PTC Inc.
Q2 2021 Earnings Call Transcript

Published: 28 Apr 2021

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2021 Second Quarter Conference Call. . I would now like to turn the call over to Emily Walt, PTC's Senior Director of Investor Relations. Please go ahead.

[Emily Walt:]

Thank you, Abigail. Good afternoon, everyone, and thank you for joining PTC's conference call to discuss our second quarter 2021 financial results. On the call today are Jim Heppelmann, Chief Executive Officer; and Kristian Talvitie, Chief Financial Officer.

[James Heppelmann:]

Thanks, Emily. Good afternoon, everyone, and thank you for joining us. I hope that you and your families have continued to stay safe throughout the ongoing pandemic. I'd like to begin by congratulating Tim Fox our long-time Senior VP of Investor Relations, who's left to pursue an exciting opportunity at ACV Auctions following the recent IPO. I worked closely with Tim for many years and feel he added tremendous value to our Investor Relations program. While we'll certainly miss Tim, we wish him all the best in his new role. Turning to Slide 4. I'm pleased to share that we delivered another strong performance in the second quarter. Bookings grew in the mid-30s as compared to a Q2 period from a year ago when bookings declined 15% as the pandemic set in. Organic bookings grew in the mid-20s. While much of the booking strength contributed to the second quarter's performance, some of the bookings have start dates in later periods and, therefore, went into backlog or what we will call deferred ARR going forward. I'm pleased to see that with several consecutive strong bookings quarters, deferred ARR has returned to pre-COVID levels as customers continue to make commitments to invest in their digital transformation initiatives over the long term. This deferred ARR gives PTC a foundation for growth going forward. The economic environment across the globe continues to improve with PMI numbers returning to or exceeding pre-COVID levels in many regions. This data, coupled with the steady increase of vaccinations and stimulus plans from the current administration is encouraging. From our perspective, demand we see for our core products and SaaS offerings, combined with a strong pipeline heading into the second half of 2021, supports our outlook for the year. In the top line category, we had a very solid quarter with ARR growth of 18% or 15% in constant currency to $1.39 billion. Growth was driven by a combination of our growth business, which delivered strong results by continued momentum in our core business, where we again outpaced market growth and by strong performance from Arena Solutions in its first quarter being part of PTC.

[Kristian Talvitie:]

