Q4 2024 PTC Inc Earnings Call
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Good afternoon, ladies and gentlemen, and thank you for standing by and welcome to today's PTC 'twenty 'twenty four fourth quarter conference call. During this presentation all parties will be in a listen only mode. Following the presentation conference will be open for open questions and I'll come back and reiterate how you can ask questions at.
Good afternoon, ladies and gentlemen and thank you for standing by and welcome to today's PTC 2020-24 fourth quarter conference call.
That time.
Speaker Change: I would now like to turn the call over to Matt Schmal Ptc's head of Investor Relations. Matt. Please go ahead.
Matt Schmal: Good afternoon, Thank you Erin and welcome to Ptc's fourth quarter and full fiscal year 2024 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.
A replay of the call will be available later today at Www PTC Dot com.
Matt Schmal: 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 can be found in.
Matt Schmal: 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.
Matt Schmal: Statements, including guidance provided during this call are valid only as of today's date November six 2024, and PTC assumes no obligation to update these forward looking statements during.
Matt Schmal: 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 to the most directly comparable GAAP measures can be found in today's press release made available on our website.
Matt Schmal: With that I'd like to turn the call over to Ptc's, Chief Executive Officer Neil.
Neil: Thanks, Matt I've been traveling the globe meeting with customers listening to their perspectives and supporting the teams to close deals.
Matt Schmal: I'm hearing one consistent theme from our companies that build the products the world relies upon Neil we need to shorten our development timelines as quickly as possible with the highest quality to remain competitive.
Matt Schmal: Includes our hardware mechanical electronic and embedded software processes that all need to come together for a final product.
Matt Schmal: Please help us do this as Ptc's core offerings are the key to unlock this value.
Matt Schmal: This is ptc's North star as we are best positioned across these critical dimensions to address the needs of our customers have.
Matt Schmal: It is tangible momentum.
Matt Schmal: And while it might not show up every quarter in a linear fashion I'm utterly convinced of our long term trajectory due to this tectonic shift happening within the key verticals we serve.
Matt Schmal: In fiscal 'twenty for our free cash flow growth was solid up 25% year over year.
Matt Schmal: Our constant currency <unk> growth was up 12% year over year.
Matt Schmal: I am proud of the team as these results werent driven in a selling environment that remained difficult.
Matt Schmal: And then environment that is consistent with what we have been articulating over the course of the past two years.
Matt Schmal: We also delivered despite several organizational moves we made over the past few quarters.
Matt Schmal: There were varying pockets of relative strength, such as areas in APAC and more broadly with our reseller channel.
Matt Schmal: There were also pockets of relative weakness such as Western Europe.
Matt Schmal: In summary, however, aggregate transaction volumes were in line with what we have been seeing over the past couple of years, which speaks to Ptc's resilient business model and our diversification across our verticals and geographies we serve.
Matt Schmal: This allowed us to report solid Q4 results, despite the steady persistence of macroeconomic headwinds and geopolitical uncertainty.
Matt Schmal: I am also energize announced that given the strength of our business and consistency of our free cash flow generation, we announced today, a $2 billion share repurchase authorization.
Matt Schmal: This provides us with another lever to further enhance shareholder value.
Matt Schmal: Christian will walk you through the details of how we plan to execute our buyback program.
Christian: Let's move now to slide four.
Christian: Which highlights our product portfolio and strategy.
Matt Schmal: As a reminder, I fought our five focus areas are.
Matt Schmal: One <unk>, which is driven primarily by our windshield product to a L. M, which is driven by a code beamer product three SLM, which is primarily driven by our service Max product for CAD, which is driven primarily by our cryo product and five our continued focus on SaaS.
Matt Schmal: These are the areas, where we believe we can create the greatest customer value and are the areas, where we have focused resources and attention.
Matt Schmal: As I said earlier, our customers need to introduce new products at a faster pace and with higher quality. It is not unusual to hear from customers that they need to shorten their new product introduction timelines in half.
Matt Schmal: And that's not possible with our digital transformation across our workforce, which is exactly what our products enable.
Matt Schmal: It is also worth highlighting that we are bringing our suite of software offerings in the areas that matter most for our customers together to help product companies improve their competitiveness.
Matt Schmal: Given the unique breadth and openness of our portfolio. We can enable end to end digital threat initiatives, which leverage our connected flow product data across design manufacturing service and ultimately reuse.
Matt Schmal: A digital thread enables product companies to break down silos streamlined workflows and achieve interoperability across departments functions and systems with a single version of the truth.
Matt Schmal: It also secures the quality consistently consistency and traceability of product related data ensuring that the data is up to date accessible reliable and actionable.
Matt Schmal: The digital thread the right data is delivered to the right people at the right time and in the right context across the value chain.
Matt Schmal: The demand drivers for our core offerings are strong and our differentiated capabilities to drive digital thread initiatives are increasingly important to our customers.
Matt Schmal: There is so much we can do to help our customers drive better business outcomes, but as I mentioned last quarter given this incredible opportunity in front of US. This underscores that we also need to evolve how we operate to deliver more value to our customers with more precision and with more consistency.
Matt Schmal: I'll turn to this now on slide five.
Matt Schmal: Last quarter I previewed some changes in our go to market efforts that we were contemplating.
Matt Schmal: I'd like to get into some more detail since the first elements of these changes have been put into place.
Matt Schmal: During my time here at PTC I visited with many of our customers and importantly spend time with the go to market teams that interact with these customers.
Matt Schmal: I had the chance to assess our capabilities and to examine the ways in which Ptc's go to market teams are organized to bring value to our customers.
Matt Schmal: Along with external advisors, we evaluated these elements on a qualitative basis and took the time to assess the performance of our go to market teams on a quantitative basis as well.
Matt Schmal: The result of this evaluation is that we are making changes to our go to market structure that I believe will make us more effective in serving our customers and enable us to sustain the low double digit <unk> growth target for the medium term that we've previously laid out.
