Q2 2024 PTC Inc Earnings Call

Operator: Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to PDC's 2024 second quarter conference. During today's presentation, all parties will be in a listen-only mode.

Good afternoon, ladies and gentlemen, thank you for standing by and welcome to Bd's East 2024 second quarter Conference call. During today's presentation. All parties will be in a listen only mode. Following the presentation. The conference will be opened for questions I would now like to turn the call over to match them out.

Matthew Shimao: Following the presentation, the conference will be open to questions. I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Speaker Change: P. P C as head of Investor Relations. Please go ahead.

Matthew Shimao: Good afternoon. Thank you, John, and welcome to PPC's fiscal 2024 second quarter conference call. On the call today are Neil Barua, Chief Executive Officer, and Kristian Talvitie, Chief Financial Officer. Today's conference call is being broadcast live through an audio webcast, and a replay of the call will be available later today at www.ppc.com. During this call, PTC will make forward-looking statements, including guidance as to future operating results. However, because such statements deal with future events, actual results may differ materially from those projected in the forward-looking statement.

Matthew George Hedberg: Good afternoon. Thank you John and welcome to Ptc's fiscal 'twenty 'twenty four second quarter conference call on the call today are Neil <unk>, Chief Executive Officer, and Kristian Talvitie Chief Financial Officer. Today's conference call is being broadcast live through an audio webcast and a replay of the call.

Matthew Shimao: Additional 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 today's date, May 1st, 2024, and PTC assume During the call, PTC will discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.

Matthew George Hedberg: All will be available later today at Www Dot PTC dot com.

Matthew George Hedberg: During this call PTC will make forward looking statements, including guidance 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 additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements.

Matthew George Hedberg: 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.

Matthew George Hedberg: Forward looking statements, including guidance provided during this call are valid only as of today's date May one 2024, and PTC assumes no obligation to update these forward looking statements.

Matthew George Hedberg: During the call PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures. 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 cheap.

Neil Barua: A 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, Neil Barua. Thanks, Matt.

Neil Barua: Executive Officer, Neil Barbara.

Neil Barua: I'm proud of what the PTC team accomplished during our second fiscal quarter. We again delivered solid results, which Kristian will take you through in detail. This quarter continues to demonstrate that PTC is on the right track and that our portfolio of products is responding to us. Before going into more detail about our strategy and discussing some proof points from the quarter, I'd like to address our midterm targets, which we have updated today. To be clear, we are not changing our cash flow guidance.

Neil Barua: Thanks, Matt I'm proud of what the PTC team accomplished during our second fiscal quarter. We again delivered solid results with Christian will take you through in detail.

Neil Barua: This quarter continues to demonstrate that PTC is on the right track and that our portfolio of products is resonating with customers.

Speaker Change: Before going into more detail about our strategy and discussing some proof points from the quarter I'd like to address our midterm targets, which we have updated today.

Neil Barua: To be clear, we are not changing our cash flow guidance what.

Neil Barua: What we have updated is our mid-term ARR growth target. We are now targeting constant-currency ARR growth in the low double digits over the mid-term, which is consistent with the performance we have delivered over the past five years in varying macroeconomic conditions. In addition, we feel very good about our ability to hit our cash flow targets, even while we appropriately reinvest in the business for product development. This is because we have a disciplined process to manage our internal spending based on the level of ARR growth we are experiencing. This year, as an example, our internal spend framework assumed 10 to 12% ARR growth. In addition to adding incremental investment to drive multi-year growth, we are also proactively managing our existing spend.

Neil Barua: While we have updated our midterm AOR growth targets, we are now targeting constant currency <unk> growth in the low double digits over the midterm, which is consistent with the performance we have delivered over the past five years through varying macroeconomic conditions.

Neil Barua: In addition, we feel very good about our ability to hit our cash flow targets, even while we appropriately reinvest into the business for product development.

Neil Barua: This is because we have a disciplined process to manage our internal spending based on the level of AOR growth, we're seeing there.

Neil Barua: This year as an example, our internal spend framework assumes 10% to 12% <unk> growth.

Neil Barua: In addition to adding incremental investment to drive multi year growth. We are also proactively managing our existing spend.

Neil Barua: We are able to do this effectively by leveraging the skill sets of our global R&D team, where we can shift the focus of these resources towards the product areas that create the greatest customer value. In addition, we have confidence in generating increasing operating leverage from our go-to-market and GDH strategies. The investments we make are aligned to the market environment and our five focus areas to ensure appropriate resource allocation towards the areas that create the greatest customer value.

Neil Barua: We are able to do this effectively by leveraging the skill sets of our global R&D teams, where we could shift the focus of these resources towards the product areas that create the greatest customer value.

Neil Barua: In addition, we have confidence in generating increasing operating leverage from our go to market <unk>.

Neil Barua: The investments, we make are aligned to the market environment and our five focus areas to ensure appropriate resource allocation towards the areas that create the greatest customer value add.

Neil Barua: As an example, we are currently in the process of rebalancing research, primarily in R&D, away from creating new standalone IoT and AR applications to instead support PLM, ALM, and SLM growth. While these are not huge movements of people, and there will not be a restructuring charge associated with this, it is an example of how we plan to put a greater focus on driving our priorities more effectively. As a reminder, our five focus areas include number one, PLM, which is driven primarily by our Windshield product; number two, ALM, which is driven by our CodeBeamer product. Number three, SLM, which is primarily driven by ServiceMax. Number four, CAD, which is driven primarily by Creo.

Neil Barua: As an example, we are currently in the process of rebalancing resources, primarily in R&D away from creating new Standalone, Iot and <unk> applications to instead support Peel.

Neil Barua: NSO growth also.

Neil Barua: These are not huge movements of people and there will not be a restructuring charge associated with this.

Neil Barua: He is an example of how we plan to put a greater focus on driving our priorities more effectively.

Neil Barua: And lastly, number five, our continued focus on SAP. I'd like to turn now to discuss two of our focus areas to illustrate the significant value we bring to customers. This quarter, I'll touch on what we have been seeing with customers of our Windchill PLM and ServiceMax SLM products, starting with PLM. This is Product Lifecycle Management, and Windchill is our flagship PLM product. PM systems tend to be highly configured, really sticky, and are a mission-critical system of record for our customers. This is software that historically had the function of helping CAD engineers keep track of their CAD files.

Neil Barua: As a reminder, our five focus areas include number one P O N, which is driven primarily by our <unk> product.

Neil Barua: <unk> two <unk>.

Neil Barua: <unk>, which is driven by our <unk> product number three <unk> lab, which is primarily driven by service Max number for CAD, which is driven primarily by Korea, and lastly number five our continued focus on SaaS.

Neil Barua: I would like to turned out to discuss two of our focus areas to illustrate the significant value we bring to customers.

Neil Barua: This quarter I'll touch on what we have been seeing with customers of our windshield P. L M and service Max and <unk> products.

Neil Barua: With P. L. App. This is product lifecycle management and windchill is our flagship product <unk>.

Neil Barua: <unk> systems tend to be highly configured really sticky and our mission critical system of record for our customers.

Neil Barua: This is software that historically had the function of helping cat engineers keep track of their CAD files.

Neil Barua: Part of the reason PTC's growth has been so solid over the last few years is because PLM systems have grown in importance at product companies. Today's products are more complex, typically with embedded electronics and software, and even the mechanical components are now more complex. To drive revenue growth, product companies have become increasingly focused on producing more variants of their products, mixing certain hardware configurations with other software configurations, while at the same time compressing the time it takes to get new products to market. That's a tall order.

Neil Barua: Part of the reason Ptc's growth has been so solid over the last few years is because <unk> systems have grown in importance at product companies today.

Neil Barua: Today's products are more complex typically with embedded electronics and software and even the mechanical components are now more complex.

Neil Barua: To drive revenue growth product companies have become increasingly focused on producing more variance of their products.

Neil Barua: Mixing certain hardware configurations with other software configurations, while at the same time compressing the time it takes to get new products to market.

Neil Barua: Simply put, product companies that offer multiple configurations of their products face a diversity at scale challenge. And sooner or later, it becomes clear to these companies that having an advanced PLM system is a strategic necessity. In general, manufacturing companies have a long way to go in terms of their digital transformation journey. When a product company gets really serious about optimizing and automating their workflows, we tend to see large PLM expansion projects.

Neil Barua: That's a tall order simply put product companies that offer multiple configurations of their products.

Neil Barua: Firstly at scale challenge and sooner or later it becomes clear to these companies that having an advanced <unk> system is a strategic necessity.

Neil Barua: In general manufacturing companies have a long way to go in terms of their digital transformation journeys.

Neil Barua: When a product company gets really serious about optimizing and automating their workforce, we tend to see large BLM expansion projects.

Neil Barua: This creates a step-function increase in ARR as customers expand their windshield deployments in terms of both seats and functionality. This is what we saw at a leading medical equipment company with over $5 billion in annual revenue and 20,000 employees. Getting new products to market faster is a top business priority for them. As a first step, they standardized on Windchill with R&D across all their business divisions and harmonized their engineering practices related to product changes and configuration management. By doing this, they established a solid engineering foundation that ensures the traceability of work performed and updates made for both productivity gains and also to remain compliant with regulations.

Neil Barua: This creates a step function increase in <unk> as customers expand their windchill deployments in terms of both seats and functionality.

Neil Barua: This is what we saw at a leading medical equipment company with over $5 billion of Rep annual revenue and 20000 employees.

Neil Barua: Getting new products to market faster is a top business priority for them.

Neil Barua: As a first step they standardize on wind show within R&D across all their business divisions, and harmonize their engineering practices related to product changes and configuration management.

Neil Barua: By doing this they established a solid engineering foundation that insurers that traceability work performed and updates made for both productivity gains and also to remain compliant with regulations.

Neil Barua: Before standardizing on Windchill, this customer did not have an authoritative source of truth for their product data. So, whenever they ran into conflicting product data in their system, they lost a lot of time figuring out why that happened and what to do about it. While the first step for this customer was expanding the windshield within R&D, they also wanted to accelerate their new product introduction timeline. To do this, they needed to drive earlier collaboration around new products across other operational functions outside of R&D.

Neil Barua: Before standardizing on wind chill this customer did not have an authoritative source of truth for their product data.

Neil Barua: So whenever they ran into conflicting product data in their system. They lost a lot of time figure out why that happened and what to do about it.

Neil Barua: While the first step of disgust arm was expanding windshield within R&D. They also want to accelerate their new product introduced introduction timelines.

Neil Barua: To do this they needed to drive earlier collaboration around new products across other operational functions outside of R&D.

Neil Barua: To accomplish this goal, they decided to leverage their Windchill system as a backbone for enterprise-wide collaboration around product data, and they expanded their Windchill deployment to teams including manufacturing, supply chain, quality, regulatory, compliance, and marketing. For example, providing the supply chain team with relevant product data earlier in the process enables any issues around component availability or component pricing to be identified earlier, resulting in less need for products to be redesigned or reworked later.

Neil Barua: To accomplish this goal they decided to leverage their winchell system as a backbone for enterprise wide collaboration around product data and the expanded their winchell deployment to teams, including manufacturing supply chain quality regulatory compliance and marketing.

Neil Barua: For example, providing the supply chain team with relevant product data earlier in the process enables any issues around component availability or component pricing to be identified earlier, resulting in less need for products to be redesigned or rework later.