Great. Thanks, Jim, and good afternoon, everyone. Before I review our results, I'd like to note that I'll be discussing non-GAAP results and guidance, and all growth rate references will be in constant currency. Let me start off with a review of our second quarter results, then review our guidance for fiscal 21. Turning to Slide 25. Fiscal Q2 ARR of $1.39 billion increased 15% year-over-year and organic ARR grew 11%. Strong Q2 free cash flow of $116 million was in line with our expectations. Q2 revenue of $462 million increased 22% year-over-year. The revenue performance was driven by strong execution and also reflects the impact of ASC 606 on revenue recognition as well as a modest contribution from Arena. The strong revenue growth, along with continued financial discipline resulted in non-GAAP EPS growth of 83% year-over-year. Turning to Page 26. I'll begin with our balance sheet. We ended Q2 with cash of $326 million and $1.5 billion of gross debt with an aggregate interest rate of 3.1%. We paid down $80 million on our revolving credit facility during the quarter. Now that our leverage ratio is below 3x, which we told you as our goal. We're evaluating the timing of reinstating our share repurchase program. Now turning to Slide 27. This slide really highlights a few of the key guidance assumptions. The only real change to our assumptions here is the impact of FX movements. And so with these assumptions as context, we're still expecting fiscal '21 bookings growth in the double digits year-over-year and putting our ARR guidance into perspective. Now turning to Slide 28. Last quarter, we told you we expected fiscal '21 ARR to be $1.47 billion to $1.5 billion, a growth rate of 16% to 18%. This assumed 10% to 12% organic growth, 400 basis points from Arena and a 200 basis point tailwind from currency. Our revised guidance range of $1.45 billion to $1.47 billion is 14% to 16%, which assumes 10% to 12% organic growth, same as before, 400 basis points from Arena, same as before, and now no impact from FX. Regarding ARR linearity in fiscal '21. On an organic constant currency basis, we continue to expect the growth rates to be fairly consistent each quarter throughout fiscal '21. Free cash flow is still expected to be approximately $340 million for the full year. This is growth of approximately 60% year-over-year. And as we said at the beginning of the year, we expected more than 60% of this free cash flow to come in the first half. As we finish the first half, we've delivered 2/3 of that target. And just as a reminder, that $340 million free cash flow target also includes approximately $14 million of acquisition-related fees and additional $7.5 million of incremental interest we expect to pay this year due to the Arena-related debt, a $14 million unforecasted payment due to a foreign tax dispute. And also includes approximately $16 million of restructuring payments. This is offset by incremental cash flow from Arena and a positive impact from FX as well of about $10 million. Free cash flow excludes about $25 million of capital expenditures as well. And as a reminder, collections are stronger in the first half, and this is offset by timing of expenses and headcount ramping throughout the year. And as you all know, we have our next bond interest payment due in the fourth quarter. As such, we're expecting 65% to 75% of the remaining free cash flow for our target to come in the third quarter. Now turning to P&L guidance. We're raising our revenue and EPS guidance for the year. Our original guidance was $1.69 billion to $1.73 billion, a growth rate of 16% to 19%. We're now expecting fiscal '21 revenue of $1.71 billion to $1.74 billion, it's a growth rate of 17% to 19%, which includes about 250 basis points from Arena and no impact from -- or nominal impact, if you will, from FX. We're increasing our operating margin guidance on both a GAAP and non-GAAP basis. GAAP operating margin increases from 15% to 16% to 15% to 17%. And non-GAAP operating margin increases from 31 -- 30% to 31% to 31% to 32%. Non-GAAP EPS guidance was $3.05 to $3.35. The revised guidance is now $3.18 to $3.39. That's growth of 24% to 32%. So wrapping up, we had strong financial performance again in Q2. We delivered double-digit ARR growth while maintaining discipline on our expense structure and continuing to navigate what's still a challenging macro environment. I think the first half positions us well to deliver attractive double-digit top line growth and strong free cash flow for the year. With that, we'll turn it over to the operator to begin the Q&A.

[Operator:]

. And our first question comes from the line Saket Kalia with Barclays.

[Saket Kalia:]

Tim, I'd love to zoom in on Slide 20 a bit, very useful slide. Understanding that, that diagram is a vision and not guidance per se. I'd love to hear how you sort of envision PTC's move to Saas. It looks like you'll have all your products available in a SaaS form -- well, the major products available in a SaaS form factor by fiscal '22. And so is the question -- or rather, the question is, is this something you perhaps drive your customer base to or encourage them to adopt? Or is this something that you're going to let happen naturally? And maybe the follow-on to that for Kristian is can you just talk about how this plan for SaaSifying the business long term, of course, maybe plays into that fiscal '24 free cash flow target? Sorry, a lot there, but does that make sense?

[James Heppelmann:]