Matt Schmal: I'd like to take a few minutes to walk you through these changes in more detail.
Matt Schmal: First we are hiring a new chief revenue officer, who is expected to start in December.
Matt Schmal: This leader is well known within the enterprise software space and I expect that once you settle in he will drive increased focus speed and accountability and a more vertically oriented go to market model.
Matt Schmal: Speaking of which the second adjustment we are making is that we are aligning PTC selling marketing and customer success motions around the five key verticals, we already serve particularly in North America and Europe.
Matt Schmal: Those are.
Matt Schmal: Industrial products.
Matt Schmal: They're all aerospace and defense electronics and high Tech.
Matt Schmal: Automotive and lastly, medical technology and life Sciences.
Matt Schmal: The rationale for this vertically focused realignment is simple it's an extension of our mantra of putting more wood behind the arrows that we believe deliver the greatest value to our customers and ultimately to our company and our shareholders.
Matt Schmal: By aligning our go to market organization, along industry lines, we will increase the specialization of our sellers, which will enhance their industry knowledge and allow them to be more effective in understanding the needs of their customers how to help with their digital transformation journeys and how to provide relevant industry specific feedback to our product.
Matt Schmal: <unk> teams.
Matt Schmal: Similarly by having customer success teams that specialize in certain verticals, they will be more familiar with the pain points that affect their check customers and can act more quickly with more precision to solve these challenges.
Matt Schmal: Frankly, I believe that we have been leaving money on the table with our previous structure and that there are significant opportunities to enhance our growth by selling to and serving our customers in this manner.
Matt Schmal: We have a large pool of customers and their need for digital transformation can be met by the portfolio of products. We have today, yet we arent fully capitalizing on this because how we currently operate.
Matt Schmal: <unk> for example, a customer in the automotive sector and.
Matt Schmal: In some cases that customers lead salesperson within PTC might also be addressing customers in the med Tech and high tech spaces.
Matt Schmal: And while that automotive customer might have certain brands and divisions using our winter product for P. L M. They might not be standardize on it.
Matt Schmal: The automotive industry is under immense pressure to transform to software defined vehicles, which of course comes with tremendous unique challenges some of which can be addressed with our code beamer product working alongside integrated with windshield.
Matt Schmal: By adjusting the PTC teams that serve this customer to focus exclusively on the auto industry. For example, we believe that our selling and customer success teams will be able to cross sell our solutions and this will also enable us to address these customers' unique industry specific challenges more swiftly.
Matt Schmal: And effectively.
Matt Schmal: Underpinning. This transformation are three cultural tenets that I think are worth highlighting because we believe they will ultimately drive value to our customers and to PTC overall.
Matt Schmal: First focus on what matters the most of our customers.
Matt Schmal: Second drive increased speed internally and deliver value to our customers more quickly.
Matt Schmal: And third be more accountable for decisions from start to finish.
Matt Schmal: As part of this transformation, we have also reduced spans and layers within the go to market organization, while also eliminating certain overlay functions.
Matt Schmal: To be clear this is not an exercise in cost cutting rather we believe reorganizing our customer facing resources will make us more effective in capturing the vast opportunity that is ahead of us.
Matt Schmal: We expect to redeploy the run rate costs associated with these people.
Matt Schmal: Back into the re Architected go to market organization.
Matt Schmal: We will be hiring quota carrying salespeople and also specialized technical resources in our customer success organization that align with our five key verticals.
Matt Schmal: There will be approximately $20 million of cash outflows associated with these changes Christian will cover more details in his discussion.
Matt Schmal: Let me wrap up my comments about this go to market realignment by saying that I believe the opportunities to improve our effectiveness our significant here at PTC.
Matt Schmal: We have started to make the required changes to our organization to our organization. We are confident that these changes will lead to repeatable and scalable go to market motions that will serve us well in the guidance that Christian who will walk you through takes into consideration the possibility for some near term disruptions associated with this realignment.
Matt Schmal: Although we are taking significant measures to avoid meaningful stumbling blocks, we must acknowledge that we are evolving our go to market organization and the potential near term risks associated with doing that.
Matt Schmal: We believe we have taken a responsible approach here and look forward to updating you on future earnings calls.
Matt Schmal: Finally, I thought it was worth spending most of my time today as I, just did sharing my thoughts and expectations related to our go to market alignment.
Matt Schmal: This took precedence over sharing some excellent customer stories and so this quarter, we put the customer stories into the appendix slides of our earnings presentations.
Matt Schmal: To highlight customer stories on a consistent basis in future quarters with that I'll hand, the call over to Christian to take you through our Q4 and full year financial results and future guidance.
Christian: Thanks, Neil and Hello, everyone.
Christian: Starting off with slide seven PTC again delivered solid financial results in terms of both <unk> and free cash flow and a continued challenging selling environment.
Christian: As you know we believe they are in free cash flow are the most important metrics to assess the performance of our business.
Christian: To help investors.
Christian: Understand our performance excluding the impact of foreign exchange volatility, we provide <unk> guidance and disclose our results on a constant currency basis.
Christian: At the end of Q4, our constant currency <unk> using our fiscal 'twenty four plan FX rates was 2.207 billion up 12% year over year deferred <unk> came in as expected.
Christian: Moving on to cash flow in Q4, our free cash flow results were also solid as we resolve the collection timing issues. We saw last quarter for the full year, our free cash flow was $736 million up 25%.
Christian: Over the medium term, we continue to expect our free cash flow to grow faster than our a R. R.
Christian: Our non-GAAP operating expense expenses expected to grow at roughly half the rate of a R. R.
Christian: Basic tenet of our subscription business model and budgeting process is that there's natural operating leverage we benefit from is our IRR growth.
Christian: In fiscal 'twenty for our operating efficiency expanded by 370 basis points to 42% compared to 38% in fiscal 'twenty three.
Christian: Moving to slide eight there are a few key takeaways here first as I just mentioned, we expect that our opex will grow at approximately half the rate of <unk> over time, you can see that on this slide.