Neil Barua: Turning to the second customer example for today, which is about cross-selling ServiceMax, SLM, and Torvay. First, a reminder that SLM is Service Lifecycle Management, and our main product here is ServiceMax, which we acquired a little over a year ago. ServiceMax is the industry leader in field service management for high-value, long-lifecycle, Our customers are not only facing complexity challenges. Globalization has forced companies to be more efficient if they want to remain competitive.

Neil Barua: Turning to the second customer example for today, which is about cross selling service Max SLM into our base.

Neil Barua: First a reminder, that SLM is service lifecycle management and our main product here as service packs, which we acquired a little over a year ago.

Neil Barua: Service Max as the industry leader in field service management for high value long lifecycle products.

Neil Barua: Our customers are not only facing complexity challenges competitive pressures have also increased.

Neil Barua: <unk> is force companies to be more efficient if they want to remain competitive they are looking for new steady sources of topline growth and margin expansion in.

Neil Barua: They are looking for new steady sources of top-line growth and margin expansion. In order to drive scalable service revenue, expanding their focus with digital tools on their services operations is key. The example I want to highlight here is one of the largest elevator companies in the world with billions in annual revenue.

Neil Barua: In order to drive scalable service revenue expanding their focus with digital tools on their services operations is key.

Neil Barua: The example, I want to highlight here is one of the largest elevator companies in the world with billions in annual revenue.

Neil Barua: After struggling with disparate, disconnected systems that got in the way of providing good service to their customers, they decided to embark on a complete service transformation to improve both the growth and profitability of their services. In the future, when their service technicians go into the field to service an elevator, they will know, using the ServiceMax application, about the specific elevator so they bring the right parts to the work site. They will also know the service history and have service instructions for that specific elevator.

Neil Barua: After struggling with disparate disconnected systems have gotten a way of providing good service to their customers. They decided to embark on a complete service transformation to improve both the growth and profitability of their services business.

Neil Barua: In the future when their service technicians go into the field to service an elevator. They will now using the servicemaster application about the specific elevator. So they bring the right parts to the Worksite.

Neil Barua: They will know the service history and have service instructions for that specific elevator.

Neil Barua: And, of course, they'll be scheduled and routed efficiently to the job site. Furthermore, the elevator business is highly regulated. The ServiceMax application will ease the regulatory compliance burden by having traceable records of the work performed during service calls. This is how ServiceMax helps our customers. We've been focused on cross-selling ServiceMax into our strong base of customers where we have established customer trust. As of the start of fiscal 24, we aligned the PTC sales team with the ServiceMax sales specialist to go to market together.

Neil Barua: And of course, there'll be scheduled and routed efficiently to the job site.

Neil Barua: Furthermore, the elevator business, it's highly regulated and a service Max application will ease the regulatory compliance burden by having traceable records of the work performed during service calls.

Neil Barua: Is how service Max helps our customers.

Neil Barua: We've been focused on cross selling services into a strong base of customers, where we have established customer trust.

Neil Barua: And this collaboration played a big role in getting this deal across the finish line. We also remain encouraged by our other focus areas that I didn't provide examples for this quarter, which are Code Beaver ALM, CAD, and SAS. In each of our five focus areas, we made incremental progress during Q2 towards executing in a scalable fashion and focusing our investments on the product advancements that customers care the most about. As many of you know, during my transition period, before taking over as CEO, I spent time listening to employees, digging into our product strategy, speaking with customers and partners to understand their needs and how we address them. As a result of the time I spent on this, I feel good about our product portfolio and strategy, which guides our five focus groups.

Neil Barua: As of the start up fiscal 'twenty four realign the PTC sales team with the service Mac sales specialist to go to market together and this collaboration played a big role in getting this deal across the finish line.

Neil Barua: We also remain encouraged by our other focus areas that I didnt provide examples for this quarter, which are could be where a L M cat and SaaS.

Neil Barua: In each of our five focus areas.

Neil Barua: Incremental progress during Q2 towards executing in a scalable fashion and focusing our investments on the product advancements that customers care the most about.

Neil Barua: As many of you know during my transition period before taking over as CEO I spent time listening to employees digging.

Neil Barua: Digging into our product strategy speaking with customers and partners to understand their needs and how we address those.

Neil Barua: As a result of the time I spent on this I feel good about our product portfolio and strategy, which guides our five focus areas.

Neil Barua: You should expect to see a continued emphasis on focusing our resources in the areas that create the greatest customer value and where we have a right to win.

Neil Barua: We should expect to see a continued emphasis on focusing our resources in the areas that create the greatest customer value and where we have a right to win. I've also started to focus on our operations and begin to examine where we excel and have room for improvement. As you know, PTC has been on a multi-year journey to improve efficiency.

Neil Barua: I have also started to focus on our operations.

Neil Barua: <unk> examined where we excel and have room for improvement.

Neil Barua: As you know PTC has been on a multi year journey to improve efficiencies but.

Neil Barua: But my early observations are that PTC will benefit from a fresh look at innovative ways to continue to drive operational efficiency. I'm turning over lots of stones, and we'll look at everything to usher in a new phase of focus and effectiveness across the entire company. With that, I'll hand the call over to Kristian to take you through our Q2 financial results. Thanks, Neil. Hello, everyone. Starting off with slide eight.

Neil Barua: But my early observations are that PTC will benefit from a fresh look at innovative ways to continue to drive operational improvements.

Neil Barua: Turning over lots of stones, and we will look at everything to Usher in a new phase of focus and effectiveness across the entire company.

Neil Barua: With that I'll hand, the call over to Christian to take you through our Q2 financial results.

Christian: Thanks, Neal Hello, everyone.

Christian: Starting off with slide eight PTC again delivered solid financial results in terms of both <unk> and free cash flow in a challenging selling environment.

Kristian P. Talvitie: The SEC again delivered solid financial results in terms of both ARR and free cash flow in a challenging selling environment. As you know, we believe ARR and free cash flow are the most important metrics to assess the performance of our business. To help investors understand our business performance excluding the impact of FX volatility, we provide ARR guidance and disclose our ARR results on a constant currency basis. At the end of Q2, our constant currency ARR was $2.075 billion, up 12% year-over-year and above our guidelines. Note that we acquired ServiceMax in Q2 of Fiscal 23, so we're no longer excluding ServiceMax from our organic ARR results.

Christian: As you know we believe in free cash flow are the most important metrics to assess the performance of our business to help investors understand our business performance, excluding the impact of FX volatility, we provide our guidance and disclose are our results on a constant currency basis.

Christian: At the end of Q2.

Neil Barua: Our constant currency <unk> was 2.075 billion up 12% year over year and above our guidance range.

Neil Barua: Note that we acquired service Max in Q2 of fiscal 'twenty three so we're no longer excluding service Max from our organic results.

Kristian P. Talvitie: In Q2-24, our cash flow results also came in ahead of our guidance with operating cash flow of $251 million and free cash flow of $247 million, both of which were up 19% year-over-year. Our cash flow performance is driven by our ARR and operating efficiency, and in Q2, we extended our track record of disciplined operational management while continuing to invest in our key focus areas. Turning to slide 9, let's look at our ARR growth at a more detailed level. Starting with our product groups, in CAD, we delivered 11% constant currency ARR growth in Q2, with the growth primarily driven by CREA. PLM

Neil Barua: In Q2 24.

Neil Barua: Our cash flow results also came in ahead of our guidance with operating cash flow of $251 million in free cash flow of $247 million, both of which were up 19% year over year.

Neil Barua: Our cash flow performance is driven by our <unk> and operating efficiency and in Q2, we extended our track record of disciplined operational management, while continuing to invest in our key focus areas.

Neil Barua: Yeah.

Neil Barua: Turning to slide nine.

Neil Barua: Let's look at our <unk> growth at a more detailed level.

Neil Barua: Starting with our product groups in Cat, we delivered 11% constant currency growth in Q2 with.

Neil Barua: With the growth primarily driven by Korea.

Kristian P. Talvitie: Our constant currency ARR growth was 13%, primarily driven by windchill. Despite the overall demand environment, which has been sluggish for many quarters now, our top line has shown good resilience. Our solid ARR growth is supported by our unique portfolio, with a solid footprint in higher growth segments of the market, and the Digital Transformation Journeys of our Customers. These underlying strengths are further supported by our subscription model, our low churn rate, and the propensity for our customer base to prioritize their own R&D investments through challenging times.

Neil Barua: In P. L M are constant.

Neil Barua: <unk> currency <unk> growth was 13% primarily driven by wind chill.

Neil Barua: Despite the overall demand environment, which has been sluggish for many quarters now our top line has shown good resilience our solid <unk> growth is supported by our unique portfolio with a solid footprint in higher growth segments of the market.

Neil Barua: And the digital transformation journeys of our customers.

Neil Barua: These underlying strengths are further supported by our subscription model, our low churn rate and the propensity for our customer base to prioritize their own R&D investments through challenging times.

Kristian P. Talvitie: Moving to our ARR by region, our constant currency organic ARR growth was solid across Americas, Europe, and APAC, with growth in the low to mid-double digits. Across all regions, our year-over-year organic constant currency growth rates in Q2 were similar to the growth rates we saw in Q1.

Neil Barua: Moving to our <unk> by region, our constant currency organic growth was solid across Americas, Europe, and APAC with growth in the low to mid double digits across all regions, our year over year organic constant currency growth rates in Q2.

Neil Barua: Or similar to the growth rates, we saw in Q1.

Kristian P. Talvitie: Moving to slide 10, first of all, given the consistency and predictability of our free cash flow, we aim to maintain a low cash balance. And as you know, our long-term goal, assuming our debt to EBITDA ratio is below three times, remains to return approximately 50% of our free cash flow to shareholders via share repurchases. However, also taking into consideration the interest rate environment and strategic opportunities. So given the strategic acquisitions, namely ServiceMax and CodeBeamer, that we've done over the past two years, we've paused our share repurchase program, and as we've said before, we intend to use substantially all of our free cash flow to pay down our debt in Fiscal 24.

Neil Barua: Moving to slide 10.

Speaker Change: First of all given the consistency and predictability of our free cash flow, we aim to maintain a low cash balance.

Speaker Change: And as you know our long term goal, assuming our debt to EBITDA ratio is below three times remains to return approximately 50% of our free cash flow to shareholders via share repurchases.

Neil Barua: While also taking into consideration the interest rate environment and strategic opportunities.

Neil Barua: So given the strategic acquisitions, namely service magazine code Beamer that we've done over the past two years, we paused our share repurchase program and as we've said before we had.

Neil Barua: Tend to use substantially all of our free cash flow to pay down our debt in fiscal 'twenty four heading into fiscal 'twenty five we'll revisit the prioritization of debt paydown and share repurchases.

Kristian P. Talvitie: Heading into Fiscal 25, we'll revisit the prioritization of debt paydown and share repurchase. We were 2.3 times levered at the end of Q2, and during the quarter, we paid down our debt by $256 million, and we ended Q2 with cash and cash equivalents of $249 million and gross debt of $2.011 billion. We expect to end the year with gross debt of approximately $1.7 billion. Lastly, we now expect our diluted share count to increase by approximately 1.5 million shares in fiscal 24 versus our previous expectation of approximately 1 million shares. Under the accounting rules, specifically ASC 260, a higher share price results in incrementally higher diluted share capital.

Neil Barua: We were two three times levered at the end of Q2 during the quarter, we paid down our debt by $256 million and we ended Q2 with cash and cash equivalents of $249 million and gross debt of 2.011 billion.

Neil Barua: We expect to end the year with gross debt of approximately $1 7 billion.