Yes, it does. And it's actually a good question. So there's a lot you can read into this slide. But if you notice the other logos, then Onshape and Atlas, start a darker greener color and as they move to the right, become more or less the same color of Atlas and in -- or I'm sorry, Onshape. And that's because we call this strategy and insidious SaaSification strategy, which means it happens step-by-step. And it's already started. Vuforia already has the first offerings on Onshape like expert capture. Which is 1 of the biggest ones. We're about to ship the second Vuforia product on Atlas, which will be called Vuforia Instruct coming out later this quarter. We mentioned that Creo is shipping a capability on Atlas now for generative design called Creo GDX. And you'll start to see that coming from Windchill and coming from Thingworx. So what we're going to do is begin to offer incremental or, in some cases, replacement modules on Saas. And then over time, the whole suite of each product line will become available on Saas. So a customer could begin adopting a part of it, get comfortable with the idea, start to generate some incremental revenue for us. And then in year 2 or 3 or 4, even flip the switch and go 100% to Saas. So that's what that diagram intends to show you is that these products are all climbing on board, but it's not an all or nothing. It's step-by-step moving toward that all state where they're fully based on Atlas, and we have really a dream unified SaaS portfolio. I'm so excited about that because a lot of these products have divergent heritages and they're on different architectures today integrated together, but still on different architectures. And we have like a spring cleaning opportunity here, thanks to the power of Atlas to unify on a single platform. And everybody at PTC is aligned behind this. So we're making great progress. And if you think in a year or 2, Windchill and Creo will have $1 billion of ARR. So if we can get some even modest degree of penetration on a 2 for 1 ARR uplift, it's a lot of growth in those businesses. So it's not going to be a lot here. This year, it's not going to be a lot next year, but by the time we get out to '24, '25 it is going to be a lot. I will tell you, though, that any guidance we gave you doesn't really contemplate this. This is kind of a new factor. I mean, I'm maybe moving into Kristian's question here. But our original thinking on SaaSification would be there was more all or nothing, and then we decided that this so-called insidious strategy is much more interesting for everybody, customers and PTC. And so we're now factoring this into the next rev, if you will, of our long-range plan. And it's going to be impactful. But again, the real big impact is farther to the right even in years yet to come on this chart. So it's going to be a big deal, but not a big deal in the near term. Anything you want to add to that?

[Kristian Talvitie:]

No.

[James Heppelmann:]

I answered your question for you. I was on a roll. Okay. Next question.

[Operator:]

Next question is from Matt Hedberg with RBC Capital Markets.

[Matthew Hedberg:]

Jim, what really stands out to me, the past several quarters, you've noted several CAD and PLM replacements, which is really great to hear. I'm wondering, can you talk a little bit more about what's driving that? Is it really kind of your SaaS vision versus other -- even though a lot of these displacements are on-prem at this point. But is it the customers see where you're taking the portfolio? And then how do you think about the pipeline for these displacements? Could these even accelerate as we move on?

[James Heppelmann:]

Yes. I think there's a couple of factors. One is all other things aside, Windchill is a very good PLM system. I mean, it works really well. It's best-in-class in every analyst survey. So it's just independently a really great system. The second thing, though, is it's part of a really interesting portfolio. I mean if you go back to Slide 9, where I was talking hundred remember was Slide 9, but where I was talking about the digital transforms physical conversation. I guess it was Slide 6. On Slide 6, you see that our Windchill solution lives in and amongst a portfolio that is very unique. Other PLM vendors don't really have IoT and AR. And they don't really have an open architecture PLM system, either like referring to Dassault in particular. So I think that people like the product because it's a great product, and they like it again because it has -- it's part of a great larger portfolio. And then they like it because they do see PTC at the cutting-edge of technology and now at the cutting-edge of SaaS technology as well.

[Operator:]

And your next question comes from Jay Vleeschouwer with Griffin Securities.

[Jay Vleeschhouwer:]

Following up on the earlier question from Saket regarding portfolio development and evolution. When we think about the larger context of what's been going on now for a number of years in engineering software, we hear a great deal about so-called digital trends. But it would seem to be more interesting for a company to leave a digital fabric to overdo the analogy. And maybe talk about how you think about that instead of a trend, but perhaps a more encompassing fabric of capabilities through or buy the portfolio. Maybe this is another way of asking you to comment on your closed-loop management strategy.

[James Heppelmann:]

Yes. I mean, Jay, I think you're absolutely right. What's better than a thread is a bunch of threads working together in a fabric that's even stronger and covers more. And I think that really is an interesting strategy. This closed-loop life cycle strategy that you and I both talk about is very unique to PTC. It's CAD and PLM, plus IoT and AR. And now this really interesting new dimension of Saas. That's a differentiated strategy. I always say our PLM competitors don't have IoT or IoT competitors don't have AR and so forth. And there's so much synergy between these products. We cross-sell all day long because customers like the value proposition. So I think it's a differentiated strategy. And the products are independently good, but they show up as a team, and the team is phenomenal, the portfolio. And I think it's just really helped us. We have a story that customers like and it really relates, like you see on Slide 6, to their digital transformation strategies. They see in PTC, a company who can solve a whole bunch or transform, if you will, a whole bunch of different aspects of their business in engineering, manufacturing, service, somewhat in sales and marketing, even the customer interaction with the product and the business model, there's a lot we can do that's unique to PTC.