Christian: On the right hand side, you can see our constant currency <unk> CAGR from fiscal 'twenty, one through fiscal 'twenty five is approximately 15% and our expected Opex CAGR. It's approximately 6%. This is the leverage that was mentioning on the previous slide.
Christian: Well this is a little less than 50%. This is also because we had a couple of acquisitions over this time and there's additional leverage as those get integrated point being that well opex growing at 50% of AOR growth may not work out exactly that way in any given year, we've been delivering on this and think that.
Christian: It remains a good rule of thumb as you think about modeling our business over the medium term.
Christian: Secondly, we also talk about our disciplined approach to budgeting and investment decisions and I think that shows up pretty clearly on this slide as well.
Christian: Well, our overall Opex CAGR is expected to be approximately 6%, it's really more like 4% and SG&A at 11% and R&D.
Christian: Think there's punctuate the point that we've made previously that given the challenge challenging selling environment, we've been in for some time.
Christian: It hasn't really made sense to be investing a lot incrementally in the sales and marketing or G&A for that matter.
Christian: Additionally.
Christian: We believe there is incremental room for effectiveness within the spend envelope, we have today as evidenced by the go to market realignment Neil elaborated on earlier.
Christian: And this brings me to the final point of the slide that I'm trying to emphasize is which is.
Christian: That we're investing in our future growth, while delivering solid free cash flow.
Christian: The slide the Blue line represents our non-GAAP R&D expense trend you can see that the slope of the Blue line inflect. It four years ago, following our transition to a subscription model.
Christian: Our free cash flows expanded this has enabled us to reinvest greater amounts.
Matt Schmal: R&D to support our customers and drive future growth despite the challenging macro.
Matt Schmal: For over a decade from fiscal 2008 to fiscal 'twenty, our average non-GAAP R&D expense was approximately $210 million and our 12 year CAGR was about 2%.
Matt Schmal: In contrast to that we expect to invest approximately $400 million in non-GAAP R&D this year and our four year CAGR from fiscal 'twenty. One through 25 is expected to be approximately 11%.
Matt Schmal: This evolution of our business is important to understand and it's great for our customers because it allows us to continue to invest incrementally in our products even during a turbulent macro.
Matt Schmal: Turning to slide nine, let's look at our AOR growth in more detail.
Matt Schmal: Starting with our <unk>.
Matt Schmal: Product groups.
Matt Schmal: In Q4, we delivered 10% constant currency growth in CAD and 13% in Pls.
Matt Schmal: Our top line growth has shown good resilience.
Matt Schmal: Despite the environment, we've seen over the past couple of years.
Matt Schmal: And is supported by our unique portfolio with a solid footprint in higher growth segments of the market as well as the digital transformation journey.
Matt Schmal: 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.
Matt Schmal: 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.
Matt Schmal: Across all regions, our year over year organic constant currency growth rates in Q4 were similar to the growth rates we saw in Q3.
Matt Schmal: Turning to slide 10.
Matt Schmal: We took on a lot of that over the past three years and we've been diligently paying that down during Q4, we paid down $63 million and ended Q4 with cash and cash equivalents of $266 million and gross debt of $1 75 3 billion.
Matt Schmal: During fiscal 'twenty four our gross debt balance decreased by $569 million we.
Matt Schmal: We used 694 million substantially all the free cash flow, we generated this year to pay down our debt as we said we would.
Matt Schmal: This was partially offset by an increase in gross debt of $125 million in Q1 related to peer variance and the imputed interest for service Max which we discussed in detail on our Q1 call.
Matt Schmal: We were one nine times levered at the end of Q4.
Matt Schmal: 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, while also taking into consideration the interest rate environment and strategic opportunities.
Matt Schmal: I'm pretty sure I don't need to do the math for you, but the 2 billion authorization that we now have in place through fiscal 'twenty seven is clearly more than 50% of the free cash flow, we expect to generate over that period.
Matt Schmal: This year.
Matt Schmal: As you also all know we have a $500 million bond that's coming due in February which we intend to retire at that time with cash on hand, and by drawing on our revolving credit facility.
Matt Schmal: And in line with what we've said previously we intend to buy back approximately $300 million of our common stock in fiscal 'twenty five commencing this quarter.
Matt Schmal: Also as you know we aim to maintain a low cash balance given the consistency and predictability of the business.
Matt Schmal: As such assuming we have excess cash we expect to return it to shareholders and the authorization. We now have in place gives us a lot of flexibility in how we do that.
Matt Schmal: Our fully diluted share count in fiscal 'twenty four it was $121 million and we currently expect fully diluted shares to be approximately flat in fiscal 'twenty five.
Matt Schmal: Moving to slide 11.
Matt Schmal: Before I take you through our guidance, let me walk you through how we guide and report a R. R.
Matt Schmal: As I said earlier, we believe constant currency <unk>, the best way to evaluate the topline performance of our business because it removes FX fluctuations from the analysis positive or negative.
Matt Schmal: If you take a look at slide 24 in our appendix.
Matt Schmal: You'll see the extent to which FX volatility impacted as reported.
Matt Schmal: <unk> over the past eight quarters.
Matt Schmal: For fiscal 'twenty, four we provided constant currency AOR guidance and reported constant currency results for all periods using our fiscal 'twenty four plan FX rates, which were as of September 32023.
Matt Schmal: We also recast historical constant currency amounts.
Matt Schmal: Back to fiscal 19 at those.
Matt Schmal: Fiscal 'twenty four plan FX rates for comparative purposes.
Matt Schmal: For fiscal 'twenty five we're taking the exact same approach we set our constant currency guidance Central report constant currency results for all periods using our fiscal 'twenty five plan FX rates, which are as of September 32024.
Matt Schmal: We also recast historical constant currency amounts back to fiscal 19 at our physical twenty-five plan FX rates for comparative purposes.
Matt Schmal: You can find the recast historical financial data tables for Q4 24 that are posted on our IR website and on this side on this slide you can see the recast constant currency amounts for the past eight quarters.