Neil Barua: Lastly, we now expect our diluted share count to increase by approximately one 5 million shares in fiscal 'twenty four versus our previous expectation of approximately 1 million shares.

Neil Barua: Under the accounting rules specifically.

Neil Barua: See 260, a higher share price results in incrementally higher diluted share count.

Kristian P. Talvitie: With that, I'll take you through our guidance on slide 11. We're reiterating our fiscal 24 free cash flow guidance and narrowing our fiscal 24 constant currency ARR guidance. We're taking the low end of the ARR guidance up by 10 million, reflecting our solid first half performance. We're taking the high end of the range down by 10 million. Reflecting a change to the deferred ARR, which we expect to recognize in the back half of the year. You will recall that we said we had approximately 20 million more deferred ARR in the back half of fiscal 24 compared to fiscal 23.

Neil Barua: With that I'll take you through our guidance on slide 11.

Neil Barua: We are reiterating our fiscal 'twenty four free cash flow guidance and narrowing our fiscal 'twenty for constant currency guidance range.

Neil Barua: We're taking the low end of the IRR guidance up by $10 million, reflecting our solid first half performance.

Neil Barua: We're taking the high end of the range down by $10 million, reflecting.

Neil Barua: Being a change to the deferred a or are we expect to recognize in the back half of the year.

Neil Barua: You will recall that we said we had approximately $20 million more deferred <unk> in the back half of fiscal 'twenty four compared to fiscal 'twenty three.

Kristian P. Talvitie: We've reduced this by $10 million as we've renegotiated a handful of customer contracts. While not commonplace with existing contracts, renegotiations do sometimes happen. Some of you may recall that we had a handful of these during COVID as well.

Neil Barua: We've reduced this by $10 million as we've renegotiated a handful of customer contracts.

Neil Barua: Not commonplace with existing contracts renegotiations do sometimes happen.

Neil Barua: Some of you may recall that we had a handful of these during COVID-19 as well.

Kristian P. Talvitie: The field teams do a good job here, working with customers in what I like to call a customer-friendly but commercially responsible manner. Meaning we're doing the right thing for the customer now, while also ensuring that these deals will result in a higher exit run rate and better contractual terms for PPC. We remain squarely focused on long-term value creation for our customers and our shareholders. It's worth noting that we're updating our Fiscal 24 Revenue Guidance accordingly, increasing the low end by $10 million and reducing the high end by $10 million.

Neil Barua: The field teams do a good job here working with customers and what I'd like to call a customer friendly, but commercially responsible manner.

Neil Barua: We're doing the right thing for the customer now while also ensuring that these deals will result in a higher exit run rate and better contractual terms for PTC.

Neil Barua: We remain squarely focused on long term value creation for our customers and our shareholders.

Neil Barua: It's worth noting that we are updating our fiscal 'twenty for revenue guidance accordingly, taking the low end up by $10 million, reducing the high end by $10 million.

Kristian P. Talvitie: Additionally, we're lowering the entire range by 10 million due to the impact of FX. As you'll recall, we do not guide to constant currency revenue. Our EPS guidance reflects our first half performance and the impacts of the narrowing of the revenue range and the FX impact as well. And lastly, our free cash flow is also impacted by FX, but we're reiterating the $725 million guidance given the first half result. For Q3, we're guiding for free cash flow of approximately $220 million and constant currency ARR of $2.115 billion to $2.13 billion, which corresponds to year-over-year growth of 11% to 12%.

Neil Barua: Additionally were low and lowering the entire range by $10 million due to the impact of FX.

Neil Barua: As Youll recall, we do not guide to constant currency revenue.

Neil Barua: Our EPS guidance reflects.

Neil Barua: Our first half performance and the impacts of the narrowing of the revenue range and the FX impact as well.

Neil Barua: And lastly, our free cash flow was also impacted by FX, but were reiterating the 725 million guidance.

Neil Barua: Given the first half results.

Neil Barua: For Q3.

Neil Barua: We're guiding for free cash flow of approximately $220 million and constant currency.

Neil Barua: Of 211, 5 billion to $1 3 billion, which corresponds to year over year growth of 11% to 12%.

Kristian P. Talvitie: We believe we've set our Q3 and full year guidance appropriately. I'll get into more ARR guidance details on the next two slides, but before we do, I'd also like to reiterate my favorite reminder. To help you with your models, we're providing revenue and EPS guides. But ASC 606 makes revenue and EPS difficult to predict for PTC since we sell primarily on-premise subscriptions. And the way revenue is recognized from these contracts can vary significantly based on variables that aren't necessarily relevant to the performance of the business.

Neil Barua: We believe we have set our Q3 and full year guidance appropriately.

Neil Barua: I'll get into more AOR guidance details on the next two slides, but before we do I'd also like to reiterate my favorite reminder.

Neil Barua: To help you with your models, we are providing revenue and EPS guidance.

Neil Barua: But ASC 606 makes revenue and EPS difficult to predict for PTC since we sell primarily on.

Neil Barua: On premise subscriptions and the way revenue is recognized from these contracts can vary significantly based on variables that aren't necessarily relevant to the performance of the business.

Kristian P. Talvitie: I did a teach-in on this subject on our Q422 call that you may want to refer to if you're new to PTC. The summary is, we believe ARR and free cash flow, rather than revenue and operating costs, are the best metrics to assess the performance of our business. Importantly, we've maintained consistent billing practices over time. We primarily bill our customers annually up front, one year at a time, regardless of the contract term

Neil Barua: I did it teach in on this subject on our Q4 'twenty two.

Neil Barua: Paul that you may want to refer to if you're new to PTC.

Neil Barua: The summary is we believe IRR and free cash flow rather than revenue and operating income.

Neil Barua: Are the best metrics to assess the performance of our business.

Neil Barua: Importantly, we've maintained consistent billing practices over time.

Neil Barua: We primarily bill our customers annually upfront one year at a time, regardless of contract term lengths.

Kristian P. Talvitie: So our free cash flow results over time are comp... Let's turn to slide 12. And here's an illustration of what's needed to get to the midpoint of our constant currency ARR guidance for fiscal 24. As you can see from the slide, to hit the midpoint of our Fiscal 24 guidance range, we need $145 million of sequential ARR growth in the second half of Fiscal 24. This is approximately $20 million more than we added in the second half of the previous two fiscal years.

Neil Barua: So our free cash flow results overtime are comparable.

Neil Barua: Yeah.

Neil Barua: Let's turn to slide 12, and here's an illustration of what's needed to get to the midpoint of our constant currency guidance for fiscal 'twenty four.

Neil Barua: As you can see from the slide at the midpoint of our fiscal 'twenty four guidance range, we need $145 million of sequential.

Neil Barua: Growth in the second half of fiscal 'twenty four.

Neil Barua: This is approximately $20 million more than we added in the second half of the previous two fiscal years.

Neil Barua: And.

Kristian P. Talvitie: In the second half of fiscal 24, we expect to benefit from CodeBeamer, cross-selling ServiceMax with an aligned and enabled sales force, and $10 million more deferred ARR than we had in the second half of fiscal 23. Moving on to slide 13, here's an illustrative constant currency ARR model for Q3-24. You can see our results here over the past 10 quarters, and the column on the far right illustrates what's needed to get to the midpoint of our constant currency ARR guide.

Neil Barua: In the second half of fiscal 'twenty, four we expect to benefit from bema.

Neil Barua: Cross selling service Max with an aligned enabled sales force and $10 million more deferred IRR than we had in the second half of fiscal 'twenty three.

Neil Barua: Moving on to slide 13, here's an illustrative constant currency RR model for Q3 24.

Neil Barua: You can see our results here over the past 10 quarters and the column on the far right illustrates what's needed to get to the midpoint of our constant currency guidance.

Kristian P. Talvitie: This illustrative model indicates that to hit the midpoint of our Q3 guidance range, we need 48 million of sequential net ARR. Because our ARR trends tend to see some seasonality, the most relevant comparison is the sequential growth in Q3 of fiscal 23 and Q3 of fiscal 22.

Neil Barua: This illustrative model indicates that to hit the midpoint of our Q3 guidance range, we need $48 million of sequential net <unk> growth.

Neil Barua: Because our RR trends tend to see some seasonality. The most relevant comparison is the sequential growth in Q3 of fiscal 'twenty three in Q3 of fiscal 'twenty two.

Kristian P. Talvitie: We think our guidance range for Q3 of 24 and the full year balances both risk and opportunity. Finally, on free cash flow, I want to reiterate the point that Neil made earlier. We continue to have a high degree of confidence in our cash flow guidance and targets due to the predictability of our cash collections and the disciplined resource allocation structure we have in place. In conclusion, PTC has a strong portfolio and strategy and a great team of people with deep expertise and strong customer relations.

Neil Barua: We think our guidance range for Q3 of 24, and the full year balances both risk and opportunity.

Neil Barua: Finally on free cash flow I want to reiterate the point that Neil made earlier, we continue to have a high degree of confidence in our cash flow guidance and targets due to the predictability of our cash collections and the disciplined resource allocation structure, we have in place.

Neil Barua: In conclusion E. T. C has a strong portfolio and strategy and a great team of people with deep expertise and strong customer relationships.

Kristian P. Talvitie: We're focused on disciplined and consistent execution to ensure we deliver on the value creation opportunities we have ahead of us. With that, I'd like to turn the call over to the operator and begin the Q&A session. Thank you. At this time, if you'd like to ask a question, please press star followed by the number one on your telephone. If you would like to withdraw your question, simply press star 1 again.

Neil Barua: We're focused on discipline and consistent execution to ensure we deliver on the value creation opportunities. We have ahead of us.

Speaker Change: With that I'd like to turn the call over to the operator and begin the Q&A session.

Speaker Change: Thank you at this time, if you'd like to ask a question. Please press thoughtful but the number one on your telephone keypad.

Speaker Change: I would like to withdraw your question simply press Star one again is.

Speaker Change: As a general reminder, to everyone. Please limit yourself to only one question and if you have any additional questions east with her into the queue.

Speaker Change: Pause for just a moment to compile the Q&A roster.

Operator: As a gentle reminder to everyone, please limit yourself to only one question, and if you have any additional questions, please return to the queue. We'll pause for just a moment to compile the Q&A roster. If your first question comes from the line of Nay Say Nong from Berenberg, please go ahead.

Speaker Change: Your first question comes from the line.

Neil Barua: Ne se numb from Baird. Please go ahead.

Neil Barua: Hi, thank you for taking my questions. And maybe if you could start with the update on your midterm ARR Growth Outlook, please. Can you maybe break it down a little bit more in terms of, you know, obviously, you had reiterated your mid-teens Growth Outlook as recently as last quarter. It's only been probably two months or so now. So what's changed in those two months? And also, if you may, could you reference it back to the growth building blocks that you have provided in your We've got Ernie's pack as well, please. Yeah, thanks for the question. I'll start with the first one, and then Kristian can add more later.

Speaker Change: Hi, Thank you for taking my questions.

Speaker Change: Okay, and maybe if could start with the update in your midterm.

Speaker Change: I'll, let Steve maybe break it down a little bit more in terms of obviously you had.

Speaker Change: Reiterated your mid teens growth outlook.

Speaker Change: As recently as last quarter, it's only been two.

Steve: Okay months to say now so what's changed in those two months and also if you may.

Speaker Change: Could you referencing back to the growth building blocks and we have provided in your.

Neil Barua: We base our earnings because of oil in place.

Speaker Change: Yeah. Thanks for the question I'll start with the first one on that Christian to that.