[Operator:]

And our next question comes from the line of Joe Vruwink with Baird.

[Joseph Vruwink:]

I just wanted to get your thoughts maybe on how this fiscal year is evolving relative to your initial expectation. There's been a quite a bit of upside in the first half so far. And just given the guidance update, it actually seems like the year is going to be pretty front-end loaded in terms of growth. We heard from this morning where they're seeing kind of this release of pent-up demand happening in 1Q and 2Q around large deals and so maybe normal seasonality is changing for them as well. I guess, are you seeing things take place or transact in the first half where when you look to the second half, you're maybe mindful of things being pulled forward? Or is it just the case that you'd like to get a little bit closer to that time frame before maybe making more meaningful revisions to the full year outlook?

[James Heppelmann:]

Yes. I think, honestly, like as we sit here at the midpoint of the year, performance to plan is in bookings is really pretty darn strong and the forecast for the back half. Part of the reasons we want to share this deferred ARR thing with you. Is to show you that some of the great bookings we've been landing, lands and deferred and rather than give you caution that start dates matter, we said, why don't we just be transparent and show you the data. Because it really is pretty impressive. And while we're at the midpoint of guidance on active ARR, we're kind of at the high end of guidance on total or as we sit here at the midpoint. So I think a lot of it just is this delicate balance of deferred versus active inside the total. And we're just going to give you transparency to it, so you know where we're heading, and you can see the business for what it is.

[Kristian Talvitie:]

Yes. It's Kristian. I mean, I think I'd add, we started off the year saying 9% to 12% ARR growth and $340 million in cash flow. After Q1, we upped it to 10% to 12% organic constant currency, $340 million in cash flow. Now we're sitting here, reiterating the same target. So I'm not 100% sure of what's changed. We've been saying that the linearity should be somewhere -- should be pretty consistent throughout the year, which if you take the midpoint of that, it's 11%. We just delivered 11% ARR growth. So I guess I'm not 100% sure. 1 other thing I'd point out is, our business performed pretty well last year. And some of our comps, so in particular, if you take out the Medidata acquisition, posted some pretty negative numbers. In the parts of the business that compete with us. So they're showing less growth against serious declines, we're showing strong growth on strong growth. So I feel like some of the companies who fell into a deep hole during COVID unlike BDC, we'll post bigger numbers as they just get back to where they were in the prior year. But if you look at our 2-year CAGR, everything is growing. Even through the COVID period. And a lot of our comps really aren't growing. They're posting numbers now that are still less than they were back in 2019.

[Operator:]

And our next question comes from the line of Gal Munda with Berenberg.

[Gal Munda:]

I just had a question around the generative design and the exciting news that you basically announced a couple of years after you acquired first of you launched it as part of Creo extension now. What I'm thinking about is how did these modules effectively increase your addressable market in terms of the pricing, maybe how you're thinking about what proportion of your customers are realistically potential customers of it? And do you think that there would ever be a cross-sell into competitive CAD environments as well? Or do you think that's more of a view into kind of potentially getting replacements into, say, existing SolidWorks customers?

[James Heppelmann:]

Yes. There's a couple of different things happening with generative design. And just to be clear, we first released it as part of the desktop application. And for compute horsepower, use the graphics card. That gets you quite a bit of compute horsepower for certain types of compute-intensive codes like generative design. But what we've done now in the second iteration is put it on Atlas, where there's elastic compute, you can have the biggest computer in the world running your generative analyses for you. Let me also say, 1 of the next steps will be the pipe that generative design capability into Onshape. Because it's actually running on the same platform as Onshape now. We just got to build it out into the UI and the functionality of Onshape. So what we'll do with generative design is, for sure, will go back to the Creo base. And we will upsell this new module. It's a purchase you add on. And then we'll go into the Onshape base, and we'll do the same thing. I think that generative design is a brand-new idea. It's a transformational idea, but some of these ideas started a little slow and then really take off once people understand what they can do. So I expect we'll see that pattern. And then I do think it will give us more competitive alternatives because opportunities. Because I think what we have is unique and special. And I think that if somebody is thinking about switching off SolidWorks, if they want to go to a high end product, they'll be impressed by Creo. If they want to go to a simpler product that's simpler to own and so forth, they'll look at Onshape and say, wow. So I think it does give us an opportunity to take some market share. But the first and primary opportunity is the opportunity to drive more growth in the installed base.

[Operator:]

And our next question is from Ken Wong with Guggenheim Securities.

[Unidentified Analyst:]

Jim, there's been a lot of talk, I guess, within your -- the design sector around infrastructure spend, potentially being a tailwind, especially for those of your peers that have AEC exposure. Would love to get your perspective on whether or not this is something that PTC would also stand to benefit from?

[James Heppelmann:]

Yes. I think not so much in the AEC field, but where AEC booms so does construction vehicles and equipment like that. So about 1/3 of PTC's business comes from a category we call industrial. And that would be everything from Deere, Caterpillar, Bobcat style equipment. Volvo go on and on. 2 carrier HVAC equipment or products that end up in new buildings and so forth. So I do think it will be helpful. I think that our industrial customers, in general, are really seeing a surge of growth right now, in part on the rebound from COVID and then might even see a little bit more with the infrastructure spending. So I think it will be helpful, but we haven't factored a lot of that in. We're kind of sticking to the guidance we gave at the beginning of the year and executing well against it, could prove to be a tailwind or an upside. But at this point, we're not changing our guidance explicitly or specifically because of that factor.

[Operator:]

And our next question comes from the line of Andrew Obin with Bank of America.

[Andrew Obin:]

Just a question about Onshape and Arena. What are the opportunities to accelerate ARRs from here? What steps can you take? And the bookings are good. So when could we see acceleration? What's the feedback from the customers?

[James Heppelmann:]

Yes. I mean I think with both Onshape and Arena, Onshape actually has a very high-growth rate, both for bookings and for ARR. In Arena, and so we just need to keep adding sales capacity and continue building out the product and do all the things you do with the growth business is working. Arena is a little bit of a different story because almost all of their sales come from the United States. And so the first thing we're going to do is globalize Arena and sell it around the world, just like all of our products, including Onshape is sold. A second thing we're going to do is integrate it to Onshape because customers that get excited about Onshape also get excited about arena and vice versa. So I think there are some short-term investments like in globalization that we can do for Arena that will be productive quickly. And we're already moving to put those resources in place to open up branch offices, if you will, outside the U.S. and to add more sales capacity and so forth. Arena was owned by a private equity company, and they were managing it for cash flow. And I think you'll see us manage it for growth, knowing that the cash flow will follow. And we have the luxury and kind of know-how to build businesses like that. So that's what we're off doing right now with Arena.

[Operator:]

And your next question is from Matthew Broome with Mizuho Securities.

[Matthew Broome:]

So we've had some optimism in the channel regarding the potential for 5G networks to facilitate sort of remote sensor enablement and ultimately drive more demand ThingWorx over the next couple of years. Just how significant do you anticipate the 5G rollout could be to overall ThingWorx adoption in the near term?

[James Heppelmann:]

Well, I think it's very helpful. It's 1 more reason why industrial companies should go back into their factories and look to make changes. If somebody's going to put in 5G, they're going to put in an application like ThingWorx at the same time because if you suddenly have all this access to data and mobility and high speed connectivity, what are you going to do with all the data? And that's really where ThingWorx and ultimately, Vuforia and products like that fit in. So I think 5G is helpful. It's a tailwind. We've been building a decent business without 5G, but 5G is certainly in the category of nice tailwind more so than anything else.

[Operator:]

And your next question is from Adam Borg with Stifel.