Matt Schmal: With that I'll take you through our guidance on slide 12.
Matt Schmal: All of the E. R. R amounts on this slide are based on our fiscal 'twenty five plan FX rates.
Matt Schmal: For constant currency a R. R. We expect growth of 9% to 10% for fiscal 'twenty, five and approximately 10, 5% for Q1.
Matt Schmal: I'll get into more detail on constant currency on the next two slides.
Matt Schmal: On cash flows we're guiding for free cash flow of 835 to 808 hundred $50 million in fiscal 'twenty, five which absorbs the approximately $20 million of outflows for severance and consulting fees related to our go to market realignment.
Matt Schmal: Given that the amount is relatively small we're not calling out any restructuring charge. So all of this will flow through the sales and marketing in Cogs line on our P&L.
Matt Schmal: And reiterating what Neil said earlier, we expect to be reinvesting the run rate expense back into the go to market organization throughout the year.
Matt Schmal: In fiscal 'twenty, five we expect similar invoicing seasonality.
Matt Schmal: Compared to the previous four years based on this and our expected cash outflows, we expect approximately 55% or more of our free cash flow to be generated in the first half of the year and for fiscal Q4 to be our lowest cash generation quarter.
Matt Schmal: Note that our cash flow guidance is not on a constant currency basis, so FX fluctuations and interest rate changes can have an impact in either direction.
Matt Schmal: For Q1, we're guiding for free cash flow of approximately $230 million, which absorbs.
Matt Schmal: Approximately $12 million of the $20 million of total outflows related to the go to market realignment the remainder of the payments will be spread out throughout the rest of the year.
Matt Schmal: We have a high degree of confidence in our guidance for free cash flow due to the predictability of our cash collections and the discipline budgeting structure, we have in place.
Matt Schmal: Importantly, we have maintained consistent billing practices overtime, we primarily bill our customers annually upfront one year at a time, regardless of the contract term length. So our free cash flow results over time are comparable.
Matt Schmal: Furthermore, over the past five years, we've optimized our internal budgeting process.
Matt Schmal: It starts with having a subscription business model that generates predictable cash inflows then we start each fiscal year by funding our business for growth at the low end of our internal expectations.
Matt Schmal: And as we progress through the year, we maintain or increase the level of funding based on the growth dynamics, we're seeing.
Matt Schmal: By proceeding in this manner, we're able to match our investments to the market environment in an agile way, while also delivering predictable free cash flow.
Matt Schmal: To help you with your models, we're also providing revenue and EPS guidance.
Matt Schmal: However, I'd like to reiterate my favorite reminder, ASC 606 makes revenue and EPS difficult to predict for PTC since we sell primarily on prem on premises subscriptions and the way that revenue was recognized from these contracts can vary significantly based on <unk>.
Matt Schmal: Variable that aren't necessarily relevant to the performance of the business.
Matt Schmal: I did it teach in on this subject on our Q4 fiscal 'twenty to call that you may want to refer to if you're new to PTC.
Matt Schmal: The summary is we believe a or are in free cash flow rather than revenue and operating income are the best metrics to assess the performance of our business.
Matt Schmal: Moving on to slide 13, here's an illustrative constant currency, a RR model for fiscal 'twenty five.
Matt Schmal: You can see our results over the past three years and the column on the right illustrates what's needed to get to our constant currency guidance for fiscal 'twenty five.
Matt Schmal: Note that all amounts on this slide are using our FY 'twenty five plant FX rates.
Matt Schmal: The illustrative model indicates that to hit 95% <unk> growth, we need to add $214 million of net new <unk>. This year.
Matt Schmal: Our fiscal 'twenty five guidance range assumes that.
Matt Schmal: That will add approximately $20 million.
Matt Schmal: Less than <unk> <unk> in fiscal 'twenty, five compared to 24, and approximately $5 million less than in fiscal 'twenty, three and 'twenty two.
Matt Schmal: It's worth noting that on an annual basis.
Matt Schmal: Opening deferred a IRR for the year is expected to be in line with to slightly better than what we've seen over the last three years when normalizing for the $10 million incremental we had in fiscal 'twenty four.
Matt Schmal: Additionally, our churn remains low and we expect our churn rate in fiscal 'twenty five to be in line with to slightly better than the improving churn rates. We've had in the past three years.
Matt Schmal: Yeah.
Matt Schmal: Our business model is resilient and while the selling environment remains challenging.
Matt Schmal: We believe.
Matt Schmal: That because of these dynamics and allowing for potential near term disruption due to our go to market realignment that 9% to 10% <unk> growth is the right target for total 25.
Matt Schmal: Next on slide 14, Here's a similar illustrative model for Q1.
Matt Schmal: As you know based on our results over the past few years, our net new <unk> can be somewhat volatile in any given quarter given dynamics, such as new or renewal booking seasonality timing of deferred a R. R. Citing how much of our new bookings in any given quarter starts in the quarter how much.
Matt Schmal: We expect in any given quarter et cetera.
Matt Schmal: We've clearly seen quarterly volatility in our results over the past few years and we expect to see some of these dynamics in Q1.
Matt Schmal: This slide shows our sequential net new E. R. R over the past couple of years and the column on the right illustrates that we need a $20 million of sequential net new a or our growth to hit 10, 5% growth in Q1.
Matt Schmal: Obviously, it's impossible to predict any given quarter with that level of precision.
Matt Schmal: However, I'm sure you'll note that this is below the sequential net new <unk> for Q1 that we've had over the past couple of years and as such I think there are two factors worth noting both timing related.
Matt Schmal: First is the linearity of deferred <unk> and <unk>.
Matt Schmal: Secondly, the mechanics of a couple of contracts that will show up as churn in Q1, but our contracted to come back a day or later this fiscal year.
Matt Schmal: Together. These two factors are expected to adversely impact our Q1 sequential net new E. R. R by approximately $10 million, but will not have an impact on fiscal 'twenty five.
