35% a year ago.
That sounds like progress, but due to ASC 606 noise. It doesn't fully capture the full magnitude of improvements we've made.
We prefer to assess our margin progress by focus focusing on a more meaningful metric, we now call operating efficiency.
Operating efficiency is the same metric that we previously called cash contribution margin, but.
But we're changing the name of the metric to be more precise that it is an operating metric not a non-GAAP financial measure.
This is a change in name only the metric is still calculated the same way and still measures how much of our billings were able to convert to cash flow each year.
At the midpoint of our guidance range based on actions already taken we continue to expect this operating efficiency to expand by another approximately 450 basis points in fiscal 'twenty three following the 300 basis point improvement we delivered last year.
The significant operating efficiency improvement when layered on top of double digit growth is what drove the strong Q1 free cash flow result.
And is what will drive that 38% free cash flow growth, we're guiding to for fiscal 'twenty three.
Christian will elaborate further.
Turning to slide seven as you are aware our FY2023 are our guidance range has from the start contemplated the possibility of a potential macro downturn.
In Q1, we saw further signs of a downturn in the form of incrementally softer bookings.
At the same time, we were comforted by strong renewals, which actually improved slightly year over year reinforcing just how sticky are software is.
The net impact of the softer bookings and stronger renewals was a slowdown of about half a percentage point from last quarter's 16% <unk> growth rate.
Taking the Q1, a growth rate down to about 15, 5%.
This was obviously less than we had allowed at the high end of our Q1 guidance range. So our results landed 3 million above the range.
The softness was relatively consistent across various dimensions of the business, suggesting was macro related rather than any type of competitive issue.
The summary is that after posting 15, 5% growth in Q1, we remain well positioned to perform against our financial targets and indeed have raised our guidance accordingly.
Turning to slide eight with Q1 behind us as.
As compared to our original guidance, we're now on track to deliver our growth results within a narrow where 11% to 14% range in fiscal 'twenty three with the low end, having been raised because the 10% outcome is less plausible now given that solid Q1.
Keep in mind. The addition of service Max to a portfolio happens here in Q2, and the inclusion of service Max will recalibrate, the AOR growth range upward.
In a few minutes Christian will outline the new guidance range, that's essentially 11% to 14% plus 1100 basis points more from service Max added on top.
Across this range of IRR outcomes. We've also raised the original cash flow guidance, we provided a quarter ago by $15 million to $575 million, which now represents 38% growth for the full year.
The raise is powered in roughly equal parts by our strong free cash flow result in Q1.
The expected $5 million benefit from the service Max acquisition.
And improving foreign exchange rates.
Should exchange rates hold or further improve FX could prove incrementally helpful. As the year progresses Kristian will elaborate on the various factors involved here too.
Turning to slide nine, let's look at <unk> growth across all geographies.
Our growth in the Americas was 16% and Europe AOR growth was 15%. Despite the Russia exit in Q2 of last year was still affects the growth rate given the trailing nature of our <unk> metric.
Our growth in APAC was 12%.
Across all geographies the largest air our growth in terms of magnitude was driven by continued strong demand for <unk> and windchill PSM products.
In the Americas, we saw the strongest percentage growth in Iot.
Rina windchill and on chip.
In Europe , and APAC the growth rate was highest for arena, which has been expanding outside the U S Army.
Our protect and serve it just takes both delivered strong growth rates in Europe and APAC.
And finally in Europe , Unshapen augmented reality also delivered strong percentage growth.
Next let's look at the performance of our product groups on slide 10.
In CAD, which is those products that enable authoring and product data, we delivered 10% <unk> growth in Q1 in a market that has been growing approximately 8%.
Within this the growth was primarily driven by Korea.
Supplemented by strong percentage growth in on shaping our protest.
<unk>, which includes those products that enable data management and process orchestration for product development or our growth rate in Q1 was 20% or 18% organic with strong growth across all geographic regions.
In <unk>, we continued to significantly outperform the market, which has been growing approximately 12%.
<unk> of our Q1 growth was driven by wind chill.
But including code Beamer.
And arena Iot and retail BLM also contributed the great Q1, <unk> results by delivering strong percentage growth.
I'd like to discuss windshield plus in the context of a new logo customer on slide 11.
Given the importance of our SaaS transformation program as a growth driver I am pleased to see good progress ramping up the new multi tenant windshield plus solution.
While it's still early across a combination of new logo deals as well as lift and shift SaaS conversions.
We now have about a dozen windshield plus customers in production Theyre headed there shortly with dozens more opportunities in the pipeline.
As we said at our Investor Day, we expect an S curve type of ramp over multiple years for a plus offerings and thus far were tracking well to that expectation.
To share a customer story, we landed a new logo deal with a well known Motorsports company. That's a great example of an organization that's reaping the benefits of the streamlined pls implementation experience the windchill plus offers.
This customer has committed to enter a new racing circuit, but faces a tight timeline to get prepared there.
The team needed a pls system to be in place quickly because they are designing a more efficient power unit that needs to be completed and tested in short order and then as usual there'll be a steady diet of changes and improvements thereafter.
With their windshield plus implementation the Motorsports company achieved a production ramp up time of several months, including integration with their hybrid SaaS ERP system.