Neil Barua: After taking over as CEO on Feb 14, I've been doing my assessment of the business, as I've mentioned, across all dimensions on this one on the midterm target. And just to make sure we are level set on this piece. For this year, we've updated our cons and currency error guidance to 11 to 13%, as Kristian stated. For the sake of understanding what low double digits means, I see it as plus or minus that range.

Speaker Change: After taking over as CEO.

Speaker Change: <unk> I've been doing my assessment of the business as I've mentioned across all dimensions on this one on the mid term target.

Speaker Change: And just to make sure we level set on this piece for this year, we've updated our constant currency guidance to 11% to 13% as Christian stated.

Speaker Change: For for sake of understanding what low double digits means I see it as plus or minus that range and again over the past five years as you've been following the company we've gone from 10% growth one year to 15% for an average of about 12% through varying macroeconomic conditions.

Neil Barua: And again, over the past five years, as you've been following the company, we've gone from 10% growth one year to 15% for an average of about 12% under varying macroeconomic conditions. So when I took a look at how I want to put my stamp in a credible way on the company moving forward in view of the midterm targets, I looked at all those variables. I also looked at the fact of the current conditions in the market and felt it was the appropriate thing to do to make the midterms target towards that low double digits versus have the mid-teens target out there. Did you want to add?

Speaker Change: When I took a look at how I want to put my staff and incredible way around the company moving forward in the view of the midterm targets I looked at all of those variables I also looked at the fact of the current Ah.

Speaker Change: Conditions in the market and so it was the appropriate thing to do to make the midterms target towards that low double digits versus have the mid teens target out there Chris.

Speaker Change: Christian do you want to add.

Neil Barua: Yeah, I mean, the only other thing that I would say is that, you know, every time we talk about the mid-teens, we have to caveat the status of the economy and so on. A cleaner way to do it.

Christian: Yes, I mean, the only other thing that I would say is that every time, we talked about mid teens, we add the caveat that.

Christian: Status of the economy.

Christian: So I think that's it.

Speaker Change: Just to.

Speaker Change: Cleaner way to do it.

Neil Barua: Sorry, I literally just got disconnected in LA, got reconnected just now, but I'll just read the transcripts afterwards. I didn't catch any of the answers, unfortunately. They were the best answers we've ever given, I am sure I'll eagerly wait for the transcript to come out. Thank you. Thank you anyway.

Speaker Change: Sorry, but it literally just got disconnected at out of Lake are reconnected, just now, but I'll just read the transcript afterwards, but I didn't catch that in your answer Unfortunately.

Speaker Change: They were the best answers we've ever given.

Speaker Change: It's a high end.

Speaker Change: Anyway, that's shrunk to come up.

Speaker Change: Thank you thank you anyway right.

Operator: The next question comes from the line of Daniel Jester from BMO Capital Markets. Please go ahead. Good afternoon.

Speaker Change: The next question comes from the line of Daniel Jester from BMO capital markets. Please go ahead.

Operator: Thanks for taking my question. Maybe on the balance sheet, you know, you've made great progress deleveraging. Well in advance of your leverage target that you want to hit by the end of the year, I guess, you know, one, why not today sort of move forward with the reassessment of any capital deployment strategy? And maybe two, you know, Neil, maybe you have any comments about how you view inorganic growth as the driver of longer-term opportunity? Thanks. Yeah, hey, Kristian.

Daniel William Jester: Hi, good.

Daniel William Jester: Hey, good afternoon, Thanks for taking my question.

Daniel William Jester: Maybe on the balance sheet.

Daniel William Jester: You've made great progress deleveraging, our well in advance of your leverage target that you want to hit by the end of the year.

Daniel William Jester: Yes.

Speaker Change: One why not today.

Daniel William Jester: Sort of move forward with the reassessment of.

Daniel William Jester: Our capital deployment strategy, and maybe too Neil maybe you have any comments about how you view inorganic growth as the driver of the longer term opportunity. Thanks.

Kristian P. Talvitie: Thanks, Dan. So I think your question is around why are we not starting buybacks sooner? I guess that's maybe the gist of it.

Neil Barua: Yeah Christian Thanks, Dan So I think your question.

Neil Barua: It is around why why are we not starting buybacks sooner as I guess, that's maybe the gist of it and you know I mean I think.

Kristian P. Talvitie: And, you know, I think I'll just try to hit it this way. Listen, we still have, you know, $2 billion plus in debt outstanding. The interest rate environment is still not favorable. The rate on the revolving credit facility we have is almost 7%. And after today's comments by the Fed, it doesn't look like those are going to get any better anytime soon.

Neil Barua: I'll just try to hit it this way listen we still have.

Neil Barua: $2 billion.

Neil Barua: Plus.

Neil Barua: Debt outstanding interest rate environment is still.

Neil Barua: Not favorable.

Neil Barua: Right.

Neil Barua: On the revolving credit facility, we have an almost 7%.

Neil Barua: After todays comments by the fed it doesn't look like those are going to get any better anytime soon.

Kristian P. Talvitie: You know, we've got a couple quarters left to get through the year here, and we'll reevaluate. And on the M&A piece. You know, we've clearly done a number of M&A deals over the history of PTC, and that continues to be something that we'll always look at as opportunities to accelerate the strategy of the business. However, given my assessment of the business currently, I like the areas, the focus areas that we are aligned towards as a company to execute on those priorities organically. [inaudible] Great, thank you very much. The next question comes from the line of Ken Wong from Oppenheimer & Co. Please go ahead.

Neil Barua: We've got a couple of quarters left to get through the year here and we will reevaluate.

Neil Barua: And on the on the M&A piece.

Neil Barua: You know, we've clearly done a number of M&A deals over the history of PTC.

Neil Barua: That continues to be something that we'll always look at as opportunities to accelerate the strategy of the business. However, given my assessment of the business currently.

Neil Barua: Like the areas of focus areas that we are.

Neil Barua: Aligned towards as a company to execute across organically those priorities, it's extremely effectively over the next number of quarters and years.

Neil Barua: Being said.

Neil Barua: If there are tuck in acquisitions or things that make a lot of sense to do we'll always take a look at it but currently my focus is on making sure the execution around the organic priorities of the business are well taken care of.

Speaker Change: Great. Thank you very much.

Neil Barua: The next question comes from the line of Ken Wong from Oppenheimer <unk> Company. Please go ahead.

Operator: Great. Thanks for taking my question. This one's for you, Kristian.

Ken Wong: Great. Thanks for taking my question.

Ken Wong: This one's for you Christian on the medium term growth I guess, we roughly estimate that maybe 100 million is coming out of <unk>. Yet you guys are still able to meet the free cash flow targets I guess, what should we assume you guys have that same level of confidence in hitting those targets as you did previously.

Ken Wong: Yes.

Neil Barua: Okay.

Kristian P. Talvitie: On medium-term growth, I guess we roughly estimate that maybe $100 million is coming out of ARR, and yet you guys are still able to meet pre-cash flow targets. I guess, should we assume you guys have that same level of confidence in hitting those targets as you did previously? Yeah, the short answer. All right, fair enough.

Neil Barua: Yeah.

Speaker Change: The short answer.

Neil Barua: And then for you, Neil, in terms of best practices that you're trying to implement here, I guess, you know, maybe this kind of piggybacks on what I just asked Kristian, but like, what should we expect in terms of driving that incremental operating leverage? You know, as you know, Ken, we've been doing a nice job. The team's been doing a nice job for many years driving greater effectiveness within the business. What I'm focused on, the stones that I'm turning, is making sure that the business is aligned around how we interact with our customers.

Neil Barua: But.

Neil Barua: Fair enough.

Neil Barua: And then for you Neil in terms of best practices that you're trying to implement here.

Neil Barua: I guess, maybe this is kind of piggybacking on what I'd, just ask Christian but like what what what do you what should we expect in terms of driving that incremental operating leverage.

Neil Barua: Okay.

Neil Barua: Yeah.

Neil Barua: As you know Ken we've been doing a nice job. The team is doing a nice job for many years driving greater.

Neil Barua: Factor this within the business, but I'm focused on the stones and I'm, turning is making sure within the business around how we interact with our customers to go to market motions from a direct and indirect standpoint are done as effectively as we can with the best practices that are out there, but also an assessment of what's the.

Neil Barua: The go-to-market motions, from a direct and indirect standpoint, are done as effectively as we can with the best practices that are out there, but also an assessment of what's the best thing for our customers and internally here at PTC. G&A, we've been efficient on that. We'll continue to turn over every rock there.

Neil Barua: The best thing for our customers and internally here at PTC G&A, we've been efficient on that we'll continue to turnover every rock there as I mentioned, a two pronged strategy of a year round incremental investments and then what can we take and reposition existing spend two more.

Neil Barua: As I mentioned, a two-pronged strategy every year around incremental investments, and then what can we take and reposition existing spend to more focused areas that could drive greater customer value and, ultimately, value for all the shareholders. And so we're taking a look at that, and we'll continue to drive forward around all those vectors to make sure we're driving the business with greater focus and effectiveness as we move forward. Great, thank you.

Neil Barua: Focused areas that could drive greater customer value and ultimately.

Neil Barua: Value for all the shareholders and so we're taking a look at that and we will continue to drive forward around all of those factors to make sure we're driving the business with greater focus and effectiveness as we move forward.

Speaker Change: Great. Thank you.

Operator: Again, if you would like to ask a question, please press star 1. And as a gentle reminder to everyone, please limit yourselves to one question only. Thank you. Your next question comes from the line of Andrew Obin from Bank of America. Please go ahead. Hey guys, good afternoon. Andrew.

Speaker Change: Again, if you would like to ask a question. Please press star one and it's a gentle reminder to everyone. Please limit yourselves to one question only thank you. Your next question comes from the line of Andrew <unk> from Bank of America. Please go ahead.

Andrew: Hey, guys good afternoon.

Operator: Hey, you mentioned on the call that the selling environment has been sluggish. Has this bottomed out? And, you know, any view on what needs to happen for a macro uplift in the software environment? And also, you know, for an industrial guy, if you can point out which verticals are particularly weak. I would imagine maybe life sciences, agriculture, machinery, but, you know, just any, I'll start, Kristian, you can add. I don't see right now any change in the selling environment. It's been tough going for at least six quarters now here at PTC.

Speaker Change: Andrew.

Andrew: So you mentioned on the call that the selling environment has been sluggish.

Andrew: Has this bottomed out and you know any view on what needs to happen for a macro uplift.

Andrew: In the software environment and also you know for an industrial Guy if you can point out which verticals are particularly weak I would imagine maybe life Sciences AG machinery, but you know just any color there. Thank so much.

Speaker Change: I'll start Christian you could add.

Christian: I don't see right now any change in the selling environment, it's been tough going for at least six quarters now here at PTC that didn't change in Q2, despite having solid results. So the team continues to deliver despite a challenging selling environment.

Neil Barua: That didn't change in Q2, despite having solid results. So the team continues to deliver despite a challenging selling environment. We have, you know, we look at every metric, GDP, PMI, you name it.

Christian: We have we look at every metric GDP PMI you name. It we have not seen a change yet.

Neil Barua: We have not seen a change yet, given some maybe positivity, it has not turned into a trend. I will say from a broad base outside of industries, outside of specific industries, the point that I think we're trying to articulate is that the challenging selling environment really is punctuated by larger deals. So these are the large digital transformation deals that are seven, eight figures that I'm truly excited about seeing how the pipeline is building on that.

Christian: Given some maybe positivity they have not turned into a trend.

Christian: I will say from a broad base outside of industries outside of specific industries.