Matt Schmal: Also we need to be mindful of any potential disruption from the go to market changes we're making.
Matt Schmal: Importantly, we continue to keep our focus on the full year. As this is how we make incremental investment decisions over the course of the year.
Matt Schmal: With all that said.
Matt Schmal: We think it's worth emphasizing that after normalizing for the approximate 10 million timing impact I just called out our Q1 sequential a are or will be in the same ballpark as the past couple of years.
Matt Schmal: Turning to slide 15, I know that most of you model free cash flow using the indirect method, which uses the P&L and balance sheet as a starting point.
Matt Schmal: However, given the complexities related to ASC 606, there are inherent challenges and using the indirect method to forecast free cash flow for P. T C. The bottle on this slide is based on what we use internally I know that looking at it in this way maybe unfamiliar to some of you. So please field feel.
Matt Schmal: Free to reach out if we can be of help.
Matt Schmal: Starting at the top for fiscal 'twenty, five or using 9.5% AOR growth midpoint of our constant currency guidance range next our perpetual revenue is primarily related to our cap, where a business, which is moving to subscription over time.
Matt Schmal: And the primary reason that our professional services revenue is modeled the decline in fiscal 'twenty five is because a portion of it is transitioning to DXP overtime.
Matt Schmal: These three line items get us to our expected cash generation for the year, assuming no significant sluggish fluctuations in FX rates.
Matt Schmal: Moving down, but the cost section I'd like to highlight that the approximately $20 million of cash outflows related to our go to market realignment are embedded in the cost of revenue and operating expenses line.
Matt Schmal: Even as we reinvest in the business and realigned the go to market organization in 'twenty five we continue to see expansion of our operating efficiency metric due to our recurring subscription model combined with our budgeting process.
Matt Schmal: Continuing to move down the model, we provide guidance assumptions for stock comp amortization capex cash interest payments.
Matt Schmal: Cash tax payments.
Matt Schmal: You can find these on slide 19 of the earnings deck and also on pages three and four of the press release.
Matt Schmal: Note that the cash interest payments are expected to be approximately $90 million in fiscal 'twenty five significantly lower than in fiscal 'twenty four driven by <unk>.
Matt Schmal: Primarily by a decrease in debt.
Matt Schmal: Also cash tax payments are expected to be $110 million in fiscal 'twenty five significantly higher than in fiscal 'twenty, four reflecting higher taxable income the utilization of our deferred tax assets and the impact of internal revenue code section 174.
Matt Schmal: And finally, let's take a look at the other category in fiscal 'twenty for the $82 million was primarily related to FX movements and working capital for fiscal 'twenty five the main drivers of the 99 million being modeled here or FX.
Matt Schmal: Which rates, which have already moved significantly since September 30, 20 door as well as working capital to support continued growth.
Matt Schmal: In this simplified illustrative model the impact of FX fluctuations are captured on a net basis in the other line in reality FX fluctuations that are net positive for free cash flow result in higher cash generation and cash disbursements and FX fluctuations that are negative for free cash flow reserve.
Matt Schmal: <unk> and lower cash generation and cash disbursements.
Matt Schmal: All of this sums up to our expected free cash flow of approximately $843 million, which is the midpoint of our fiscal 'twenty five free cash flow guidance range.
Matt Schmal: So in conclusion.
Matt Schmal: PTC has a strong portfolio and strategy a track record of operational discipline.
Matt Schmal: And clear value creation opportunities, we're focused on what matters most for our customers and we're aligning our operations. Accordingly, so that we can scale our business in a consistent manner.
Matt Schmal: With that I'd like to turn the call over to the operator for today's Q&A session.
Speaker Change: Thank you and ladies and gentlemen, as mentioned we will begin our Q&A session now and remember if you would like to ask a question on today's call.
Matt Schmal: Need to hit Star followed by the number one on your telephone keypad.
Matt Schmal: We do ask that you. Please respect the process and limit yourself to one question only when asking a question.
Matt Schmal: If you have additional questions you're free to return back to the queue and we'll get to it we have done before.
Matt Schmal: Our first question for today comes from the line of Ken Wong with Oppenheimer and company.
Matt Schmal: Your line is life.
Ken Wong: That's fantastic I'll I wanted to just ask a question. It in terms of the go to market disruption. Neil you mentioned that Christian is baked that into the guidance I guess, one when would you assume that you you hit sort of peak disruption.
Ken Wong: I couldn't help but notice that in Q1, Youre growing 10, 5% 11 on an adjusted basis is that the right way to think about the growth rate assuming you guys can manage through the disruption with minimal impact.
Speaker Change: Let me take the Ken Thanks for the question, let me take the front end and then Christian can talk about the the way in which we're thinking about the year. So we're not expecting disruption in fact, we've been really thoughtful and art have gone to already great lengths to prevent disruption we've got a number of mechanisms.
Speaker Change: We've done it before to make sure that we we prevent that disruption across the team as we're going through this this transformation.
Speaker Change: At the same time, though we are also recognizing that as in many go to market transitions that happened across every company.
Speaker Change: There can be some friction within the sales team. Despite all our best efforts you know at the end of the day. These are people not spreadsheets emotion is there and a lot of management that goes into them, but again, we're hyper focused on making sure that we minimize it but in contrast to your question to setting guidance conservatively.
Speaker Change: So kind of artificially engineer, a beat and raise cadence we set our guidance in a way that gives us some room can in case, we end up seeing any short term disruptions over the course of the next number of quarters, Chris you want to take the second base.
Speaker Change: I think you just did okay.
Speaker Change: [laughter] alright, perfect. Thank you guys.
Speaker Change: Thank you for your question. Our next question is from the line of Daniel Jester with BMO capital markets. Your line is live.
Daniel Jester: Great. Thanks for taking my question maybe.
Daniel Jester: Maybe just on on the market I know, there's there's five pillars on the product side, though what youre really focused on maybe Neil we can have an update as to you what you expect to see.