They got there so quickly by leveraging the out of the box capability of windshield plus delivered by PTC to the customer is the secure pre configured service.
This customer has no dedicated <unk> team so leveraging SaaS applications is an important to enable them to keep their internal efforts focused on racing while improving collaboration across team members in the field and around the globe.
As a reminder, windshield plus is the tip of the iceberg of a bigger plus strategy.
And Youll see us follow with <unk>, plus and similar premium SaaS offerings in FY2023 and beyond.
We are aiming to launch <unk>, plus and the bigger plus strategy at <unk> in May.
I'd like to share another customer anecdote to help you better understand the immense power of our technology.
Turning to slide 12, I want to tell you about an important project from our customers at the U S Department of energy.
I Trust you saw the mid December news that for the first time scientists at Lawrence Livermore National Laboratory have produced a nuclear fusion reaction that generated more energy than it consumed.
This major scientific breakthrough happened at Lawrence Livermore National ignition facility and May pave the way to a future filled with clean energy.
The national ignition facility or Niff is essentially a massive machine of enormous size and complexity.
The NIM is a precision engineered system of systems that generates and then directs 192 powerful laser beams onto a pencil eraser sized area that heats to millions of degrees to ignite the nuclear fusion reaction.
The sports stadium sized Niff machine is all modeled in krill and windchill.
Everything they say, except the walls and the bathrooms.
With three and a half million components. We believe the neff is the largest krio and windchill assembly ever made and very likely the largest assembly ever modeled in <unk>, which is a real testament to the power of our technology.
During our regular collaborations with Doa teams over many years now PTC product teams have been challenged to further develop our products to enable such highly advanced projects in what has proven to be a mutually beneficial relationship.
While substantially more work lies ahead in the effort to harness the potential of fusion energy as demonstrated by the now we're very proud of the role that our technology has played in enabling this early breakthrough.
And the announcement was exciting for many PDC employees, who have been involved including me.
<unk> may very well prove to play a key enabling role in the ultimate ESG breakthrough.
Summarizing on slide 13, while in Q1, we saw incremental signs of a macro slowdown theres a lot going our way right now.
PTC has established itself as the clear category leader in PLO, which has become a must have technology backbone for digital transformation at industrial companies. We just posted another quarter of 18% organic BLM growth well ahead of market peers.
We are conquering the BLM market.
The addition of service Max further extends what was already a unique portfolio of interconnected digital thread capabilities across the full product lifecycle and service Max is expected to be a tailwind to <unk> and free cash flow right from the start.
Both code Beamer and service Max will provide a big boost to our Pls conquest efforts.
Second while the company growth is at a double digit level already we're in the early days, but executing well against a major on premise to SaaS transformation that should provide a multi year growth tailwind.
Third we have a reputation for driving margin expansion that goes back more than a decade and the proactive changes. We've already made are driving high levels of free cash flow growth again this year.
Fourth we're demonstrating that our business model is very resilient topline.
Top line growth and bottom line profitability are at levels that are amongst the best in our industry peer group.
Not many peer companies are projecting the double digit organic top line and 38% bottom line growth. The PTC is guiding to this year.
And finally were led by a team that has deep expertise and proven ability to drive growth and margin expansion.
We're happy to welcome Neil Birla to the PTC executive ranks, because Neil and the entire service Max team share the same depth and passion for the business. That's so important here in the PTC culture.
With so many positive trends going our way I continue to believe PTC as a tremendous opportunity to create shareholder value even in the face of a macro downturn, we've all been expecting.
With that I'll turn it over to Christian for his more detailed commentary on financial results and guidance.
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 15 in.
In Q1, 'twenty three our constant currency <unk> was $1 6 billion up 15% year over year and exceeded guidance.
On an organic constant currency basis, excluding code beamer or <unk> was 159 billion up 14% year over year.
As Jim explained our topline strength in Q1 was broad based we're executing well against our strategy and we're continuing to improve upon the strong market position that we have our SaaS businesses saw continued solid <unk> growth in Q1 as well.
On an as reported basis, we delivered 11% growth 10, 410% organic due to the impact of FX headwinds.
Currency fluctuations were positive in Q1 of 'twenty, three and our as reported <unk> was $60 million higher than our constant currency <unk>. However, on a year over year basis currency fluctuations, we're still a meaningful headwind.
Moving onto cash flow our results were strong with Q1 coming in ahead of our Guy.
Our guidance across all metrics.
Well it was great to see favorable FX movements. During Q1, there was no impact to free cash flow from FX.
Our free cash flow performance in Q1 was driven by strong execution based on a foundation of solid collections and cost discipline.
Cash from operations also came in ahead of guidance by $11 million due to a combination of free cash flow outperformance and the timing of capital expenditures, which were $9 million in Q1 compared to our guidance of $5 million.
When assessing in forecasting our cash flow, it's important to remember a few things.
The majority of our collections occur in the first half of our fiscal year.
Q4 is our lowest cash flow generation quarter.
And on an annual basis free cash flow is primarily a function of a R R rather than revenue.
Q1 revenue of $466 million increased 2% year over year.
And was up 9% year over year on a constant currency basis.
In Q1 recurring revenue grew by $12 million.
