The operator thanks the listeners for joining the PTC's 2024 second quarter conference call and introduces the speakers, CEO Neil Barua and CFO Kristian Talvitie. The call will be broadcasted live and a replay will be available later. PTC will make forward-looking statements and discuss non-GAAP financial measures. The CEO, Neil Barua, thanks the operator and begins the call.

The speaker is proud of PTC's accomplishments in the second fiscal quarter, which demonstrate the company's success and resonance with customers. They have updated their mid-term targets for ARR growth and are confident in their ability to hit cash flow targets while reinvesting in the business. They have a disciplined process for managing spending and are proactively shifting resources towards areas that create the most customer value, such as PLM, ALM, and SLM growth.

The paragraph discusses the focus areas of a company, including PLM, ALM, SLM, CAD, and SaaS. It also highlights the importance of PLM systems for product companies, as products become more complex and diverse. The company's Windchill PLM and ServiceMax SLM products are specifically mentioned as providing significant value to customers. PLM systems are described as a strategic necessity for product companies in order to drive revenue growth and manage the challenges of producing multiple product configurations.

Manufacturing companies are still in the early stages of their digital transformation journeys. One leading medical equipment company saw a significant increase in annual revenue and employee count after implementing Windchill for their R&D processes. This allowed them to establish a solid engineering foundation, ensuring traceability and compliance. They also expanded Windchill to other operational functions, such as manufacturing, supply chain, and marketing, to accelerate their new product introduction timelines.

The second customer example discussed is about cross-selling ServiceMax SLM into the company's base. This involves using digital tools to improve the growth and profitability of their services business. The example highlights a large elevator company that struggled with disconnected systems and is now undergoing a service transformation to improve efficiency and regulatory compliance. With the ServiceMax application, technicians will have access to specific elevator data and instructions, leading to more efficient service calls.

In this paragraph, the speaker discusses how ServiceMax has helped their customers and how they have focused on cross-selling to established customers. They also mention their other focus areas and the progress they have made in each. The speaker also talks about their product portfolio and strategy, and how they are focusing on areas that create the most customer value. They mention their efforts to improve operations and drive operational improvements. The paragraph ends with the speaker handing the call over to Kristian to discuss their Q2 financial results, which were solid despite a challenging selling environment.

In the second quarter, the company's constant currency ARR was $2.075 billion, up 12% year-over-year and above their guidance range. They provide ARR guidance and disclose results on a constant currency basis to exclude the impact of FX volatility. Their cash flow results also exceeded expectations, driven by ARR and operating efficiency. In terms of product groups, CAD and PLM saw 11% and 13% constant currency ARR growth respectively. Despite a slow demand environment, their top-line has remained resilient due to their unique portfolio and subscription model. ARR growth was solid across all regions, with low to mid double digit growth in the Americas, Europe, and APAC.

The company saw consistent organic growth rates in Q2, and aims to maintain a low cash balance while returning 50% of free cash flow to shareholders. They have paused their share repurchase program due to recent acquisitions and plan to use their free cash flow to pay down debt in fiscal '24. The company expects to end the year with a lower gross debt and a slightly higher diluted share count. They are reiterating their fiscal '24 free cash flow guidance and narrowing their constant currency ARR guidance range.

PTC has renegotiated some customer contracts, resulting in a reduction of $10 million in deferred ARR for fiscal year 2024. This has led to an update in revenue guidance, with the low end increasing by $10 million and the high end decreasing by $10 million. The entire range has also been lowered by $10 million due to the impact of FX. EPS guidance reflects first half performance and the impacts of the changes in revenue and FX. Free cash flow guidance remains at $725 million, with Q3 guidance for free cash flow of $220 million and constant currency ARR growth of 11% to 12%. ASC 606 makes revenue and EPS difficult to predict for PTC due to their primarily on-premise subscription sales.

The way revenue is recognized from contracts can vary and may not accurately reflect the performance of the business. PTC believes that ARR and free cash flow are better metrics to assess performance. To reach the midpoint of their fiscal '24 guidance, they need $145 million of sequential ARR growth in the second half of fiscal '24. They expect to benefit from Codebeamer, cross-selling ServiceMax, and having $10 million more deferred ARR. To reach the midpoint of their Q3 '24 guidance, they need $48 million of sequential net ARR growth. The company believes their guidance balances both risk and opportunity.

The speaker reiterates their confidence in the company's cash flow guidance and targets, citing the predictability of their cash collections and disciplined resource allocation. They also mention the strength of their portfolio, strategy, and team. They then hand the call over to the operator for a Q&A session. The first question is about the update in the company's mid-term ARR growth outlook, which was previously reiterated as mid-teens but has now been adjusted to low double digits. The speaker explains that they have been assessing the business since taking over as CEO and have updated their constant currency ARR guidance to 11% to 13%.

The company has seen varying growth over the past five years, with an average of 12% despite changing economic conditions. The CEO has reassessed the company's mid-term targets and decided to aim for low double digits rather than mid-teens. The CFO mentions that this is a cleaner approach and avoids the need to constantly caveat the economy. The next question is about the company's balance sheet and why they are not starting buybacks sooner. The CFO responds that they are making progress in deleveraging and will reassess their capital deployment strategy in the future. The CEO also mentions that inorganic growth is an important driver of longer-term opportunities.

The company still has a significant amount of debt and the interest rates are not favorable. They will reevaluate their strategy in a few quarters. The CEO believes in focusing on organic growth, but will consider acquisitions if they make sense. The CFO is confident in meeting free cash flow targets despite a decrease in ARR. The new CEO is implementing best practices to drive operating leverage.

The speaker discusses the team's efforts to improve effectiveness within the business and focus on customer interactions and go-to-market strategies. They mention a two-pronged strategy for incremental investments and repositioning existing spending for greater customer value. The speaker also notes that the selling environment has been sluggish and there has been no change in the past six quarters, with no specific mention of which verticals are weak.

In the paragraph, the speaker discusses the current state of the selling environment and how it is impacting the company's performance. They mention that while there have been some positive developments, they have not yet turned into a trend. The speaker highlights the challenges in selling larger deals, particularly in the area of digital transformation. They also mention that they are doing well in key industry verticals, but the largest deals in these verticals are still difficult to close.

Neil Barua, CEO of PTC, talks about the company's focus on resource allocation and putting more emphasis on PLM (product lifecycle management) while managing other areas like IoT and AR. He explains that the next step in this evolution is to bolster specific areas within PLM, such as improving the user experience and integration between different tools and systems, to provide customers with better visibility and understanding of their data. This reallocation of resources from IoT and AR will help PTC achieve their goal of delivering the best possible value to their customers.

The company is working on integrating their ServiceMax Windchill product data to be accessible in the field. They are also focusing on using AI and Copilots within Windchill to add value for customers. This integration may lead to more closely coupled products, potentially impacting the regularity and variability of the business. However, they will continue to have open integrations and are not a closed system.

PTC offers best-of-breed solutions in PLM, CAD, SLM, and ALM, and customers can choose from them with confidence in interoperability. Customers are pushing for even more seamless integration between Codebeamer and Windchill, and ServiceMax is a stable recurring revenue business that adds value to the SLM business. PTC believes customers will choose them for a one-stop-shop of solutions, driven by customer value rather than closed systems. The pipeline of large deals is uncertain due to the 606 effect, but PTC remains confident in the long-term customer view.

The speakers, Kristian Talvitie, Jay Vleeschhouwer, and Neil Barua, discuss the possibility of predicting the effects of 606 and the current pipeline of large deals. They mention that they cannot predict the effects, but feel good about the pipeline of deals. They also mention that the main drivers of 606 are contract type and length, and that they are transitioning customers to SaaS. The next question comes from Stephen Tusa about the recent increase in net new ARR.

The speaker asks about the company's guidance and whether it reflects the current macroeconomic conditions. The CFO responds that the guidance is split evenly between Q3 and Q4 and that $10 million has been deferred to a future period. He also mentions that there can be volatility in deals and start dates that can affect results. The speaker then asks about the company's cash tax guide, which the CFO says has not changed.

Neil Barua states that in their segment of the market, there is no evidence that AI is taking away from IT prioritization. They are involved in many POCs and are working on practical use cases for Copilots. They have also put out a beta for a GenAI solution for service and are getting good feedback. Barua believes that AI will eventually happen, but there is still work to be done in terms of pricing and use cases. He also mentions that their company is still at the top of the heap in terms of large systems, and most customers have realized the importance of a digital foundation before implementing AI at scale. Therefore, they feel confident in their position and do not see AI slowing down their sales pipeline.

The speaker discusses the progress of Onshape CAD and Arena PLM, which are important parts of their business. They are working to get these products on the top five priority lists and have seen good momentum in both. The speaker is particularly enthused about Onshape's SaaS platform and its positioning in the market. They also mention keeping a close eye on the progress of these products and ensuring their momentum continues to build.

Neil Barua expresses his support for two businesses within PTC, Onshape and Dave Katzman's leadership. He emphasizes the importance of utilizing their resources and momentum to make them a high priority. He also clarifies that PTC is not abandoning IoT and AR, but rather repositioning their focus to integrate these technologies into their core systems.

During a conference call, a question was asked about PTC's above-average growth rate in CAD. The CEO attributes this to the strong product, Creo, and the growing small business, Onshape. Additionally, there has been a trend of customers consolidating their CAD systems and PTC's involvement in the digital thread has helped drive interest in 3D CAD. In Japan, the majority of CAD is still in 2D.

The company is moving towards digitization and 3D models, which may make them competitive with other offerings. The subscription model and contracting model are also contributing to growth. The indirect channel has faced some challenges, but the company is working to ensure that both channels perform well. The company is focusing on driving pipeline, bookings, and ARR growth in both direct and indirect channels.

The company is focused on five key areas, one of which is SaaS. The CEO gives an update on the progress of Creo Plus and Windchill Plus, stating that it is a priority and they continue to build momentum. They are working through conversions and learning from them to improve the customer experience. The CEO sees this as a long-term journey and will work closely with customers to ensure a seamless transition.

The company has released new versions of their products for the medical device sector with a focus on compliance and regulatory issues. They are continuing to invest in their Plus strategy and anticipate a long journey before it reaches its full potential. The sales cycle for big PLM deals has been longer due to customers needing more time to study the capabilities and workloads. The company is not providing specific close rate assumptions but expects high conversion rates for the large deals in their pipeline, which could potentially result in higher than expected ARR growth rates.

The paragraph discusses the different sales cycles within PTC's portfolio and how the company is working to control the level of conversations and clarify the value of enterprise PLM to customers. The CEO believes that PLM is crucial for companies to survive in the market and is confident in the company's ability to show the business value to potential customers. However, he cannot predict when the macro environment will become less stressful and impact the sales cycle. The company is focused on executing their strategy and is prepared for potential growth opportunities if the selling environment changes.

The Q&A session has ended and the call is being turned back over to Neil Barua for closing remarks. He thanks everyone for joining and announces upcoming investor conferences that PTC will be attending. These include the Bank of America Industrials Conference, JPMorgan Conference, Baird Conference, Wolfe Conference, Stifel Conference, BMO Conference, and Rosenblatt Conference. The PTC team looks forward to engaging with investors. The operator then concludes the call.

This summary was generated with AI and may contain some inaccuracies.