Daniel Jester: The variation in terms of the performance of the business and maybe double click on service Max and it could be for thank you.
Speaker Change: Yeah. Good question. So as you can see from the results from our P. O M and cat breakout we'd continue to have strong performance across those categories across last year and what's driving that is this the wind chill proliferation, which will you know that the strategy of this go to market transformation is within the.
Daniel Jester: Verticals that are using windchill, how to continue to penetrate that more in a precise and consistent manner across the enterprise. So windchill is something we continue to see momentum in we're building more momentum and with this vertical strategy will have even more precision by the key verticals, we already serve with.
Daniel Jester: No and Kelly chair and examples of other customers in those verticals that are using when shell at scale like we're seeing in many cases already but we have plenty of wood to chop to take down all of those dollars in a or that we could have as we extend windshields. So that that's a category that we're really leading into <unk>.
Speaker Change: Whereas you asked you know.
Daniel Jester: Last year in particular in Q4.
Daniel Jester: Two out of the 10 to get data out of the 10 largest automotive OEM companies with revenue two out of them are expanding both beamer, even in Q4 and pace and so that's good.
Daniel Jester: Additional three plus customers that have been using code beamer already in deployment have decided to expand that Houston. So we're starting to see this element of code Beaver as it gets deployed in the environment as software engineers are using it as they're seeing how software interacts with the hardware engineers mechanical engineers.
Daniel Jester: <unk> customers are saying, we want more of code Beaver. So we're going to press on that Youre going to see continued emphasis on how code beamer windshield work, even more comprehensively together, which will continue to accelerate the peel I'm thrust that we're starting to see in the market and then lastly, I know I didn't talk about customer.
Daniel Jester: So as I mentioned on the call, but there's a great case study that we're seeing continued indications and customer a customer deployments on with service Max to your question around the one of the largest manufacturers.
Daniel Jester: Manufacturers of cranes in the world, there's been a large krio windshield customer for almost a few decades and we've been working on this with the service Max team for the last call. It 12 to 18 months with this customer with our new release that I mentioned in the summertime around windshield service smacks connection on.
Daniel Jester: Trouble tickets being able to flow back into windchill from servicemaster that customer did a very comprehensive proposal in an RFP that looked at all the competitive offerings and they chose us because of servicemaster is integration with windshield on the floor product data from engineering to service and back which was the <unk>.
Daniel Jester: Key differentiator for us. So we see continued emphasis there momentum continues to build and we look forward to a good year on both fronts.
Daniel Jester: Thank you very much.
Speaker Change: Thank you for your question.
Speaker Change: Our next question is from the line of Socket Korea with Barclays. Your line is live.
Socket Korea: Okay, Great Hey, guys. Thanks for taking my question here.
Socket Korea: And Neil maybe maybe for you.
Speaker Change: I know you spend a lot of time with customers.
Speaker Change: And you called out in Western Europe in your prepared remarks, so I'd love to I'd love to just zoom into that into that.
Speaker Change: Geography, a little bit.
Speaker Change: What are you hearing from customers there about willingness to spend right now and how do you sort of envision 2025 in Europe from just a demand perspective.
Speaker Change: Yeah, Great question I I've been spending a lot of time in Europe, and rest of world and and also here in North America meeting customers. As you mentioned I think what we're seeing the dynamic we saw some of that in Q4.
Speaker Change: We delivered solid results as we said.
Speaker Change: For a R R and really great results on cash flow for Q4, but you know in terms of having a blowout quarter for Q4 and they are are we had a few deals in western Europe in particular like we've noted that either pushed out or got smaller and the deal value that we're really pushing on.
Speaker Change: <unk> getting done over the course of Q4, which I believe will still get in due time over the course of this year and the dynamic that's happening and at the same time by the way. We've won a number of deals that were at the same value that we thought in western Europe and close those in Q4 I think what we're working through is particularly within the automotive.
Speaker Change: <unk> vertical in Germany.
Speaker Change: There is obviously a lot of pressure around just the cost structure, the speed in which they're developing cars. The tier one suppliers that supply those folks all of those components and so how do you really create competitiveness versus Chinese Oems, we're seeing a lot of that pressure occur as we've all been reading in the press and Ive been sit.
Speaker Change: And boardrooms with all these customers.
Speaker Change: That's the bad news kind of the highlights of the media reports.
Speaker Change: I believe that this is forcing our customers that we're serving in these in this specific vertical in western Europe to rethink how they were actually operating as a business to remain competitive and that comes down to first code Beamer was continue to build momentum within western Europe, because software now needs to be.
Speaker Change: Work at the same speed as mechanical hardware Mecca Mechatronic systems within these Oems that need to have code beaver implemented to do that to keep pace with the Chinese development cycles. So I think that's a net positive for us despite the macro and the issues that the German automakers are dealing with so that's a positive.
Speaker Change: On the second piece is on wind chill, they're looking at thinking about P. L M. How to move product data faster to do their enterprise because they need to stay alive and so I don't want to get too aggressive on saying, it's gonna be wide open field for us to go execute and win a lot of deals in western Europe, because there is a.
Speaker Change: <unk> drop of uncertainty, but within the business, there's a lot of urgency and a need to change the way they are actually doing business and our technology underpins that change so I'm bullish around the requirement socket I'm bullish around the urgency for them to do it I'm cautious.
Daniel Jester: How they're actually going to spend those those dollars over the course of the next couple of years.
Matt Schmal: And and we'll see how that goes over the course of this year, we factor that into how we put this range of guidance as well.
Speaker Change: Makes sense, thanks, guys. Thanks.
Speaker Change: Thanks for your question.
Speaker Change: Our next question is from the line of Joe <unk> with Baird. Your.
Speaker Change: Your line is live.
Speaker Change: Great. Thanks.
Speaker Change: I'm not go to market change when you say that initiating the timing now.
Speaker Change: The structure is mature I had a meeting to be positioned for maybe any benefits from renewed spending that customers might proceed around macro improvement.