[Adam Borg:]

Maybe for Jim, just on Rockwell, it was great to see the strength in the quarter on the partnership. And I was just curious, it's always been a couple of quarters since that new extended agreement that you guys have had, expanding beyond IoT. And I'm just curious, was this strength that you've seen, just focused on the IoT and AR side? Or was there any early green shoots around Rockwell being able to sell Windchill and Onshape?

[James Heppelmann:]

No. I mean, honestly, and I would characterize it as IoT and AR. Rockwell, and I think I was transparent on this. That new agreement gave Rockwell the right to sell more products because sometimes they come across those opportunities. But it wasn't really changing the center of gravity of the partnership. I think if you look at what's driving a little more momentum with Rockwell, it's 2 things. First of all, Rockwell brought in some new talent. And I'll just say from the sidelines as a partner, these guys are making a difference. They're shaking some things up and really creating some energy. And then the second thing is Rockwell had a good quarter overall. Particularly on the orders front. I saw they announced today and their order book was up double digits and so forth. So I imagine some of those orders ended up flowing our way. So I think it's really more improving economic situation in the world of industrial automation, coupled by new talent. It's not really a mix shift in the product line up to sell it.

[Operator:]

And next question is from Sterling Auty with JPMorgan.

[Unidentified Analyst:]

This is mile on for Sterling. I was hoping you could just maybe give more of a demand breakdown between CAD, PLM, IoT and AR? And then are there any vertical end markets that you aren't seeing a bounce back in demand yet as the economy is reopening?

[James Heppelmann:]

Okay. The first part of your question was breakdown demand between Creo and Windchill? Did I get that right? The whole portfolio? Well, I think the demand sort of mirrors the growth rates. As you might expect, some of the products with the highest growth rate, of course, in order to sustain those growth rates, they have the highest bookings. And in some cases, higher churn as well with newer technologies and so forth. And then when you get to a product like Creo, churn is very low. So we can build a growth business of less aggressive bookings coming in the top. So I would say, yes, demand is strongest for Vuforia and Onshape. At the next level, it's really ThingWorx. And then below that, PLM and below that CAD, just in terms of demand. But it's again a function of the maturity of these products. It's a function of the growth rate of the markets, which is sort of a function of the maturity of the markets and so forth. Hopefully, that hits your question. I guess it was the second part, I mean.

[Operator:]

And for our last question, we have Jason Celino with KeyBanc Capital.

[Jason Celino:]

PLM, very helpful slide, as always, it's been quite strong for a couple of quarters now, but maybe taking a step down in terms of the strength, customer size wise? Any comments on is it enterprise, mid-market, SMB? Or is it truly more broad-based?

[James Heppelmann:]

It truly is broad-based. And let me just say, Jason, that's 14 quarters in a row of double-digit growth in the core business. So it's not just a couple of quarters. It's 14 now. And it's always been PLM leading CAD and the 2 together, representing double digits and double digits right through COVID, by the way. So that's impressive. Certainly compared to some competitors who weren't posting numbers or anything like that. But I'd say it's broad-based. I mean, there's a few pockets like medical device in med tech in general, which is a regulated industry around the globe. We're especially good at that. Windchill tends to take a large percentage of those deals in the larger accounts. And believe it or not, Arena takes a lot of those deals in the smaller accounts is kind of more of a mid-market solution. But they, too, in their market space, are particularly good at regulated markets. But I mean, we've had good success in aerospace, good success in the automotive business. It's just really is pretty broad-based. It's a fair amount of expansions, but then a good number of new logos and competitive displacements, thanks to a differentiated story as well.

[Operator:]

And there are no further questions at this time. I will now turn it back over to Ms. Emily Walt for any closing remarks.

[Emily Walt:]

Thanks, Abigail. I'd like to thank everyone for joining us on the call today. PTC will be participating in a number of virtual investor events this quarter, and you can find all the details on our investor website. We'd also like to highlight our LiveWorx series, which you can see the agenda and register or [e-mail]. We look forward to seeing you on the conference circuit in the coming months. And again, thank you for your interest in PTC. Have a great evening.

[James Heppelmann:]

Thank you, everybody. We'll see you on the road or see you in 90 days.

[Kristian Talvitie:]

Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.