Christian: The point that I think we're trying to articulate is the challenging selling environment really is punctuated in the larger deals. So these are the large digital transformation deals that are seven eight figure that I'm truly excited about seeing other pipelines building on that that continues to be challenged the same by which <unk>.

Neil Barua: That continues to be challenged, the same way it has been for the last six plus quarters around the large yield and getting those projects to be the key priority by which you could get the signed PO and begin implementation.

Christian: It's been for the last six plus quarters around the large deals and getting those projects to be the key priority by which you could get the signed Po and begin implementation. That's the area. We continue to work through to be clear, we continue to do well around securing those but those are the areas by which the challenging selling environment really.

Neil Barua: That's the area we continue to work through. To be clear, we continue to do well around securing those, but those are the areas by which the challenging selling environment really impacts us the most. And I don't see that changing right now in the current environment.

Christian: Impacts us the most and I don't see that changing right now in the current environment.

Neil Barua: First, I need to add... And any specific verticals that just stand out as being particularly weak within certain industries? You know, from our perspective, we are, I feel good about the key industry verticals that you know, we play in, Andrew, doing well; some are doing better than others, I'd say, all are going through digital transformation in a very serious manner. So we feel good about our positioning in those verticals. It's a question of the largest deals in those verticals. How much can we actually execute and close within a certain quarter?

Christian: I say that.

Speaker Change: Oh, that's right.

Speaker Change: And any specific verticals that just stand out as being particularly weak with them.

Speaker Change: Certain industries.

Christian: From our perspective, we are I feel good about the key industry verticals that you know we play and Andrew.

Christian: Doing well some are doing better than others I would say all are going through digital transformation.

Christian: In a very serious manner. So we feel good about our positioning on those verticals. It's a question of the largest deals in those verticals how much can we actually execute and close within a certain quarter.

Neil Barua: Gotcha. No, I really appreciate it. Thanks so much.

Speaker Change: No I really appreciate it thanks, so much.

Operator: Again, if you would like to ask a question, please press bar one. And, as a gentle reminder for everyone, please limit yourself to one question only. If you have any follow-up questions or additional questions, please return to the queue. Thank you. The next question comes from the line of Saket Kalia from Barclays. Please go ahead. Okay, great. Hey, Neil. Hey, Kristian. Thanks for taking my question here. How are you?

Speaker Change: Again, if you would like to ask a question. Please press star one.

Speaker Change: And as a general reminder, for everyone. Please limit yourself to one question only if you have any follow up questions or additional questions. Please refer into the queue. Thank you.

Speaker Change: Next question comes from the line of socket Calia from Barclays. Please go ahead.

Saket Kalia: Okay, Great Hey, Neil Christian Thanks for taking my question here how are you.

Speaker Change: Target.

Operator: Thank you. Hey, Neil, I'll keep it to one, just maybe for you. You know, when you joined, I think one of the things that was really interesting that you talked about was just being more discerning about resource allocation and, and maybe, very specifically, putting more wood behind the arrow for PLM, well, while maybe managing other areas like IoT and AR, and you're right there. But maybe the question is, what's the next step in that evolution? And as you think about sort of that investment in PLM, what are the areas that you want to bolster the most inside that business? Does that make sense? Yeah, a great question, Saket.

Saket Kalia: Hey, Neil I'll keep it to one just maybe for you.

Speaker Change: Yes.

Saket Kalia: When when you joined I think one of the things that was really interesting that you talked about was just being more discerning about resource allocation and and maybe very specifically, putting more wood behind the arrow for Pinot limb well, maybe managing other areas like like Iot and AR and you've correctly there from wrong.

Speaker Change: So maybe the question is what's the next step in that evolution.

Speaker Change: And as you think about sort of that investment in <unk>. What are the areas that you want to bolster the most inside that business does that makes sense.

Neil Barua: And I want to make sure I make this point again. We did say, and I did say, put wood behind more wood behind the arrows that matter the most for customer value. We have already done that, started that process. This IOTAR, all those two sentences I mentioned, is a very significant first move in executing on that point that I made to all of you for the last six months. And what that will allow us to do is make sure that the concept of PLM, as you asked, Windchill, which is this wonderful system that I referenced, the great customers are now getting enterprise adoption.

Speaker Change: Yeah, Great question socket, and just I wanted to make sure I make this point again.

Socket: We did say and I did say it would be on more wood behind the arrows that matter the most of our customer value.

Saket Kalia: We already have done that started that process. This Iot a are always two sentences I've mentioned is a very significant first move of executing a cross that point that I've made to all of you for the last six months and what that will allow us to do is.

Saket Kalia: Make sure in the concept of Pls as you asked windshield, which is this wonderful system that I referenced a great customers now getting enterprise adoption.

Neil Barua: There is more we can do around making sure that there are three components. Number one, Windchill, and the ability for all the enterprise groups that I mentioned to have really understanding and visibility and viewability of the data that is coursing through an engineering group, as an example. Right? And so the product development around making sure the user experience, the viewing of that data, is best in class.

Socket: There is more we can do around making sure that there's three components number one windshield and the ability for all of the enterprise groups that I mentioned have really understanding and visibility and view ability all the data that is coursing through an engineering group as an example, right and so.

Socket: The product development around making sure the user experience the viewing of that data is best in class. We're working through that with these dollars that we're repositioning from Iot AAR.

Neil Barua: We're working through that with these dollars that we're repositioning from IOTAR. We're working through stronger integration points by which CREO and the CAD design tools can more seamlessly move through the enterprise within Windchill. We're working through CodeBeamer and Windchill integration points by which software configuration management with hardware configuration management can be even more clearly done for an enterprise.

Socket: We're working through stronger integration points by which <unk>.

Socket: Trio and the CAD design tools can more seamlessly move through the enterprise within Windchill, and we're working through code Beamer and windchill integration points by which software configuration management with hardware configuration management can be even clearer more clearly done before in enterprise or working through a server.

Neil Barua: We're working through a ServiceMax Windchill integration, and we're going to keep working through that so that product data can now be seen in the field and vice versa. Those are the two big themes, and the third other theme that we're putting wood behind the arrow within PLM is using the foundation of Windchill and all the great things that AI could do and copilots could do with a seamless data stack within Windchill

Socket: <unk> windchill integration and we're going to keep working through that by which product data can now be seen in the field and vice versa. So those are the two big themes and a third other theme that we're putting wood behind the arrow within <unk> is using the foundation of windshield and all the great things that <unk>.

Socket: I could do and co pilots could do with a seamless data stack within wind chill over time, we'll work through how does that create value for our customers as well in a differentiated way towards them as they use this as an enterprise system. So a lot of great things socket happening on that and again, Steve around focus on.

Neil Barua: Over time, we'll work through how that creates value for our customers as well in a differentiated way for them as they use this as an enterprise system. A lot of great things are happening there and again, the theme around focus on the priorities, focus on the core, and let's bring the cavalry behind it because our customers are really needing it and requiring us to show up in this manner, and the opportunities are right in front of us. That's very clear.

Socket: The priorities focus on the core and let's bring the calverley behind it because our customers are really needing it and requiring us for us to show up in this manner and the opportunities there in front of us.

Speaker Change: That's very clear thanks, guys.

Neil Barua: Thanks, guys. Your next question comes from the line of Jay Vleeschhouwer from Griffin Securities. Please go ahead. Thank you, good evening.

Speaker Change: Your next question comes from the line of Jay the shower from Griffin Securities. Please go ahead.

Operator: Neil, your comments just now in answer to Saket's question touch on an important point about the portfolio, where cross-selling necessarily has the corollary of increasingly integrating products across the portfolio, so more closely coupling the products rather than loosely coupling the products. So over time, what do you think that might mean in terms of, let's say, the regularity of the business? You know, SLM historically was quite a variable, lumpy business.

Jay: Thank you good evening.

Jay: Neal your comments just now in answer to sockets question I think touched on an important.

Jay: Point about the portfolio, where cross selling it necessarily has the corollary of increasingly integrating products across the portfolio. So.

Jay: We're closely coupling the product rather than loosely coupling the.

Jay: The products so overtime.

Speaker Change: What do you think that might mean in terms of let's say the regularity of the business.

Jay: Excellent historically was quite a variable lumpy business.

Operator: You know, the ALM business was on a good trajectory. But as you increasingly closely couple the various three letter acronyms of the business, how do you think about retention? How do you think about the variability of the business? Yeah, great question. Thank you for asking, Jay. It is a journey. And as a reminder, we've done a really nice job, and we will continue to have open integrations in the environment. We're not a closed system. And when a customer looks at us, they can see the best of breed PLM, the best of breed CAD, the best of breed SLM, and the best of breed ALM. And we believe we have all of them, right?

Jay: <unk> business is on a good trajectory, but as you increasingly closely coupled various related acronyms of the business. How do you think about.

Jay: Our retention how do you think about variability of the business.

Speaker Change: Yeah, Great question. Thank you Jay.

Speaker Change: It is a journey.

Speaker Change: And as a reminder, we've done a really nice job and it will continue to add opened integrations in the environment, we're not a closed system.

Jay: And when a customer looks at us they can see best of breed <unk> best of breed CAD best of breed. That's L. A best of breed a L. M and we believe we have all of them right, but the customer can choose from that and feel okay for the interoperability with other systems that they may choose for <unk>.

Neil Barua: But the customer can choose from that and feel okay about the interoperability with other systems that they may choose for ALM, SLM, PLM, or CAD. So that will be the philosophy we continue to have. That being said, our customers are really pushing on us because there's real value given the credibility PTC has with them of creating even more distinct integration points, UI interfaces that are seamless between CodeBeaver and Windchill. Obviously, we have a very strong, tight integration already with CREO and Windchill.

Jay: Cap so that will be the philosophy, we continue to have that being said.

Jay: Our customers are really pushing on us because there's real value given the credibility PTC has with them all creating even more distinct integration points UI interfaces that are seamless between Kobe Bryant windshield.

Jay: Obviously, we have a very strong tightened it integration already with Cree on wind shell, we can do more with that right now as you mentioned service Max which I will correct you for a little bit service axes of very stable recurring revenue business that is native SaaS. So it takes away the lumpiness from the Epsilon business.

Neil Barua: We can do more with that, right? And now, as you mentioned, ServiceMax, which I will correct you on a little bit. ServiceMax is a very stable recurring revenue business that is native SaaS. So it takes away the lumpiness from the SOM business that might have existed historically. It helps with that.

Jay: Have existed historically it helps with that but the main point strategically is as we create better value props as I can.

Neil Barua: But the main point strategically is, as we create better value propositions, as I answered in Saket's question, for the customer to have product data run, Why have we through their enterprise for all the collaboration, time to market benefits, quality benefits? We believe customers will choose PTC for a greater number of those best of breed solutions in a one-stop shop, but we will make it so it's customer value driven versus edicts from us saying So we're taking the customer view, and I think it's going to win out Jay in the long term.

Jay: And sockets question for the customer to have product data run.

Jay: Wildly through their enterprise for all the collaboration time to market benefits quality benefits, we believe customers will choose PTC for a greater number of those best of breed solutions and a one stop shop, but we will make it so its customer value driven versus edicts from us saying it's only.

Jay: Yes, you could play within a closed system versus being open. So we're taking the customer view and I think it's going to win out Jay and the long term.

Neil Barua: In the meantime, for let's say the remainder of this year or early next year, how would you describe your pipeline of large deals that might have, as you saw in Q2, a significantly pronounced 606 effect? Incremental, obviously, in the case of Q2, apparently in Europe especially. So is there any way to predict the 606 effects and fold that into guidance? If there was a way to predict the 606 effects, Jay, trust me, we'd be happy to share it. The answer is we can't do that.

Jay: In the meantime for let's say the remainder of this year or early next year. How would you describe your pipeline of large deals that might have as you saw in Q2 are significantly pronounced 606 in fact incremental obviously in the case of Q2, apparently in Europe, especially so is there any way to predict.

Jay: <unk>, the 606 effects and fold that into guidance.

Jay: [laughter].

Speaker Change: If there is a way to predict the 606 effects Jake Trust me, we'd be happy to share it with you.

Speaker Change: Okay.

Speaker Change: Understood.

Speaker Change: We can't do that.

Speaker Change: Okay.

Neil Barua: I will say though that the pipeline of large deals we feel good about is healthy, and the sales team, all of us are focusing on closing them. Timing of those is always tough, as I mentioned, but we have a really nice pipeline that's been growing on those large-sized deals across the world, quite frankly. We feel good about what we're entering into in the second half here, and Jay, not trying to be snarky about the 606 thing, you will remember that. The main drivers are the kind of contract. There are upfront contracts, and there are ratable contracts. The term length of the contract, you know, so those are probably the two main drivers.

Speaker Change: I'm, not saying that the pipeline of large deals we feel good about is healthy and sales team all of US are focused on closing them. The timing of those always tough as I mentioned, but we have a really nice pipeline that's been growing on those large sized deals across the world quite frankly so.

Speaker Change: We feel good about what we're entering in the second half year.

Speaker Change: Jay not trying to be snarky about the 606 thing I mean, you you will remember that the main drivers are the kind of contract.

Speaker Change: And there is the upfront contracts. So there is a ratable contracts the term length.

Speaker Change: Of the contract.

Neil Barua: Term lengths, we can try and incentivize customers to move in a certain direction, but ultimately, they're going to make the right decision for them. And that includes both on new and renewal, new and renewal transactions. And then as it relates to the Ratable versus the upfront contracts, you know, we still have a small base of perpetual support that we're still converting. So every time that happens, you take it up, you know, you're taking a Ratable contract and moving it to an upfront contract. We have, we're, as you know, transitioning customers to SAS. So every time you do that, you're taking an upfront contract and moving it to a ratable contract.

Speaker Change: So those are probably the two main drivers term lengths, we can try and incent customers to move in a certain direction, but ultimately theyre going to make the right decision for them and that includes both on new and renewal.

Speaker Change: New and renewal.

Speaker Change: Transactions and then as it relates to the ratable versus upfront contracts, we still have a small base of.

Speaker Change: Perpetual support that we're still converting so every time that happens you are taking it up.

Speaker Change: Taking a ratable contract and moving it to an upfront contract we have.

Speaker Change: Sure.

Speaker Change: As you know.

Speaker Change: Transitioning customers to SaaS. So every time, you do that you're taking it upfront contract and moving it to a ratable contract the moving parts the volatility.

Neil Barua: The moving parts, the volatility is. Well, you get the picture. Yes. Indeed. Thank you. Again, if you would like to ask a question, please press star 1. And as a gentle reminder to everyone, please limit yourselves to one question only.

Speaker Change: As well.

Speaker Change: You get the picture yes.

Speaker Change: Yes, [laughter] indeed, thank you.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: Again, if you would like to ask a question E Press Star one.

Speaker Change: And as a gentle reminder to everyone. Please limit yourself to one question only if you have any additional questions or follow ups you further into the queue. Thank you.

Operator: If you have any additional questions or follow-ups, please return to the queue. Thank you. The next question comes from the line of Tisa and Tusa from JP Morgan. Please go ahead.

Decent Tusa: Next question comes from the line of decent Tusa from Jpmorgan. Please go ahead.

Operator: Hey guys, how's it going? So the net new ARR has been up nicely the last couple quarters. You have it guided, I guess, down just year over year. You can kind of like cut these numbers any way you want. But is that a reflection of the macro you were talking about?

Decent Tusa: Hey, guys How's it going.

Descent Tusa: Hey, Steve.

Charles Stephen Tusa: So the net.

Decent Tusa: New <unk> has been up nicely. The last couple of quarters, you had guided I guess down just year over year, you can kind of like cut these numbers any any way you want but.

Tusa: Any is that a reflection of the.

Decent Tusa: The macro you were talking about and then when does this.

Kristian P. Talvitie: And then when does this now $10 million of deferred go live? Are you expecting that in the 3Q or the 4Q? So let's start the, I guess we'll go in reverse order.

Decent Tusa: Now $10 million of deferred go live are you expecting that in the <unk> or the <unk>.

Speaker Change: So let's start the <unk>.

Kristian P. Talvitie: The $10 million of deferred revenue is also split probably pretty evenly between Q3 and Q4. The other $10 million, let's just be clear, those are still contractual commitments that have just moved to a future period, right? So they haven't gone away. They've just gotten larger and moved to a future period.

Speaker Change: I guess, we'll go in reverse order.

Speaker Change: The $10 million of deferred.

Speaker Change: He is also split probably pretty evenly.

Speaker Change: <unk> Q3, and Q4, the other $10 million.

Speaker Change: Let's just be clear those are still.

Speaker Change: Contractual commitments that will that have just moved to a future period right. So they haven't gone away are they.

Speaker Change: They've just.

Speaker Change: Got larger and moved to a future periods.

Kristian P. Talvitie: In terms of, you know, the macro, Again, I think Neil mentioned earlier, we haven't really seen any change in any direction here over the past few quarters. And as it relates to, you know, tying that back to Q2 results and Q3 guidance, you know, in any given quarter, there can be a little volatility around, you know, lumpiness of deals, start dates, and, you know, prediction of those that can cause minor swings in either direction.

Speaker Change: In terms of.

Speaker Change: The macro.

Speaker Change: <unk>.

Speaker Change: Again, I think Neil mentioned earlier, we haven't really seen any change really in any direction.

Speaker Change: Here over the past few quarters.

Speaker Change: And as it relates to tying that back to Q2 results Q3 guidance.

Speaker Change: Any given quarter.

Speaker Change: There can be a little volatility around.

Speaker Change: Lumpiness of deals start dates and prediction of those that can cause minor swings in either direction. So all in all we're pleased with the results for Q2, we think we've set the Q3 guidance appropriately.

Kristian P. Talvitie: So all in all, we're pleased with the results for Q2. We think we set the Q3 guidance appropriately and steady as she goes. And then just one last one on the appendix, you would have guided for like cash taxes and 25 and 26. I think it was.

Speaker Change: Steady as she goes.

Speaker Change: And then just one last one on the.

Speaker Change: And in the appendix you at in the last presentation I believe.

Speaker Change: <unk> guided for like cash taxes in 'twenty, five and 'twenty six.

Kristian P. Talvitie: That wasn't in the appendix this time around. Anything changing about that cash tax guide for the next couple of years? No, not specifically. I think we were just trying to tighten up the, you know, the disclosures. And it was, you know, to be honest, it was a little weird. We were giving points on certain line items and not other line items.

Speaker Change: It was that wasn't in the appendix this time around.

Speaker Change: Moving around on.

Speaker Change: On a cash tax guide for the next couple of years.

Kristian P. Talvitie: And so we just, you know, tidied up the more detailed disclosures for fiscal 24. And otherwise, we, we, we remain, you know, on target for the other two, for 25 and 26. So sorry, one more just to get Neil involved.

Speaker Change: No not not specifically I think we were just trying to again tighten up the you know the disclosures in there was to be honest. It was a little weird we were giving.

Speaker Change: Points on.

Speaker Change: On certain line items and not other line items and so we just you.

Speaker Change: Tidied up the more detailed disclosures to fiscal 'twenty four.

Speaker Change: Otherwise we will.

Speaker Change: We remain.

Speaker Change: On target for the other 25 and 26.

Speaker Change: Alright.

Speaker Change: Sorry, one more just to get to get Neal involved.

Neil Barua: Is there a dynamic here where your customers are evaluating their IT budgets and, you know, in regard to AI, and that's slowing these, you know, these pipelines from closing because, you know, they've obviously been faced with a different kind of choice that seems like a bit generational in nature? And so is that something you're, you know, seeing as far as these extended close rates, that there's potentially a bit of reallocation into these new technologies? Absolutely not.

Speaker Change: Is there a dynamic here, where your customers are evaluating their it budgets.

Speaker Change: In regard to AI and that's slowing these.

Speaker Change: These pipelines from closing because.

Speaker Change: They've obviously been faced with a different kind of choice.

Neal: It seems like a bit generational in nature and so is that something you are.

Neal: Youre seeing as far as these extended close rates that there is potentially a bit of reallocation into these new technologies.

Neil Barua: And the reason why I say that with such firmness is that in our segment of the market, there is plenty of POC and experimentation and conversations. And what I will say is, we're involved in those, right, on a fair number of them, because while I'm not coming out promoting this on calls like my other peers, we are building and working through a number of ideas around practical use cases for co-pilots. We've actually put out, like I mentioned last earnings call, a beta for a Gen I service solution that we're getting good feedback on.

Speaker Change: Absolutely not.

Speaker Change: The reason why I say it with such firmness is because.

Neal: In our segment of the market there is plenty of POC and experimentation and conversations.

Neal: And what I will say is we're involved in those right on a fair number of them because while I'm not coming out promoting this on calls like my other peers, we are building and working through a number of ideas around practical use cases for co pilots, we've actually put out like I mentioned last earnings.

Neal: Paul.

Neal: Data for our Gen I solution for service that we're getting good feedback on.

Neil Barua: Where I'm going with this, Steve, is that I believe that AI is not taken away from IT prioritization, currently, as they're thinking through what the POCs are and what the use cases are, and quite frankly, what they're going to do with it. And vice versa, what are vendors actually going to charge for it? So we've got some work to do as an industry around it. I actually think it will happen.

Neal: Where I'm going with this Steve is that I believe that AI is not taken away from prior.

Neal: Prioritization currently.

Neal: As they are thinking through what the <unk> are and what the use cases are and quite frankly, what theyre going to do with it and vice versa, what our vendors actually going to charge for it. So we've got some work to do as an industry around it I actually think it will happen, but there's no way in which causing anything different than the cell.

Neal: Environment, because now we have AI coming on the top of ERP CRM or P. L. At migrations, we still are at the top of the heap in terms of the large systems, because lastly, and I'll summarize. This I think most of our customers have realized that a digital foundations necessary before you do anything.

Neal: <unk> practical on AI at scale and Thats why you need a system like what we have to offer a P. L. M O M.

Neal: Pat <unk> and I think the customer base is prime for that so we feel good about that dynamic Steve.

Neil Barua: But there's no way in which causing anything different than the selling customer base is prime for that. So we feel good about that dynamic, Steve. Great. Love the conviction.

Speaker Change: Love the conviction thanks a lot.

Speaker Change: Yes.

Speaker Change: Again, if you would like to ask a question it seemed to press star one.

Speaker Change: Gentle reminder, to everyone. Please limit yourselves to one question only if you have any additional questions. You sit there did appear. Thank you. Your first your next question comes from the line of Bear Abernethy from Rosenblatt Securities. Please go ahead.

Operator: Thanks a lot. Again, if you would like to ask a question, just press bar one. And, as a gentle reminder to everyone, please limit yourselves to one question only. If you have any additional questions, please return to the queue. Thank you. Your next question comes from the line of Blair Abernethy from Rosenblatt Securities. Please go ahead. Thanks very much.

Operator: Neil, just one more on the product side of ShapeCAD, ARENA, PLM, that SAS part of the business: how is adoption going there? And and growth rates in those businesses? How are they faring this year?

Blair Harold Abernethy: Thanks very much.

Blair Harold Abernethy: Just one more on.

Blair Harold Abernethy: On the product side on sheet pad Arena T L M that SAS.

Blair Harold Abernethy: Part of the business, how was adoption going there and growth rates in those business how are they faring. This year and then secondly, as you look to deemphasize some of the other areas. They are in Iot as an example.

Neil Barua: And then secondly, as you look to de-emphasize some of the other areas, AR and IoT, as an example, would that be something you would consider spinning off at some point? So on Shaping Arena, I want to be clear, those are very important parts of our business. I'm not talking to them on a call like this, up until a question is asked, because the five focus areas drive the greatest amount of customer value and, ultimately, economic value for us currently.

Speaker Change: Would that be something you would consider spinning off at some point.

Speaker Change: So so on on shaping arena I wanted to be clear those are very important parts of our business.

Speaker Change: I'm not talking to them on a call like this up until our questions asked because the five focus areas drive the greatest amount of customer value and ultimately economic value for us currently now the on shaping our Ria team are tasked with getting on those five priority list sooner rather than later.

Neil Barua: Now, the Onshape and ARENA team are tasked with getting on those five priority lists sooner rather than later, and they are working hard at that. And what I will give you color on is that I'm very enthused about what's happening in Onshape right now. I think the dynamic of a great product at a time when we have the openness, and customer friendliness of that tool in a SaaS platform is a huge differentiator versus the others that are out there, right? Outside of PTC.

Speaker Change: And they are working hard at that but I will give you color on is I'm very enthused about what's happening in odd shape right now I think the dynamic of a great product at a time when we have the openness the customer friendliness of that tool in a SaaS platform is a huge differentiator versus the other.

Speaker Change: That are out there right outside of PTC. So we feel good about the strategic positioning I feel good about what I'm seeing so far in terms of onshore momentum and we're keeping a close eye is that.

Neil Barua: So we feel good about the strategic positioning. I feel good about what I'm seeing so far in terms of Onshape momentum, and we're keeping a close eye on how that evolves around the momentum and by which that becomes part of the top five priorities of the company. Arena, similarly, we're seeing good trends there.

Speaker Change: Balls around the momentum and by which that becomes part of the top five priorities of the company.

Neil Barua: PLM, they have a very strong set of capabilities, particularly in the supply chain, and the module there is picking up some really interesting themes. You know, I feel good about the progress we've seen in Arena over the last couple quarters. We're staying close to them and making sure that that momentum builds. But in summary, those two businesses, I'm actually really rooting for them with the resources they have, with the attention that they've got from a great leader in Dave Katzman, to make sure that they make it on the high priority list. They're not being ignored.

Speaker Change: Similarly, we're seeing good trends there P. L M. They have a very strong set of capabilities, particularly with supply chain.

Speaker Change: And the module there is catching some really interesting themes you know I feel good about the progress we're seeing in arena for the last couple of quarters.

Speaker Change: Staying close to them and making sure that that momentum bills, but in summary, those two businesses.

Speaker Change: I'm actually really rooting for them with the resources they have with the attention that they've got from great leader in Dave Katherine to make sure that they make it on the high priority list.

Speaker Change: They are not being ignored they've got the momentum and we're making sure that we take advantage of that scale and so that just answers. Your last question I'm more focused on making sure on shape creates a disruptive force in the competitive market right now and build on the momentum versus anything else outside the business. So I'm looking forward to there.

Neil Barua: They have the momentum, and we're making sure that we take advantage of that scale. And so that just answers your last question. I'm more focused on making sure Onshape creates a disruptive force in the competitive market right now and builds on the momentum versus anything else outside the business. Continued recognition and their support as well as productivity within PTC. Great, thank you.

Speaker Change: <unk>.

Speaker Change: Our continued recognition and.

Speaker Change: Their support as well as productivity within PTC.

Neil Barua: One thing, sorry to interrupt. I think it is important to make this point to the team here. We're not abandoning IOT and AR. We're absolutely not abandoning those two areas. And I'll take A.R. first.

Speaker Change: Great. Thank you.

Speaker Change: One thing sorry to interrupt.

Speaker Change: I think it is important to make this point to do that.

Speaker Change: Team here.

Speaker Change: We're not a banding Iot and a R.

Speaker Change: We are absolutely not abandoning those two areas and I will take a our first.

Neil Barua: AR, we're not doing standalone applications, new product roadmaps, expending resources for things that are discrete markets that have very little tie to our core systems. So that those cost items, and more importantly, the focus will be built upon AR tools that actually make sense within our core systems like Windchill, Service Max, etc. for sustainable applications, which has been the case for the last few years. So we're stopping that.

Speaker Change: We're not doing standalone applications, new product roadmap expanding resources for things that are discrete markets that have very little tie to our core systems. So that.

Speaker Change: Those cost items and more importantly, our focus will be built upon a our tools that actually makes sense within our core systems like Windchill service, Max et cetera versus Standalone applications, which has been the case for the last few years. So we're stopping that we're still going to support the current customers because that's important since they are part of.

Neil Barua: We're still going to support the current customers because that's important since they're part of the entire ecosystem, and similarly, in IoT, we'll make sure that we support what we've done in SEO and SCP but position that IoT strength, that ThingWorx capability to enable Windchill expansion within the enterprise, and so we're positioning that to be the emphasis and where we allocate the cost. It's not an abandon Thank you. The next question comes from the line of Matt Hedberg from RBC Capital Markets. Please go ahead.

Speaker Change: The entire ecosystem and similarly in Iot will make sure that we support what we've done in SCO S. C P, but position that Iot strength that thing works capability to enable this.

Speaker Change: Wind chill expansion within the enterprise and so we're positioning that to be the emphasis and where we allocate the cost not an abandonment whatsoever. It's a repositioning of focus of where Iot to air technologies actually makes sense for us.

Speaker Change: Okay.

Speaker Change: Makes sense thanks Neal.

Speaker Change: The next question comes from the line of Matt Hedberg from RBC capital markets. Please go ahead.

Operator: Great, thanks for taking my question, guys. Um, we've spent a lot of time in the past, I feel like several years talking about above average PLM growth, but seeing CAD continue to grow double digits is really impressive. I guess, you know, when you think about obviously, macros remain a bit uneven, but like, what are the core drivers there, you know, beyond just SAS, which Creo Plus is still early?

Matthew George Hedberg: Great. Thanks for taking my question guys.

Matthew George Hedberg: We've spent a lot of time in the past I feels like several years talking about above average PLO growth, but seen CAD continued to grow double digits. It was really impressive.

Speaker Change: Yes, I guess.

Matthew George Hedberg: When you think about obviously macros remains still a bit uneven, but what are the core drivers there beyond just SaaS, which creel plus its still early.

Speaker Change: Because I guess, what I'm trying to get at is like.

Speaker Change: This above peer growth rate, how do we explain it because it's a question that we often get from folks and it feels like you guys continue to outperform on that line item.

Operator: You know, because I guess what I'm trying to get is, you know, this above pure growth rate, how do we explain it? Because it's a question that we often get from folks, and it feels like you guys are too busy to outperform on that line item. So I'll start, and Chris, if you want to add anything,

Speaker Change: So I'll start and Chris if you want to add anything.

Chris: Youre right.

Speaker Change: We are happy with what we're seeing in terms of our CAG growth rate and I believe given my work on this and talking to customers. It's because we have a really great product in Korea and subsequent to that we have a growing very small business and on check right. That's.

Neil Barua: You're right, we are happy with what we're seeing in terms of our CAD growth rate, and, I believe, given my work on this and talking to customers, it's because we have a really great product in Creo. And subsequent to that, we have a growing, very small business in Anshe, right? That's, as I mentioned, doing well, and we expect to do even better as the years come by, given the competitive dynamic. So I believe we have a really strong product.

Chris: As I mentioned doing well and we expect to do even better as the years come back given the competitive dynamics. So I believe we have a really strong product I also believe tying this into as I mentioned the customer example of the Med Tech company, that's deploying windchill, but he didn't mention is they had disparate CAD systems as well.

Neil Barua: I also believe tying this into, as I mentioned, the customer example of the MedTech company that's deploying Windchill, what I didn't mention is they had disparate CAD systems as well. And when they went through the Windchill consolidation to make sure Windchill seeds expanded within the enterprise, they actually did the same thing with their CAD systems, right? Which helped the business for PTC in that area. So there's a level of customers seeing the digital thread and having PTC be part of that, that's helping, I think, the CAD piece.

Chris: And when they went through the windshield consolidation to make certain windchill seats expanding within the enterprise. They actually did the same thing with their CAD systems, right, which helped the business for PTC on that.

Chris: On that area. So there's a there's a level of customers.

Chris: Seeing the digital thread and having PTC be part of that that's helping I think the CAD piece.

Chris: So that's one theme and then two as you know.

Neil Barua: And so that's one theme. And then two is, you know, around the world, there has been more interest in the movement from 2D to 3D. In Japan, where I was just a couple, a month ago, the world was still in 2D.

Chris: Around the world there has been.

Chris: More interest and movement from two D to three D and.

Chris: In Japan that I was in just a couple a month ago. The world. So on two D. They are now moving to digitize and that's moving to three D models, which allows for potentially pre O and on shape to be competitive as some of the offerings out there. So there's a bit of of the competitive positioning occurring I don't think it's the majority.

Neil Barua: They are now moving to digitize, and that's moving to 3D models, which allows for potentially Creo and Anshe to be competitive with some of the offerings out there. So there's a bit of a competitive position occurring. I don't think it's the majority of the growth, but it helps us as we display some of the seats in other competitors with some of the dynamics that we have with the full portfolio. And then, of course, in addition, I know everybody knows this, but the model, we've talked about that before, the subscription model, the sales model that we have, or the contracting model also adds to that. I appreciate it, guys. Well done. The next question comes from the line of Joshua Tilton from Wolf Research. Please go ahead. Hi, this is Arsenije Matovic on behalf of Joshua Tilton.

Chris: City of the growth, but it helps us as we displace some of the seats in other competitors with some of the dynamics area with a full portfolio.

Chris: And then of course in addition, I know everybody knows this but you know the.

Chris: The model, we've talked about that before the subscription model the sales model that we have or contracting model.

Speaker Change: Uh huh.

Speaker Change: Also adds to that ground right.

Speaker Change: I appreciate it guys well done.

Speaker Change: Yeah.

Speaker Change: The next question comes from the line of Joshua Tilton from Wolfe Research. Please go ahead.

Speaker Change: Hi, this is our sending them out of Israel and for Joshua Tilton, just a quick question on indirect performance versus direct channel I think indirect was dilutive from growth of about two points on a tougher comp I guess, what's your expectations for the performance of performance of the channel throughout the year or are they facing any macro headwinds of threat channel isn't facing and then one.

Operator: Just a quick question on indirect performance versus direct channel. I think indirect was diluted from growth by about two points on a tougher comp. I guess, what are your expectations for the performance of the channel throughout the year? Are they facing any macro headwinds that direct channel isn't facing?

Neil Barua: And then there was one brief follow-up. Yeah, I've been spending much more time with the channel, heading up there to Europe with some of our bigger ones next week. What I'll say is, we, we, and under my leadership, we're really making sure the channel is operating with the same sort of energy and focus as the direct side, which, as you can see, we've been delivering solid results on. And, you know, by that, I mean, how do we really position our channel partners to really think through the driving of the pipeline and the bookings and the ARR growth that we've been seeing on the direct side with the consistency that we've been showing?

Speaker Change: Brief follow up thanks.

Speaker Change: I've been spending much more time with the channel having out there in Europe with some of our bigger ones next week, what I'm, saying is.

Speaker Change: Where we are.

Speaker Change: Undermined leadership, we're really making sure that channel is operating with the same sort of energy and focus as the direct side, which as you could see we've been delivering solid results on.

Speaker Change: And by that I mean, how do we really position our channel partners to really think through the driving of the pipeline and the bookings and the AOR growth that we've been seeing on the direct side and the consistency that we've been showing and so we were working through that through enablement through again.

Neil Barua: And so we were working through that through enablement, again, prioritizing the focus areas, showing them what's been working, etc., supporting them like I will be next week. So we're making sure that we revitalize the trend lines of the channel to deliver growth on ARR versus just renewal deals. And so we're going to push on that, and I have a high expectation that if we have the channel partner, they must also deliver the same type of results as we're seeing and pushing our direct teams to do so. Hey guys, I appreciate it. Got it. I got it.

Speaker Change: <unk> the focus areas showing them, what's been working et cetera, supporting them like I will be next week.

Speaker Change: So we're making sure that we revitalize the trend lines of the channel to deliver the growth on a R. R versus just renew deals and so we're going to push on that and I have a high expectation that if we have the channel partner. They must also deliver the same type of results as we're seeing in pushed.

Speaker Change: Our direct team to do so.

Speaker Change: Hey, I got it.

Speaker Change: I'm sorry, that's right.

Speaker Change: Got it.

Operator: The next question comes from the line of Adam Borg from Stifel East. Go ahead. Awesome, and thanks for fitting me in. For Neil, obviously, it's great to hear the strategy around the five focus areas and, just maybe, drill into the fifth area of SAS. Maybe just an update on how, you know, Creo Plus and Windchill Plus are responding. Obviously, we've talked about this being a decade-long journey, but maybe just give us an update on how these conversations are going and how we should think about that in the coming years. Thanks.

Speaker Change: The next question comes from the line of Adam Borg from Stifel. Please go ahead.

Adam Charles Borg: Awesome and thanks for fitting me in.

Adam Charles Borg: Maybe for Neil obviously, it's great to hear the strategy around the five focus areas and just maybe drilling into the fifth area.

Adam Charles Borg: Maybe just an update on how you know Cree Oclock the winter plus are resonating obviously, we've talked about this being a decade long journey, but maybe just give us an update on how these conversations are going and how we should think about that in coming years. Thanks. So much.

Neil Barua: Sure, great question. It is a priority to continue to build momentum there. We have not slowed down in terms of our approach, our customer conversations, and our intensity to make sure we work through all the automation and back-office elements to make the experience really great. We're working through a number of conversions where we're learning a lot and making sure we continue to sharpen our swords, so to speak, to make sure the next conversion happens more seamlessly.

Speaker Change: Sure Great question it is a priority.

Speaker Change: We continue to build momentum there.

Speaker Change: We have not slowed down in terms of our approach.

Speaker Change: Our customer conversations and our intensity to make sure we work through all the automation and back office elements to make the experience really great work through a number of conversions, where we're learning a lot and making sure. We continue to sharpen our sword so to speak to make sure. The next conversion happens.

Speaker Change: Seamlessly as I mentioned to reiterate I see this as a 10 plus year journey, we will do it hand in hand with customers. So the experience is good so.

Neil Barua: As I mentioned, to reiterate, I see this as a 10-plus year journey. We will do it hand-in-hand with customers so the experience is good. So I think that's been working well. We've also put out new releases of Windchill Plus specific to the medical device sector that have a greater emphasis on compliance and regulatory issues that we've embedded into our product.

Speaker Change: So I think that's been working well we've also.

Speaker Change: Put out new releases of windchill, plus specific to the med device sector that has greater emphasis around compliance and regulatory issues that we've embedded into our product. We're looking forward to continued.

Neil Barua: We're looking forward to continued evaluation of how that is received in the marketplace. So we are not laying off the accelerator within our Plus strategy. Across even Creo, we're putting out a release now, Creo Plus, so we continue to invest in it. Again, it will be a long journey, as I mentioned. I view 10-plus years. It might happen earlier.

Speaker Change: View of how that is received in the marketplace.

Speaker Change: So we're not laying off the accelerator within our past strategy across even Korea, we're just.

Speaker Change: We're putting out a release now <unk> plus so we continue to invest into it again it will be a long journey as I mentioned I view 10, plus years it might happen earlier, we're building that the ramp so to speak to make sure that we're ready for that scale conversions into our <unk>.

Neil Barua: We're building the reps, so to speak, to make sure that we're ready for at-scale conversions into our Plus strategy. We continue to invest our resources and attention on that front and feel progress is okay to good on that front over the last few quarters. Awesome, thanks for the question. The question comes from the line of Joe Vruwink from Bayard.

Speaker Change: Strategy, and we continue to invest our resources and attention on that front and feel progress is okay to good on that front over the last few quarters.

Speaker Change: Awesome. Thanks for the question.

Speaker Change: Next question comes from the line of Joe <unk> from Baird. Please go ahead.

Operator: Please go ahead. Great. Hi everyone.

Joe: Great Hi, everyone.

Joe: Going back to the big deals in P. L. M. This is something we're hearing more regularly as well, particularly it seems like it comes up as part of enterprise ERP decisions.

Neil Barua: Neil, just going back to the big deals in PLM, this is something we're hearing more regularly as well, particularly as part of enterprise ERP decisions. But also, the feedback seems to be more recent that customers just need to end up spending more time studying what PLM can do. And, you know, the studying process, and I think appreciating the workloads that matter, it just contributes to longer sales cycles.

Joe: But also the feedback.

Joe: Seems to be more recently that customers just need to end up spending more time studying what <unk> can do and studying.

Speaker Change: Studying process and I think appreciating the workloads that that matter.

Speaker Change: Just contributes to longer sales cycles. So I'm wondering if you could maybe characterize how you think about close rate assumptions on this big pipeline and.

Speaker Change: Have you converted at a high rate and these are very large <unk> deals what might that mean for kind of the upper bound of ranges I imagine the low double digit <unk> growth rate, you're talking about that's probably more of a base case planning assumption. So I'm I guess I'm poking at what the upper.

Neil Barua: So I'm wondering if you could maybe characterize how you think about close rate assumptions on this big pipeline. And if you convert it at a high rate, and these are very large ACV deals, what might that mean for kind of the upper bound of ranges? You know, I imagine the low double-digit ARR growth rate you're talking about is probably more of a base case planning assumption. So I'm, I guess I'm poking out what the upper end of the ranges could be. Yeah.

Speaker Change: And the ranges could be ultimately.

Speaker Change: Yeah.

Neil Barua: So we have a broad portfolio, not just large PLM expansion deals or displacements, to be clear, right? And there are some parts of the portfolio that have faster cycle, close rates, some are longer. Very large deals, to your point, like PLM deals, take a while given some of the closing dynamics that we mentioned. What I can say is, I can't predict when the close rate and selling environment change. I'm not smart enough to tell you when the world gets steadier, geopolitics becomes less of an issue, interest rates, whatever, all the dynamics that cause stress in the system for our customers. I can't predict that.

Speaker Change: So we have a broad portfolio not just large.

Speaker Change: Expansion deals or displacements to be clear right and theres, some or some parts of the portfolio of faster cycle close rates. Some are longer very large deals to your point.

Speaker Change: <unk> M deals.

Speaker Change: Take take a while given some of the closing dynamics that we mentioned.

Speaker Change:

Speaker Change: What I can say is I can't predict when the close rate and selling environment changes.

Speaker Change: I'm not smart enough to tell you when the world gets steadier geopolitics becomes less of an issue interest rate whatever all the dynamics that causes.

Speaker Change: Stress in the system for our customers I can't predict that but what I can do is control the level of conversations the clarity of describing to our customers the value of enterprise P. L lab, which is what we are internally working on in execution to the external market by which they all know that.

Neil Barua: But what I can do is control the level of conversations, the clarity of describing to our customers the value of enterprise PLM, which is what we're internally working on in execution for the external market, by which they all know that if you don't deploy enterprise PLM, you as a product company will no longer exist in a few years. Because many customers are already doing this, as you can see from our results, but there's plenty more wood to chop for us.

Speaker Change: If you don't deploy enterprise <unk>, you as a product company will no longer exist in a few years and I fundamentally believe that that is how important.

Speaker Change: Construct appeal is to our customers because cycle times, new product introductions quality collaboration across the entire enterprise to deliver a great product and customer experience. If you don't do that we're seeing it across the board you're dead.

Speaker Change: And I believe our job is to show what others have already done at PTC, using windchill as well as a L. M.

Speaker Change: Cat as well as SLM and make sure we show the business value and so if you. If you if you just heard what's happening internally.

Speaker Change: Working through that aggressively so that this conversation becomes an easier way in which the customers can see even if I'm in a stressed macro environment I need this.

Speaker Change: Because many customers are already doing this as you can superb results, but there's plenty more of wood to chop for us and if the selling environment changes and we have a large pipeline you guys do math better than me clearly, we have greater opportunity to execute around our growth.

Speaker Change: That's higher than what we put in terms of our aspirations, but I'm not assuming that until I see that change.

Speaker Change: Great. Thank you very much.

Speaker Change: Yeah.

Neil Barua: And if the selling environment changes, and we have a large pipeline, you guys do math better than me, clearly, we have a greater opportunity to execute around ARR growth that's higher than what we put in terms of our aspirations, but I'm not assuming that until I see that change. Great. Thank you very much. Ladies and gentlemen, this concludes our Q&A session. I would like to turn the call over to Neil for his closing remarks. Thank you, everyone, for joining us today.

Speaker Change: Ladies and gentlemen, this concludes our Q&A session I would like to turn the call over back to Neil for closing remarks.

Neil Barua: Here's what's ahead specific to investor conferences. On May 14, Kevin Wrenn, our CPO, will attend the Bank of America Industrials Conference in New York. May 20, KT and I will be at the JPMorgan Conference in Boston. In early June, KT will attend the Baird Conference on the 4th and the Wolf Conference on the 5th in New York City. On June 4, I'll attend the Stifel Conference in Boston. PTC will also attend two virtual conferences this quarter; KT at the BMO conference on June 11, and Steve Verteen, our CTO, will attend the Rosenblatt conference on June 12. On behalf of the entire PTC team, thank you again, and we look forward to engaging with you. This concludes today's conference call. Thank you for your participation. You may now disconnect.

Neil: Thank you everyone for joining us today, Here's what's ahead specific to investor conferences may 14th Kevin ran a C. P. L will attend the bank of America Industrials Conference in New York May 20th Casey and I will be at the Jpmorgan Conference in Boston Early June K T will attend the Baird Conference.

Speaker Change: On the fourth and the Wolfe Conference on the fifth in New York City on June 4th all attend the Stifel Conference in Boston.

Speaker Change: D. C will also joined two virtual conferences this quarter Kt at the BMO Conference on June 11th and Stephen <unk>, Our CTO will attend the Rosenblatt conference on June 12 on behalf of the entire PTC team. Thank you again, and we look forward to engaging with you.

Speaker Change: Thanks, everyone.

Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.

Speaker Change: Okay.

Speaker Change: Yeah.