Matt Schmal: I guess I.
Matt Schmal: I ask because there's the.
Matt Schmal: Potential always softer U S election that industrial orders pick up if you did see an improvement in industrial sentiment the PMI.
Matt Schmal: Do you think there is a lag for your business so yeah.
Matt Schmal: Their pipelines to replenish maybe later in 2025 and that really simply lines up with when this new structure is going to be mature anyways and so.
Matt Schmal: All of that is ultimately compatible with the changes are now making.
Matt Schmal: Yeah.
Speaker Change: Yeah, Great question, I would say that our teams are already underway and getting ready and executing across the plan and there are several things we're working through around account plans assignments all the great stuff that every team needs to do to organize for.
Matt Schmal: Sure.
Matt Schmal: Being able to face the vertical opportunities that exist and we're working through that and that's the area that we believe we're not expecting disruption, but we're taking into account that some things in other situations to adjust for that if something does happen, but what we won't have is not being ready.
Matt Schmal: The opportunities that we see in the current pipeline and if somehow or another business actually changes versus the last two years of this focused sales environment.
Matt Schmal: Our vertical approach already with experience in these verticals at scale with big customers were prime to take advantage of incremental demand and being able to continue to be well versed to take advantage of that and not have as much of a lag. So I'm looking forward to if we could get manufacturing and <unk>.
Matt Schmal: <unk> to tick up PTC is ready for that we've been riding for for a while and we're gonna be even more ready as we vertical is the business, which we're doing and it's underway and we're looking forward to how that translates over the course of this year into next.
Matt Schmal: Yeah.
Matt Schmal: Thank you.
Speaker Change: And thank you for your question. Thank you for having me.
Speaker Change: Our next line is from the line of Adam Borg with Stifel. Your line is live.
Speaker Change: Awesome.
Adam Borg: Thanks, so much for taking the question.
Speaker Change: Maybe for Neil you talked a little bit about the go to market a focus around five key verticals and I believe the sockets question talk a little bit about what youre seeing in the automotive I was hoping you could talk a little bit is there anything else interesting happening in the other four verticals are worth comedy are both positive and negative and maybe Christian if you could just remind us what.
Matt Schmal: The current mix is for each of those top five verticals that'd be really helpful. Thanks, So much.
Speaker Change: You know I'll I'll start with the with the one that's top of.
Matt Schmal: Everyone's mind across the World I was in India, a couple of weeks ago and it's the same dynamic.
Matt Schmal: Federal Aerospace and defense.
Matt Schmal: He is just continuing to be an area that is facing significant backlog and demand and they're trying to move that faster through their business to deliver the products that are being are being asked to them from their customers and so you know in India I was in U K.
Matt Schmal: Here in North America spending a lot of time that that segment I think is continuing to be an area, where leading into we have a lot of experience we have a lot of credibility there.
Matt Schmal: We're going to continue to do that I'm going out to Washington D. C to make sure. We continue to promote this and get it in a vertical marketing perspective already going into that model.
Matt Schmal: We believe Theres a lot of really interesting dynamics happening in the federal aerospace and defense across the world and we're very well positioned there on med Tech and life Sciences were also seeing an interesting other dynamic where a lot of these companies have gotten very big through a lot of acquisitions and they're now being forced to really develop.
Matt Schmal: Products in a faster pace.
Matt Schmal: That requires P O M at the heart of an epicenter of moving product data as fast as possible to manufacturing and so we're seeing some really interesting trends occurring in med Tech and life Sciences. We had a couple of really interesting wins that happened in the last couple of quarters of 2024.
Matt Schmal: And we expect that to continue because again, it's a survival in existence of their business to actually put these frameworks and systems together like windchill light could be relate krio and service snacks to be able to deal with the competitive nature of their business.
Matt Schmal: Yeah.
Matt Schmal: And then Adam get back to your other question.
Matt Schmal: If we talk about the vertical exposure across the major industries.
Matt Schmal: The industrial spaces kind of high twenties for us.
Matt Schmal: F. A N D Ah is.
Matt Schmal: And around 15.
Matt Schmal: Electronics and high Tech also in that same mid teens.
Matt Schmal: Automotive.
Matt Schmal: The kind of low teens med tech in the low teens.
Matt Schmal: And then the other what we would I guess called noncore verticals make up the difference which is also around kind of 15 ish percent of the of the business.
Speaker Change: Awesome. Thanks again.
Speaker Change: Great. Thank you for your question.
Speaker Change: Our next question is from the line of Jay Felicia <unk> with Griffin Securities. Your line is live.
Jay Felicia: Hey, Thank you good evening.
Matt Schmal: With regard to the digital thread comments, maybe we could tie that into the the vertical comments you'd have this evening that is which verticals would you say are furthest along in terms of adoption adopting.
Matt Schmal: Three or more solutions.
Matt Schmal: Three or more of your various three letter acronyms.
Matt Schmal: Indicative of implementing closed loop lifecycle management.
Matt Schmal: And then with regard to auto.
Speaker Change: When you last reported your segments as a percentage of revenue, which was six years ago. It was mid teens percent, but your exposure to auto was very different back then it was largely powertrain.
Matt Schmal: Powertrains from supply chain and never really body.
Matt Schmal: But would you say now that with the evolution of automotive systems requirements.
Matt Schmal: That your whole exposure in delivery of software.
Matt Schmal: Automotive is going to be fundamentally different.
Matt Schmal: Then you're more limited exposure in the past.
Speaker Change: Yeah, Great question, Jay I'll start with the second one on automotive I think there's been a massive shift in our our determination and our foothold in that market I think is very different than whenever that prior stat was given in.
Speaker Change: The reason for it is it's predominantly the influx of windshield and code Beamer in that group and this as you know well. This includes the oem's and tier one tier two tier three suppliers Kona beers taken a hold on that and we're just pushing all accelerators windchill is also right along.
