The operator introduces the conference call for PTC's fiscal 2024 third quarter, and the company's CEO and CFO will be presenting. The call is being broadcast live and a replay will be available. PTC will make forward-looking statements and discuss non-GAAP financial measures. The CEO thanks the operator and begins the presentation.

In Q3, the company saw solid growth in constant currency ARR and free cash flow. The President and COO, Mike DiTullio, will be transitioning out of his roles at the end of the fiscal year, but will continue as an advisor. The CEO will be assuming many of his responsibilities and is actively making changes to drive growth and effectiveness in the company. The next slide will discuss the company's product portfolio and strategy.

The company has five main focus areas, including PLM, ALM, SLM, CAD, and SaaS, which aim to help customers introduce new products faster and with higher quality through digital transformation. The company's suite of software offerings can enable end-to-end digital thread initiatives, breaking down silos and ensuring the quality and consistency of product-related data. The demand for these offerings is strong and the company's differentiated capabilities are important to customers.

The company's CEO has started to focus on improving operations to unlock the company's potential. This includes rebalancing resources and optimizing go-to-market and G&A activities. The CEO is actively looking at every facet of the business to drive alignment and effectiveness. The company's three focus areas, Windchill PLM, Codebeamer ALM, and ServiceMax SLM, are all critical for customers' digital transformation initiatives.

The author discusses the importance of having an advanced PLM system for product companies to optimize and automate their design and manufacturing processes. They also give an example of a Q3 win at a supplier to the automotive industry and a medical equipment customer who have both been using PTC's Windchill system for years.

A customer has chosen to use the digital thread approach and has signed a deal with Codebeamer to expand their ARR by 190%. Codebeamer's ALM product helps engineers keep track of product requirements and tests, which is important in safety-critical and regulated industries. Codebeamer's traceability capabilities and support for Agile development processes make it a preferred solution for managing the increasing complexity of software-driven products. It is also a key component in completing the customer's digital thread vision.

Codebeamer has helped a medical equipment company manage their high volume of software requirements, leading to faster product releases and reduced risk. This has increased their confidence in PTC and they are expanding their use of Windchill and Codebeamer to create a digital thread for their product lifecycle. The digital thread is becoming a crucial aspect for many industries to improve their competitiveness. Another example is a ServiceMax SLM win for a company that engineers, manufactures, and services industrial and electrical power systems. This win highlights the trend of product companies seeking new sources of growth through managing complexity and accelerating time to market.

The customer in this example had a CEO-led initiative to improve their aftermarket revenue and selected ServiceMax as their software foundation. The ServiceMax application will help their service technicians with scheduling, routing, and complex procedures, and was chosen based on its product capabilities and alignment with the customer's priorities. The company is also making progress in other focus areas such as CAD and SaaS, and consistently investing in R&D to provide value to customers.

PTC's focus on aligning resources and improving consistency in execution will take time, but they are committed to seeing it through. In the third quarter, they saw solid financial results in terms of ARR and free cash flow, despite a challenging selling environment. Their constant currency ARR was up 12% year-over-year and free cash flow was up 29%. They expect to reach their free cash flow target for fiscal 2024 and remain confident in their business model.

In Q3, there was a 10% constant currency ARR growth in CAD and 13% growth in PLM. The company's top line has shown resilience despite a sluggish demand environment. This is due to their unique portfolio, subscription model, low churn rate, and customer prioritization of R&D investments. The constant currency organic ARR growth was solid across all regions. The company aims to maintain a low cash balance and return 50% of their free cash flow to shareholders via share repurchases. However, due to recent strategic acquisitions and debt, they have paused the share repurchase program and plan to use their free cash flow to pay down debt in fiscal 2024. They will reassess their priorities for paydown and share repurchases in fiscal 2025. The company ended Q3 with cash and cash equivalents of $248 million and gross debt of $1.8 billion.

PTC expects to end fiscal 2024 with gross debt of approximately $1.7 billion and fully diluted shares of approximately 121 million. They have updated their fiscal 2024 constant currency ARR guidance, lowering the high end of the range by $20 million. They are also reiterating their free cash flow guidance of $725 million for fiscal 2024 and providing guidance for Q4 with expected free cash flow of $83 million and constant currency ARR growth of 11% to 12%. PTC believes ARR and free cash flow are the best metrics to assess their business performance, as revenue and EPS can be difficult to predict due to the way revenue is recognized from their contracts. They have maintained consistent billing practices over time.

The company primarily bills its customers annually upfront, making its free cash flow results comparable over time. The constant currency ARR model for Q4 shows that $85 million of sequential net new ARR growth is needed to hit the midpoint of the guidance range. The company expects to benefit from Codebeamer cross-selling and has a balanced view of risk and opportunity for Q4 and the full year. Looking ahead to fiscal 2025, the company anticipates low double-digit ARR growth and resuming share repurchases at around $300 million, while balancing debt pay down and returning capital to shareholders. Official guidance will be provided next quarter, but the company feels confident in its recurring business model and budgeting process.

PTC has a strong portfolio, strategy, and team, and is focused on executing value creation opportunities. The demand environment has not changed significantly in the past quarter, but the company has a strong pipeline for the next quarter. The CEO and CFO are looking for improved close rates as an indication of a better environment for PTC. The company is confident in its demand and is focused on closing deals and increasing ARR.

The speaker, Tyler Radke, asks Neil Barua about the demand environment and the trends seen during the quarter. Barua is pleased with the performance in Q3 and believes the challenges are due to execution rather than macro factors. He also mentions that there has been no change in customer behavior. The company has updated its guidance for Q4, taking into account deals landed in Q3 and expected close rates. The guidance range is seen as appropriate, balancing risks and opportunities. The next question comes from Joe Vruwink with Baird.

Neil Barua, CEO of PTC, discusses the company's focus on driving customer value and where they have the highest potential for success. This is reflected in their five priorities and recent repositioning of product and R&D capabilities. The focus is now on the go-to-market function and ensuring that all employees are effectively working towards these priorities. This has led to a lot of customer demand and pull for their products and services.

PTC did not see any changes in trends among geographies and verticals like their competitor did. They have been consistent in their approach and have been operating within a challenging sales environment without expecting it to change.

The speaker believes that the company's success is due to their disciplined approach and focus on five priorities. They are confident in their ability to continue delivering results and are working on a plan for next year. They use a budgeting process to gauge their progress and make adjustments as needed. They are also prepared to defend their cash in case of a challenging environment.

The speaker discusses the company's plans for managing expenses and making changes to their go-to-market strategy. They believe these changes will be beneficial and not cause disruptions in the near term. The company has lowered their ARR range by $20 million, possibly due to renegotiated contracts.

Kristian Talvitie apologizes for not addressing any changes to the deferred ARR in the previous quarter. He explains that the decrease in the midpoint of the full year ARR guidance by $10 million is not due to a lost deal, but rather a timing issue with collections. They were hoping to receive the cash before the end of the quarter, but customers had the contractual right to pay the following week.

The company has received the expected cash flow, resulting in no change to the cash flow forecast for the year. About half of the deferred ARR from the previous year was recognized in the third quarter and the remaining half will be recognized in the fourth quarter. The revised ARR guide is largely due to close rates, which have been consistent with previous quarters and years.

The company is facing challenges with their close rate and is unsure of how their ARR will come into play. However, they are pleased with the momentum of their Codebeamer and ServiceMax businesses and are expecting a strong jump off into next year. They are also considering the impact of the upcoming US election on their customers' decision-making processes and are factoring this into their guidance.

Neil Barua discusses the current state of the US election and its impact on customers and digital transformation. He believes that regardless of who wins, the need for companies to focus on digital transformation will remain the same. Barua also mentions that geopolitical factors and uncertainty have been consistent in recent years, but the company is confident in navigating through these challenges. When asked about the drivers of low double-digit growth in 2025, Barua states that more details will be provided next quarter.

The operator introduces a question from Jay Vleeschhouwer about the CAD market and its stability. Vleeschhouwer asks how the company plans to respond to potential increased competition in the CAD market and how this might affect their cross-selling initiatives. He also asks for more information about the company's internal R&D changes and the progress of their common platform, Atlas. CEO Neil Barua responds by discussing the company's two approaches to the CAD market, Onshape and Creo, and their competitive positioning. He also mentions that Onshape is starting to scale and will be discussed further when it has a significant impact on the company's financials. Barua also assures that the company is strategically placing their focus on ensuring the success of Onshape against competitors.

The connection between Creo, Windchill, and Codebeamer is a strong value proposition for customers interested in the digital thread. The company is ready to compete in the CAD business and has a comprehensive offering with Creo and Onshape. They are focusing on R&D for go-to-market and G&A, and their top priority is to deliver on their roadmap and continue to innovate with features like generative AI and integrations with ServiceMax.

During a conference call, Clark Jeffries from Piper Sandler asked Kristian about the factors that will contribute to the $85 million in sequential ARR for the fourth quarter. Neil Barua responded by breaking it down into different categories, including pricing, the channel, base business, and large deals. He noted that the channel has been consistent, while large deals are more volatile and difficult to predict.

Neil Barua thanks everyone for joining the call and mentions upcoming investor conferences. Steve Dertien will attend the Rosenblatt Virtual Tech Summit Conference on August 20th and Kristian will be at the Citi Global Tech Conference on September 4th. The team thanks everyone and looks forward to engaging with them. The operator then concludes the call.

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