Perpetual license revenue grew by $5 million and professional services revenue declined by $9 million year over year.
The decline in professional services revenue is consistent with our strategy to transition some of our professional services talent and revenue to DXP or our partner for windchill, plus lift and shift projects.
As we've discussed previously revenue was impacted by ASC 606, So we do not believe that revenues the best indicator of our underlying business performance, but we'd rather guide you to a R. R is the best metric to understand our topline performance and cash generation.
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.
Compared to Q1, 'twenty two our non-GAAP operating margin expanded by approximately 100 basis points to 36% in Q1 of 'twenty three.
We continue to caution that because revenue is impacted by ASC 606, other derivative metrics such as gross margin operating margin operating profit and EPS are all impacted as well still it's worth mentioning that we're benefiting from the work that we've done to optimize our cost structure in fiscal 'twenty.
Two.
On a year over year basis in Q1, we continue to grow our top line at a faster rate than our spending and delivered significantly higher <unk> and free cash flow.
Moving to slide 16, we ended the first quarter with cash and cash equivalents of $388 million.
Our gross debt was $1 three 6 billion with an aggregate interest rate of four 3%.
Looking forward.
In Q2 in conjunction with the service Max acquisition, we took out a $500 million term loan and increased the size of our revolving credit facility from 1 billion to 1.25 billion.
The net of new borrowings and debt down.
And debt Paydown in Q2 should leave us with $1 billion in high yield notes, the $500 million term loan and approximately $450 million drawn on the revolver at the end of the quarter.
As a reminder.
We also have a second payment for the service Max transaction due in October 2023 of $650 million.
We intend to fund this with cash on hand, and our revolving credit facility.
This deferred payment is included in debt on our balance sheet and is factored into our debt to EBITDA ratio.
We expect our debt to EBITDA ratio to be approximately three four times at the end of Q2.
We should be around three times levered by Q4 and below three times throughout fiscal 'twenty, four and into fiscal 'twenty five as we continue to pay down debt.
Yeah.
To help you with your models in fiscal 'twenty three as it relates to cash flow, we expect total cash interest payments of approximately $85 million.
And as it relates to the P&L, we expect interest expense of approximately $125 million.
Given the interest rate environment, we expect to prioritize paying down our debt in fiscal 'twenty, three and 24 well.
We will pause our share repurchase program and in fiscal 'twenty three we expect our diluted share count to increase by a little under a million shares.
We expect to have substantially reduced our debt by the end of fiscal 'twenty four and we'll then revisit the prioritization of debt pay down and share repurchases.
Despite this interruption our long term goal, assuming our debt to EBITDA ratio is below three times.
It remains 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 17 shows our <unk> by product group.
In the constant currency section on the top half of the slide we use FX rates as of September 32022 to calculate <unk>.
<unk> for all periods.
You can see on the slide how currency dynamics have resulted in differences between our constant currency and as reported over the past five quarters.
Exchange rates continued to move materially in Q1 'twenty three.
Causing a difference between constant currency results in our as reported are our results.
Based on the exchange rates at the end of Q1 'twenty three.
Our as reported <unk>.
In Q2 of 'twenty, three would be higher by approximately $62 million compared to the midpoint of our constant currency guidance and fiscal 'twenty three as reported.
Would be higher by approximately $67 million compared to our constant currency guidance midpoint.
We report both actual and constant currency results in FX fluctuations can obviously have a material impact on actuals.
But remember that we provide our guidance on a constant currency basis, if exchange rates fluctuate significantly between the end of Q1.
In the end of Q2 'twenty three.
The impact to our as reported <unk> would also change.
We believe constant currencies, the best way to evaluate the top line performance of our business because it removes currency fluctuations from the analysis positive or negative.
Given the sharp moves that we've seen recently I thought it'd be useful to provide an updated our sensitivity rule of thumb on slide 18.
In addition to the U S dollar Retrans Act in Euro yen and more than 10 other additional currencies.
Using currency rates at the end of Q1, the impact of a 10 cent change in the euro to USD rate would be $39 million positive or negative and the impact of a 10 yen change in the U S. D to yen rate would be 9 million again positive or negative and.
Of course, the estimated dollar impact to <unk> is dependent on the size of the <unk> business.
With that I'll take you through our guidance on slide 19.
For our <unk> guidance amounts, we're using FX rates as of September 32022.
The previous guidance shown on this slide is from our November 2022, Investor Day presentation and includes service Max.
For fiscal 'twenty, three we expect constant currency <unk> growth of 22% to 25%.
Which corresponds to a fiscal 'twenty three constant currency, our guidance range of $1 nine one to $1 $96 billion.
This narrowed range is based on two primary factors.
First we took up the bottom end of the 10% to 14% guidance range. We provided on our Q4 earnings call, which excluded service mix.
Well, we saw some incremental macro driven booking softness in our first quarter. This was partially offset by better than planned churn.
And our guidance contemplated the potential for a much bigger impact than what we saw and we actually finished $3 million above the high end of our Q1, 'twenty three or our guidance range.
So based on our strong Q1 results and forecast for the year, while still being mindful of the macro environment, we feel comfortable taking up the lower end of the range, which still allows for continued softening due to the macro environment.
Secondly, the other update to guidance is adding approximately $170 million for service mix compared to our Investor day assumption, which was for approximately $175 million.
There's a few reasons we're doing this which include first service Max's fiscal quarters ended one months later than ours.
As we all know the final month of a quarter and a software company is really when the magic happens.
So well I think that ultimately their results will align with Ptc's quarter end hockey stick I also think it is prudent to assume it may take a few quarters to align selling and customer buying behavior.
Second as you know Salesforce dot com as a go to market partner with service Max where it's at 360 product sales.
Salesforce, just announced a fairly sizable reduction in force and while we do not know if or how this may impact service Mac's business in the coming months, we feel it's a valid concern, which we want to account for in our guidance.
And third frankly, the uncertainty of the macro environment applies to service Max as well.
So it's primarily for these three reasons that we're derisking the service Max guidance for fiscal 'twenty, three and adding $170 million to our now updated 11% to 14% guidance range.
With a strong Q1 behind us and given our pipeline and forecast and how we've set our guidance ranges.
We believe we're well positioned to achieve our fiscal 'twenty three guidance.
Note that we expect modestly more deferred <unk> to become <unk> in fiscal 'twenty three.
Then in fiscal 'twenty two and.
And our churn in Q1 was lower than planned.
In dollar terms churn was actually lower in Q1 'twenty three than it was in Q1, 'twenty two and that's against a bigger base of a R. R.
For Q2, we're guiding constant currency <unk> to be in the range of $1 79 to $1 eight 1 billion at.
At the midpoint this equates to 25% constant currency growth.
I'll discuss our Q2 guidance in more detail on the next slide.
On cash flows for fiscal 'twenty three we raised our guidance. We now expect cash from operations of approximately $595 million up 37% and free cash flow of approximately $575 million up approximately 38%.
Compared to the guidance, we provided a quarter ago, our updated 575.
Million dollar target for free cash flow factors in our strong execution and results in Q1 5 million from the service <unk> acquisition, which we already communicated at our Investor day, as well as an increase from FX tailwind for the remainder of the year.
Assuming we hit our Q2 free cash flow target will be at approximately 65% of our full year target similar to in the past two years.
Our capex assumption for fiscal 'twenty, three is $20 million, therefore relative to our free cash flow guidance of $575 million were guiding to cash from operations of $595 million.
For Q2, we're guiding to free cash flow of approximately $200 million.
We expect approximately $5 million of Capex in Q2, and therefore, our cash from operations guidance is approximately $205 million.
As you model the quarters of fiscal 'twenty three keep in mind, we expect the quarterly distribution of full year cash flow results to follow a similar pattern as in fiscal 'twenty, two and fiscal 'twenty, one with over 60% of cash flow in the first half of the year in Q4, being our lowest cash flow generation quarter.
Moving on to revenue guidance, we raised.
Which we raised from our November 2nd guidance, primarily because of service Max and currency.
For fiscal 'twenty, three we expect revenue of 2.07 to $2, one 5 billion.
Which corresponds to a growth rate of seven 211%.
ASC 606 makes revenue fairly difficult to predict in the short term for on premise subscription companies, hence the wide range.
More importantly revenue does not influence or cash generation as we typically are typically billed customers annually upfront regardless of term links.
Turning to slide 20, here's an illustrative constant currency our model for Q2 'twenty three.
You can see our results over the past nine quarters and in the far right column, we've modeled the midpoint of our Q2 constant currency guidance range.
Because our <unk> tends to see some seasonality the most relevant compare.
Is Q2 of 'twenty two.
The illustrative model indicates that to hit the midpoint of our Q2 'twenty three guidance range of $1 8 billion.
We need service Max <unk> of approximately $160 million, which is what we said at Investor day, and believe is a reasonable target.
On top of the surface service Max contribution, we need to add $37 million of organic.
On a sequential basis.
This is $19 million less than the $56 million, we added in Q2 of fiscal 'twenty two in percentage terms, we need that.
We need 2% organic sequential <unk> growth to hit our guidance midpoint for Q2, which is at the lower end of what we've delivered over the past nine quarters.
All things considered we believe we've set our Q2 'twenty three constant currency our guidance range prudently.
Turning to slide 22.
I'll conclude my prepared remarks today by highlighting that we are prepared for a storm and expect to be resilient in the face of one from a topline perspective, we serve industrial product companies and R&D at those companies tends to be quite resilient. So we have a supportive topline backdrop.
We also have a subscription business model and our products are very sticky with our customers.
Just as importantly from a cost perspective, we've already battened down the hatches. In addition to the cost optimization work. We did last year, we've already slowed planned hires in backfill as we head into Q2.
Nevertheless, as we've said in the past, we don't have a pollyanna type view when it comes to the macro situation.
We have a strong track record of disciplined operational management and if the macro situation gets meaningfully worse, you can expect us to moderate our spending further to better align spending with market realities and mitigate the impact on our fiscal 'twenty three cash flow results.
For example, variable compensation will automatically adjust and depending on the magnitude of the downturn.
Would also be incrementally more cautious on hiring and marketing spend travel et cetera on.
On the other hand, if the macro situation improves.
<unk> if the dollar weakness continues this would be favorable for our cash generation and in that scenario, we would have the optionality to invest more aggressively in our business.
There's no question that the macro environment is hard to predict nevertheless.
We've contemplated one strong quarter of fiscal 'twenty three.
Completed one strong quarter of fiscal 'twenty, three and are positioned to continue producing attractive financial results based on our strong product and market position, coupled with solid execution and prudent financial management.
With that I'll turn the call over to the operator to begin Q&A.
At this time in order to ask a question Press Star then the number one on your telephone keypad. We ask that you. Please limit yourself to one question. If you have additional questions. Please press star one again to reenter the queue and your first question comes from the line of Matt Hedberg from RBC capital markets. Your line is open.
Great guys. Thanks for taking my question congrats on.
Congrats on the strong results guys.
Jim you guys are pushing the envelope of SaaS beyond many peers that we talked to which is which is obviously great. I guess two part question do you think that's resulted in sort of a larger pipe pipeline coverage ratio than maybe a year ago and with your plus strategy do you think the opportunity for <unk> and CAD.
Placement.
Could accelerate as well.
Yeah.
<unk>, let's say.
Certainly the plus strategy in SaaS here at PTC is helpful to the pipeline because first of all when deals come in as SaaS. They come in twice the size as they would've been had they been on premise. So right away you have a factor there, but I'd also say the interest level is quite high I mean, I think if you come to if you come to LIBOR, because you're going to see.
Lots of customers are going to come just to learn about SaaS because they are interested there's we're at that phase where everybody's interested some people will bite sooner than others, but everybody wants to hear about it and start thinking about it and understand how it plays into their future.
And then on the on the competitive.
Replacement opportunity I do think that some of our competitors are laggards with SaaS or they're doing SaaS in a pretty hokey way.
For example, we have a French competitor, who is trying to become a hyper scaler and when you when you place an order with them they turnaround by hardware to hosted on between you and me I don't really think Thats. The right strategy and I think a lot of companies are going to say I don't actually want to buy into a strategy like that because of the day. It all collapses I'm a little bit out in the cold so.
I do think that people are going to say, we need to go to SaaS. If my vendor doesn't have a good story I should shop around and at PTC, we have a mature proven products like grill and windshields it'll be available in an honest to God true SaaS form not unlike for example, Microsoft Office 365.
And then on the other hand, if you want to go full bore clean slate right from the start peer SaaS, while we have on shaping arena, which are the SaaS products and our entire industry. So I do think we're going to get some amount of people moving to SaaS and switching vendors at the same time and as you said, we're way out there ahead of people without.
Pretty serious well thought out strategy.
Thanks, Jim Congrats.
Your next question comes from the line of Matt Broome from Mizuho Securities. Your line is open.
Thanks, very much hi, Jim Yeah.
Okay.
Hi, how is the <unk> growth during the quarter.
It hasnt been impacted at all by the reallocation of resources there.
I think where growth was pretty steady.
No doubt the reallocation of resources isn't actually helpful.
Two just Standalone thing works growth, but I think it's actually been quite helpful to PTC growth.
Very very helpful to PTC cashcall.
Instead of hiring new new resources that would consume cash flow, we moved resources around and let that fall to the bottom line. So I think probably not helpful. The thing works, although it thing works.
She is clipping along at a decent growth rate, but very helpful to PTC altogether kind of neutral to growth altogether very helpful. The gas flow.
Okay, great and if I could just also ask.
Channel continues to lag direct growth.
On a constant currency basis can you talk about why go through a little bit slower in the channel.
I guess with your partners and what might be done sort of bring that more in line with your direct business.
Well I think they simply are more impacted by the macro situation.
When the economy was strong our channel was growing faster than direct and I think a small companies have less.
Room, if you will too.
Less capacity to weather a downturn, so theyre more conservative so I think in a in a downturn situation small and medium businesses, which is what our channel coverage. They are the first ones to start getting conservative on spending and we've seen that I think are for example, a lot of start up companies arent hiring and if they're not hiring they don't need expansion.
And so forth.
So I would attribute that.
The channel is relatively more macro sensitive than the direct sales force.
On the rebound goes the other way of course.
Right makes sense, okay. Thanks, again and congrats on the results.
Thank you. Your next your next question comes from the line of Tyler Radke from Citi. Your line is open.
Hey, Todd.
Hey, good evening.
Jim Good evening Christian.
So a question just on the bookings commentary so I think last quarter. Your base case was for flattish year over year bookings for the full year I'm, just kind of get to that 12% AOR growth, obviously pre service Max.
When you say you saw bookings weakened did bookings go negative during the quarter and we are.
Where is kind of your underlying assumption.
For the full year on bookings.
Yes, Tyler I mean, so we thought a lot about how to describe this end.
What we really <unk> is transparency to how bookings and macro effect because they are ours. The key metric and we are in this funny situation where.
You know what happened in the quarter didn't align to any of our scenarios because bookings was a little softer insurance frankly was shockingly good.
So what we decided is.
If we really want to tell you what exactly happened to bookings, we're gonna have to tell you exactly what happen to churn and we probably ought to tell you what happened to deferred and then maybe we ought to get into a year over year comps because.
As you know bookings is where the volatility is so we decided we will disclose it.
We'll quantify it as half a percentage point of slowdown so half a percentage point is you can do the math, it's about $8 million on $1 603.
We had $8 million less in bookings than what it took to maintain a 16% growth rate, but $3 million more in bookings than what it took to hit the high end of the of the guidance range. We gave you.
I think if you look at it that way in the year now we've lost $8 million and that'll show up four quarters and it won't compound, but the $8 million will show up in the next four quarters.
As we look forward you know the pipeline looks pretty decent the forecast looks good.
The real question will be close rates does the business come in or not.
And that's sort of an unknown, but you know to US Q1, while it was a little bit softer than the previous two quarters actually was not a bad quarter.
No. That's that's super clear, Thank you and just a follow up so you know.
Going back to one of the questions on.
The competition, maybe broader than just what you're seeing as it relates to SaaS.
Talk about.
You know, maybe the strength youre seeing in Pls more broadly and obviously the growth rates, you're you're posting on our organic basis or kind of above market, who who do you see your you're taking share from.
Any anything from a prada.
Product perspective, you'd highlight.
Yeah I mean.
Nothing changed materially in the quarter, but to kind of remind you just in general what's happening you know SAP is giving up share oracle's, giving up share.
In our view this always given up quite a bit of share because we pass them in the last year and we're opening up quite a gap now.
And we think Siemens has given up some share.
Siemens has been posting actually negative numbers in terms of PLO growth of late and it'll be interesting to see at the next earnings report I encourage it I'll dig in.
I'm trying to parse it apart because I think Siemens is losing a lot of momentum they have some structural changes happening. So it's a little hard to kind of tease it all out and they don't provide much disclosure, but you know.
Youre going to see.
Siemens would be our toughest competitor and youre going to see us post.
No growth rates approaching 20% and it wouldn't surprise me if there is a negative number on the front of it when they report this quarter.
Thank you.
And your next question comes from a line of Steve Tusa from Jpmorgan. Your line is open.
Hey, guys. Thanks for taking my question.
I'm, sorry, I'm, not I'm kind of new to covering you guys and so the math, maybe it's a little bit tricky, but like you said last quarter that I think it was a.
Low single digit constant currency bookings growth year over year.
Trouble, putting what you just said kind of all together what does that actually mean on a year over year constant currency bookings growth.
Rate for this quarter I mean, we.
We don't we don't.
Disclose we don't report bookings, we don't guide bookings, we provide color and because again the scenario was a little strange compared to the guidance scenarios softer on bookings stronger on.
On free cash flow to avoid having to disclose a lot more detail we netted it out.
And netted it out as.
You know better than guidance.
But a slowdown of about $8 million for the year half a percentage point yeah. Okay got it that's helpful. And then just lastly on on free cash flow.
Pretty strong.
Even seasonal even even how you talk about it with.
A decent amount coming here in the in the first half of the year, assuming you hit the $200 million.
Receivables were a big positive.
At least on a GAAP basis.
And anything else moving around and in working capital that.
You know kind of overdraft at all or is this kind of back in line with what you guys were expecting.
Yeah.
In General I think it was largely in line with what we were expecting Steve.
Okay, Yeah, I mean again solid collections performance.
Yeah.
It gets a little bit Steve like what the IRR situations, where you know our guidance contains a little bit of a buffer and we didn't need it.
Yep Yep.
Congrats on the good result.
Great. Thank you.
Our next question comes from the line of second Kelly <unk> from Barclays. Your line is open.
Oh.
Oh, Hey, Hey, Jim Hey, Hey, Christian Thanks for taking my question here.
Jim maybe maybe you could just I'd love to dig one level deeper just into sort of the.
That dichotomy right the softer bookings, but then also the lower churn maybe just on the softer bookings piece are those deals that are pushing those deals that are still in the pipeline.
Or are they ones that you think just got pushed indefinitely and then on the lower churn piece.
Great great to hear particularly with the hiring environment how much of it is maybe the some of the price adjustments that we did that we did last year, maybe factoring into that as well.
Yeah, well, let me address the churn piece first and I'll circle back to the bush or a cancellation on bookings.
On churn you remember that we gave you scenarios that had churn.
Getting worse.
We were clear we have no evidence that that is happening or will happen just seems prudent to allow for the possibility.
So we're allowing for a possibility that would require a reversal in trend, but we did not get the reversal in trend, we got actually more of the same improving trend.
And I think we were clear that.
Certainly pricing helps but it doesn't really account for the strength, we're seeing I mean, the strength we're seeing is.
Fundamentally just good renewals.
To put in perspective, you know Korea and when shell.
Represent roughly 70% of our <unk> just those two products and if you took the churn rate for creon winch all in the quarter and you annualize that for the entire year it would be less than 3% churn on those two massive product basis. So I mean, we're talking about fundamentally strong adoption of our technology.
<unk> mission critical technology, you can switch from it you can't stop using it you can't stop paying for it.
Unless your wind in your business down so.
I think it's just good fundamental sticky software that people are continuing to use and I think there's not really a lot of layoffs happening in our AR.
And our marketplace right now our customers.
A lot of layoffs happening in tech, but I don't think so many engineers in the world of product development.
For physical products getting laid off.
And then coming back to the pushing council I mean, I think it's mostly push.
What happens is typically you know you've got a purchase order and need some level of approval you know me.
Last quarter it needed a higher level of approval another signature maybe somebody sat on that signature because of this and could we do this next quarter because we start this project a little later, so I think it's pushing there's no competitive dynamics and generally it's not being canceled because companies do need this technology, they're just delaying a little bit the second.
Factor would be.
Expansion, sometimes are driven by hiring.
Our company is hiring a lot of engineers well now they need to go back and buy more Tad BLM seats for those engineers, there probably is a slowdown in hiring.
Which you know is slowing down expansions, but nothing nothing structural happening, it's just sort of the natural delays that cholesterol. If you will and it gets in the way of doing deals when people are getting nervous about the economy.
It makes a lot of sense. Thanks, Jim.
Yeah.
Your next question comes from the line of James Lee Shower from Griffin Securities. Your line is open.
Thank you good evening gentlemen, Christian.
Jim for you first.
Over the last couple of years at least to the active bases for both Korea when winter will have seemingly grown at at least a mid single digit rate at least by our calculation.
Which correspond to the share gain for each we've been able to document.
How are you thinking about the active base growth from here for both of those products and perhaps more broadly.
So if we'd gone through so many evolutions of both those markets over the last many years what from here do you think are the critical functionalities.
Within cat and Peel that to continue.
Our sustained growth in.
In those businesses, maybe Judy or something else that you care dimension and then secondly, maybe.
Maybe for Christian.
You've done well in terms of product releases adhering to the roadmap.
But you do have the smallest R&D budget and your peer group.
So how are you thinking about orchestrating or managing R&D productivity from here to keep executing on the roadmap in the context of containing your expenses.
Yeah.
Okay, you got a couple of different questions for me there, let me say.
The wildcard J is what happens with the economy, there's nothing again structurally happening that would cause our share.
Share gain or our seat growth to differ from the trend as it has been other than just <unk>.
Macro slowdown and in the past like in 2020, one there's a macro slowdown than we had an acceleration on the back end of it we had.
A tough quarter and I think it was Q3 right Christian or was it Q Q3 of 2020 and a monster quarter in Q4, and it was like a snap back to where we were so even if there's a slowdown we might get that effect, but that's the wildcard otherwise nothing in the industry is happening that would.
That would in my view change the trend.
In terms of.
In terms of some of the critical functionality, yes generative design is important the answers simulation is important but the thing I think is really carrying the day is this concept that our guys call model based enterprise and what that really means is companies are trying to make two D drawings go away.
In the World of Engineering, there has been forever, a really messed up process, where engineers create <unk> models to really conceptualize the parts and how they fit together and to stimulate them with technologies like answers.
And everything is done in three D. And then the very last step is they convert that all to two D drawings, they dumb it down and leave a lot of information behind and the drawing it gets sent out to the supply chain into the factory and everything else.
And then for example at suppliers they get these drawings and a turnaround and remodel them in three D and in the factory gets the data and they might have to remodel. So they can generate tool paths off it and whatnot. So the industry has said for a long time, we shouldn't need drawings, but we need to figure out how to get different processes that aren't so dependent on them.
All the procurement processes the supplier collaboration problem processes are based on drawings and red lines and so forth.
What's happening now is many many companies are saying okay. This is yet that drawing process has to go now what we have to do is model it and <unk>. It has to be three D.
<unk> three D models go out to suppliers annotated three D models go down in the manufacturing process annotated three D models and up in the service process theres not going to be any more drawings now that requires a lot more adoption of cat because suddenly now a lot more people.
Need a CAD seat rather than a acrobat viewer pdfs seat if you will.
We're not just talking about dealing a PDF out when I was talking about interacting directly with the three D. Data. So I think that's a driver for the whole industry, but I certainly can tell you here at PTC it to driver many more seats.
Ken software sold when a company decides to move away from dry and then their side. They can shed a whole department down and it's a department that not only leaks value it.
Actually actively destroys it by dumping data down that then has to be smart and back up by somebody else downstream. So I think that's a big factor this model based enterprise stuff.
That's the whole capability around annotated three D models, and whatnot viewing technologies and markup in collaboration but certainly generative design and stimulation three D printing additive manufacturing those are all quite interesting as well now finally.
And your last question about the smallest R&D budget.
I'm, an R&D guy so us.
I'm not going to lose and we have not been losing the product battle, we've actually been winning the product battle and I think what it is is just you know R&D is not about body count. It's about strategy. It's about project selection, it's about execution.
Some of our.
Larger competitors spend a lot of time and energy developing nonsensical products products that don't work don't make any sense Autodesk was famous for that for many years, but.
Some of our some of our French and German competitors ranch in particular, they develop a lot of <unk> experience blah blah blah.
These are products that actually mean anything to anybody but those engineers working on them. So I think at PTC, which is much more serious much more focused.
We prioritize what we do we execute it well we don't get into many rework loops, which is very efficient and I think that's the winning recipe throwing bodies at R&D is not a winning strategy executing a good strategy efficiently is what it takes to win and we're doing fine in the product front you know you know this or.
Products are very strong and if anything getting stronger. Despite the fact that we spend less in R&D and then finally, one last comment it's not like we don't spend much on R&D Credo has 500 engineers working on it Windchill has 500 engineers working on it you know if you have 1000 engineers on it you just have more people tripping all over each other so.
I think also I don't want you to think we don't spend much. We just we don't we're not quite as extravagant as other people, but we're executing very very well within what is a substantial spend envelope.
Thank you very much Joe.
Thanks.
Your next question comes from the line of Adam Borg from Stifel. Your line is open.
Awesome. Thanks, so much for taking the question maybe just two quick ones just first Jim just on the incremental softness and the macro it doesn't sound like things got any soft in the month of January and of course generate a small amount to begin with but just any commentary there on how demand trends have started so far in the month of January and maybe just as a follow up on service back.
Obviously, he's really compelling just curious now that the acquisition closed.
Early customer feedback is not for both customers and prospects. Thanks, so much.
Yeah. So on the first question Q2 again.
At the start of the quarter here were more or less still at the start of the quarter because you know.
If you look at our quarter a majority of our business is done the third month of a quarter. So it's very difficult in the first month that to really understand.
How things are trending I mean, we're starting the quarter with a decent pipeline, we're starting the quarter with a decent forecast. The real question will be in the last week or two of the quarter are we able to close these deals or do they slide.
If they slide bookings will be soft again, if they close actually we'll have a pretty stellar bookings quarter. You know based on the based on how things are forecasted at the moment or maybe we'll end up somewhere in between.
What was the second question, sorry, I didn't write it down.
So if there was a mass yet.
Service Max I mean, you see I'm very excited about it.
You can probably sense that through the call here, that's because customers are really excited about it I mean, we had a thesis on what this was going to mean.
We've gotten into it we've found how many customers had independently purchase software from both of US but also how.
How many customers you know service Max has that looked like PTC customers and how many customers PTC have that looked like they should be servicing <unk> customers and a lot of common customers immediately contacted me immediately contact Aneel and said Hey can we get together can you fly out and see US can we come visit you.
Want to hear the story.
So were pushing back a little bit on him, saying could you just give us a little bit of time to figure out the details.
So we're really targeting that for LIBOR I mean, obviously, we'll talk to a lot of customers before LIBOR, but that'll be kind of the grand unveiling of that sort of infinity concept that I had in that slide.
And I think it'll be very exciting I think there'll be many many excited customers.
Rob.
One more question today.
Okay.
Your next question comes from the line of Jason Salina from Keybanc capital markets. Your line is open.
Yeah.
Hey, Jim and Christian Thanks for fitting me in maybe just.
A quick one.
Been hearing.
Different customers and organization is trying to use <unk>.
More within their organizations.
When we think about the expansion is it expanding the different departments and teams or is it product development, just becoming a more critical.
Role within an organization.
Or would you kind of quantify.
This secular dynamic.
Yeah, I think maybe a couple of thoughts you know one one thing I've said, Jason is that Pls is moving from a nice to have to a must have and for example, this concept I was talking about earlier model based enterprise, where youre going to interact with three D models and three D models are too big to email around by the way when you're interacting with the three DS.
It's not one file it can be dozens hundreds or thousands of files and you need the system to find them all and fit them together and presented to you. So that you can understand what's going on so I think what's happening. This is all forms of digital transformation is that companies are saying, we're going to get rid of paper drawings and PDF files, we're going to go to three D. There.
For everybody in the company, who interacts with product data is going to need to peel them seat and theyre going to need some type of a three D C might be a viewer might be CAD whatever.
But it's driving a proliferation of Peel EM out from the engineering Department, where it's always been into purchasing into manufacturing now into the service technicians.
We pretty quickly envision service technicians out in the field on their phone interacting with three D models, when they're standing in front of a piece of equipment, if not augmenting it right onto the piece of equipment.
So I think that's what's happening is it becoming a true enterprise system versus a departmental system. While at the same time, it's becoming a must have rather than a nice to have I think it's those trends that are really driving this proliferation of peel them, which frankly is good for the whole industry, but I think PTC has taken share in the industry at the same time.
Okay, great. Thanks, well look forward Tomorrow and live works right.
Okay. So let me let me just wrap up here. Thank you all for spending time with us in the next quarter, we have quite a busy investor schedule. So I just want to share with you some of the things happening in case, you want to participate so Christian and I together are.
Going Tomorrow, and Friday, we're gonna Tomorrow at dinner and Friday in the morning, we're going to participate in RBC Road show in New York.
Then on February 27th we're hosting a headquarters visit the J P. Morgan is conducting here in Boston.
On March 8th we're both going to the Morgan Stanley TMT Conference in San Francisco.
Meanwhile, on my own behalf I'm going to the Wolfe Conference.
In New York on February 28th.
Christian Additionally is going to the Baird conference in Utah in March 2nd to the J P. Morgan Global High yield conference in Miami on March 6th and Christian has gone on a Barclays virtual bus tour.
Hosting of Barclays Virtual bus tour on March 15th and then one of our executives Kevin ran who's our chief product Officer is doing the virtual conference on March 13th So lots of IR touch points here in the coming quarter hope to see many of you you know in a course of one or more of those events and if not hope to catch it.
And in about 90 days on our Q2 earnings call. So thanks, again and have a good evening everybody.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Uh huh.
[noise].