Speaker Change: On for the ride and you'll see more and more of that come into it versus the design guys. The factory guys.
Speaker Change: Are those are there they're great competitors ours, one of our focus on helping our customers deal with this entire problem statement of how to build software defined vehicles at speed to compete against the Chinese and our tools and our software Jay as you know well is very well placed there some cases by the way.
Speaker Change: They are looking at krio Theyre looking at other things that we have across the portfolio, but the majority of the.
Speaker Change: The strength in that group and you'll see that continue again, it might not happen in a linear fashion, but the ultimate over the medium and long term will be you will see windchill and code Beaver really wrap their arms around that space in an aggressive fashion, that's the strategy and kind of direction that we've got on on your first part.
Speaker Change: To your question on digital thread across verticals. So theres not really one that's taken I can I can say wow.
Speaker Change: Really taken on hold and that's the amazing part of this business Jay which is we look at those verticals and this is my point of we've got a lot of money on the table to go tell them around how krio windshield code Beamer work together and then on the aftermarket service side, how the service.
Speaker Change: Fit into it but also all the other things that we've got but in those four core areas. We've got a real opportunity with in certain segments already customers using it but lets promoted across the entire vertical and that that's the area that we're going to keep pressing on we're going to build product integrations around we're going to get our messaging consistent around.
Speaker Change: We're gonna do customer reference ability on and that's where we think we've got the ability to have a sustainable low double digit growth rate in the medium and long term. That's the goal that we're pushing for and.
Speaker Change: And from our perspective.
Speaker Change: Great. Thank you. Thank you. Thank you for your question our neck.
Speaker Change: Question is from the line of Andrew <unk> with Bank of America. Your line is live.
Speaker Change: Hi, yes, good evening.
Speaker Change: Yeah Andrew.
Andrew: Hey, how are you. So we're sitting here right right. After the election, and we ended up going to a bunch of industry shows.
Speaker Change: And it just seems a lot of uncertainty that we're picking up from a rush them.
Speaker Change: This multiyear destock really impacting our people's budgets that have disrupted operations.
Speaker Change: You know post election, you know do you feel are there's more uncertainty than usual.
Speaker Change: <unk> to 'twenty, five calendar year budgets or because the comps have gotten so much easier and we are past the election that sort of created this uncertainty that visibility has gotten better. Thank you.
Speaker Change: Yeah to be fair, we're 24 hours post the election result, so I I was with two customers today already and what I will say is their commentary and their desires are similar to what it was 48 hours ago, which is around how to make sure we are set.
Speaker Change: Up to deal with all the complexity of the world, which includes geopolitical uncertainty, but that's the only one facet of it there is supply chain uncertainty there is workforce disruption uncertainty of retirements aging there is complexity of products that consumers are demanding now as we do.
Speaker Change: I'll note the Chinese Oems they have opened up the world to saying, let's give the users all of this complexity and configuration of products in very different ways and when you add all that together, what we're hearing from customers again 24 hours, but previous to that is we need technology.
Speaker Change: That P. D. C provides to be relevant to have product data move faster through organization through high highly configured models and variances are there products that include software that includes hardware that includes electronics and mechanical so that we could survive and I think that's gonna be in any.
Speaker Change: <unk> I need that will continue to accelerate regardless of an administration and regardless of push in certain geographies versus the other so we're that's why we're what I said was we're working through a tectonic shift.
Speaker Change: Really convinced around the long term view of it the linear nature of this on a quarterly basis.
Speaker Change: You can pick and choose that number but this business is moving in these verticals because of the urgency of our customers to survive and to remain competitive and I think those dynamics are perfectly suited for what PTC has to offer.
Speaker Change: So realignment is our biggest source of uncertainty into 25 versus macro is that fair to say.
Speaker Change: I think it's Andrew if I, if I can say I think it's everything I don't think there's going to be at least in the last 24 hours less uncertainty I think it's we're going to see how the next couple of quarters play out and we'll be ready for it but right now we're focused Andrew on delivering what our customers are needing from us and.
Speaker Change: Depending on the changes in the environment will be ready for it we have been ready for it through multiple different administrations for 35 plus years and we were successful as a company and we're going to deal the same way going forward for the next 35 years.
Andrew: That's great answer thanks, so much.
Speaker Change: You for your question and ladies and gentlemen, a reminder to please stay on the call at the conclusion of today are Neil is going to be back on to close this out and we have a final question from today from the line of Jason Celaeno with Keybanc. Your line is life.
Jason Celaeno: Hey, appreciate you fitting me in.
Jason Celaeno: You know maybe for Christian.
Speaker Change: Back the tape from 90 days ago, I think when you gave US an initial framework for FY 'twenty five technically said no double digits.
Speaker Change: Now if I look at the guide you know technically.
Speaker Change: Single digits at the midpoint, so curious like what had changed and these 90 days, but I don't know if it was macro or if it's just.
Speaker Change: Incremental conservatism around the go to market kind of changes, but just curious on.
Speaker Change: The hair, then I'm splitting hairs.
Speaker Change: Yeah, Ryan I think it's the latter Jason I think it's just.
Speaker Change: Conservatism around potential impact of.
Speaker Change: The go to market realignment.
Speaker Change: Okay, great. Thank you.
Speaker Change: Thank you for your question and ladies and gentlemen, as promised that we will wrap up our Q&A session for today and I'd like to turn the line back over to Neil.
Neil Ptc: To close this out thank you.
Neil Ptc: Thank you everyone for joining us and for your questions today Christian and map will be both on the road in the weeks ahead participating investor conferences Christian will be in New York mid November hosting and Mizuno dinner and attending the RBC Conference Christian will also be go into London, while I'm in Asia in early December and will be at the NASDAQ.
Neil Ptc: Conference that will be at the Wells Fargo, UBS and Barclays conferences on the West Coast in early December and thank you again, and we really look forward to engaging with you. Thanks.
Neil Ptc: Yeah.
Neil Ptc: Yeah.
Neil Ptc: