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spk04: Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the PTC 2021 third quarter conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. I would now like to turn the call over to Emily Walt, PTC's Senior Director of Investor Relations. Please go ahead, ma'am.
spk00: Thank you, Peter. Good afternoon, everyone, and thank you for joining us. for PTC's conference call to discuss our third quarter 2021 financial results. On the call today are Jim Heppelman, Chief Executive Officer, and Christian Talvatia, Chief Financial Officer. Before we get started, please note that today's comments included forward-looking statements, including statements regarding future financial guidance These forward-looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in PTC's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. As a reminder, we will be referring to operating and non-GAAP financial measures during today's call. Discussion of our operating metrics and the items excluded from our non-GAAP financial measures and a reconciliation between GAAP and non-GAAP financial measures are included in our earnings press release and related form 8K. Lastly, we will be referencing our earnings presentation today, which you can find posted on our IR website. And with that, let me turn the call over to Jim.
spk09: Thanks, Emily. Good afternoon, everyone, and thank you for joining us. I hope you and your families are well during these continued uncertain times. I'm pleased to share that PTC has welcomed many of our vaccinated employees back to our offices where requirements allow, and we look forward to the day when we can do this on a global scale. Meanwhile, we're monitoring the growing concern with the Delta variant of the virus, and hoping this new development doesn't lead to another round of business lockdowns. Before I dive into the quarter, I want to share some important news on the investor relations front. Emily's been doing a great job holding down the fort since Tim Fox left, but keeping up with IR demands is a big job, and Emily was happy to hear that reinforcements are on the way. I'm pleased to announce the hiring of Matt Schimau as our new Senior VP of Investor Relations. Matt came to us as a recommendation from one of our largest investors, and he came out on top following a thorough search process. Matt comes to us with a finance background and several successful stints on both the corporate side and the sell side of investor relations. He's a strategic thinker, and we're excited to bring him on board. Turning to slide four, with three quarters behind us, our guidance for FY21 has us right on track to deliver mid-teens ARR growth and $340 million of free cash flow this year. That would be a fourth consecutive year of double-digit, top-line ARR growth, and I anticipate we'll be discussing a fifth consecutive year of double-digit ARR growth when we guide fiscal 22 in 90 days or so. While the stronger PMI numbers that we're seeing can only be helpful, I'm pleased to see that PTC is earning a reputation as a company that can consistently perform at high levels in good times and in bad. In preparing for this call, I thought back to where we were a year ago with shutdown orders in place, empty offices and factories, and schools contemplating how to educate from home. Against that chaotic backdrop, I'm very pleased with the results that PTC has been able to deliver and right through the pandemic. Some years back, in the days when our portfolio was narrower and sold in a perpetual model, our business was much more cyclical. But consistent, reliable performance is always what we strive for. And we did the difficult work to earn that. The type of steady, organic, top-line growth performance you see from PTC hasn't been the rule in our peer group, especially among our most direct CAD and PLM competitors. I attribute our superior performance to a better business model, to tremendous strength across our entire portfolio, and to growth drivers that are now more secular than cyclical. In terms of growth drivers, PTC is well positioned for the future. The new logo success of our Onshape and Arena businesses demonstrates the growing demand for SaaS technologies. We see PLM joining IoT and augmented reality as key digital transformation technologies for industrial companies. And years of market outgrowth in the CAD business speaks to the innovation we've reignited there. Turning now to slide five so we can get into the Q3 details, PTC delivered another strong performance in top-line ARR and bottom-line free cash flow in the third quarter. Bookings grew in the mid-30s, a strong rebound in comparison to a year ago when bookings declined. In the top-line category, we had a very solid quarter with ARR growth of 18% or 15% in constant currency to $1.42 billion. Growth was driven by solid performance in our growth businesses continued momentum in our core business, where we again outpaced market growth, and by a solid contribution from Arena Solutions. On an organic basis, ARR grew 14%, or 11% in constant currency in Q3, in line with our guidance. To close out the top-line category, revenue growth of 24%, as reported, was driven by strong execution, aided by the impact of ASC 606 revenue recognition policies, plus, of course, the ARENA contribution. Switching to the bottom line category, we delivered strong free cash flow of $85 million and non-GAAP EPS growth of 34%, reflecting a combination of strong top-line results combined with continued operating expense discipline, even while we also invest for growth. We continue to feel confident about our FY21 target of $340 million in free cash flow. Moving to slide six, digital transformation remains our main secular driver of growth. You may remember last quarter I shared our new tagline, digital transforms physical. These three words are captured in our logo and embody how PTC thinks about our long-term strategy. PTC is a digital company, but our customers do business in the physical world, making physical products in physical factories and servicing those products at physical customer sites. In my LiveWorks keynote in June and again at our Global Partner Summit in July, I outlined the power of PTC's unique digital transformation story that has one foot in the digital world and one foot in the physical world. We tell our customers that our digital transforms your physical. And by that we mean we help customers use digital to define, manage, connect, and augment physical products. Our portfolio is already transformative, but now with SaaS, PTC is at the very forefront of thinking about how customers will use digital to disrupt physical in terms of taking an entirely different approach across the hardware, software, and system administration of their IT systems. SaaS is surely coming to our market, as it has so many other B2B software markets, and PTC has carved out an enviable leadership position. we now have the most to gain from this disruptive force. With that as context, let's take a look at the respective contributions of the FSG core and growth segments of our portfolio. Moving to slide seven, you'll see that ARR in our focus solution group showed growth of 4% or 1% constant currency, which aligns with our growth expectations for this segment. ARR growth for our core business was 14% or 11% in constant currency. Our growth segment saw 60% ARR growth with 23% organic constant currency growth, reflecting on one hand some lingering hangover from COVID, but counterbalanced by solid performances from our Onshape AR and Arena SaaS solutions. Let's go a click deeper into the main elements of our large core and growth segments. Turning to slide eight, our CAD team delivered another impressive quarter with ARR growth in the low double digits, reflecting growth across all geos and an improving demand environment. The additional features and functionalities that Creo 7 delivers, including Creo Simulation Live and Creo Ansys Simulation, continue to demonstrate the power and differentiation of Creo. In addition, last quarter we announced Creo 8, which includes the generative design extension module called GDX, which is based on our Atlas SaaS platform. While it's still early days for Creo leveraging Atlas, this module is a great example of how PPC plans to deliver innovative SaaS-based capabilities as we systematically transition our core products to SaaS. On slide 9, a great example of how CAD generative design and real-time simulation make an enormous impact can be found at hpe coxa a provider of products engineering solutions and technology projects for the performance automotive and motorsports sectors the company designs and manufactures car components and complete systems for some of the highest profile super premium sports car brands around the globe Inefficiencies in a multi-step, multi-software approach to design were causing miscommunication between design and analyst teams, which delayed production times and caused customer satisfaction risks. By adopting fully integrated and streamlined generative simulation and additive technology workflows in Creo, HPE Coxa simplified the design sequencing, reduced overall design and production time, and improved design agility in time to market. Moving on to slide 10 in our PLM business, you'll see that PLM continued to deliver very strong performance with another mid-teens ARR growth quarter. From a geographic perspective in Q3, we saw broad-based strength across all our geos and in our customer base with a solid quarter in the reseller channel. And we saw increased demand for PLM through the Microsoft alliance. Another proof point suggesting more customers are understanding the critical role that PLM plays in their digital transformation initiatives. Incidentally, during the quarter, we won three more Partner of the Year awards from Microsoft. On slide 11, we profile a win with Cellcentric, a Daimler truck and Volvo joint venture, which helps hydrogen fuel cells or which develops hydrogen fuel cell systems and believes that PTC's PLM solution is best in class. As the deadline of becoming an independent entity loomed on the horizon, Cellcentric knew they needed a PLM backbone in place quickly. PTC delivered our cloud-based Winchell offering, establishing a best-in-class application landscape for PLM in a great competitive displacement. Moving on to our growth businesses, I'll begin with IoT on slide 12. IoT delivered high teens year-over-year ARR growth driven by strength in Europe and APAC. Rockwell was the largest reseller of IoT in the quarter. On slide 13, we discuss how Eaton, a multinational power management company, saw the need to deploy a digital transformation strategy across their enterprise. Our factory insights as a service IoT application helped to deliver quick wins forming a digital foundation upon which they can easily add more use cases. Eaton was able to realize multiple improvements, including improved OEE, reduction in unscheduled maintenance, reduction in manual efforts, and 100% worker compliance with SOPs. Let me shift to our augmented reality business on slide 14. The Vuforia augmented reality team again delivered strong results in Q3, with ARR growing across all geos. We saw improving retention and expansion rates, and the opportunity to cross-sell into the larger PTC portfolio is gaining momentum. This quarter, we also announced a new ARR product, Vuforia Instruct, a unique Atlas-based SaaS solution designed to enable enterprises to leverage 3D CAD data to deliver create, deliver, and scale interactive AR work instructions to optimize inspection procedures. When you consider that two-thirds of manufacturers are still using paper-based inspection processes, you can appreciate how Instruct delivers considerable value to our customers. Vuforia resonates with the customers we engage through our alliance with Microsoft, and one of the awards we won this quarter was Partner of the Year in Mixed Reality. On slide 15, you'll see an innovative example of the use of augmented reality that comes from Stana, a UK company dedicated to the design, production, and service of residential and commercial stair lifts. Stair lifts are customized systems configured for and installed in the consumer's home to help those with difficulty navigating stairs, for example, the move from the first floor living room to the second floor bedroom. Stana leveraged Vuforia to create an AR application that allowed customers to see how a customized 3D hologram chairlift could fit and work in their homes. With COVID limiting the amount of face-to-face interaction by sales and service teams, Vuforia enabled a customer-centric tool that could be used by sellers during the sales cycle to help potential buyers visualize a residential stairlift in their home. Stana saw increased purchase confidence improved differentiation against competitors, and shorter sales cycles through improved customer communication. Turning now to slide 16, Onshape delivered a very strong quarter with ARR growth of 40% year over year. We had a very strong bookings quarter in the Onshape core commercial business with larger deal sizes and stronger renewals thanks to a maturing product. Onshape continues to gain share in the education market, too, as schools and students turn to SaaS-based solutions for mobility and ease of everything. Looking ahead to Q4, we see a strong pipeline for both the commercial and larger account enterprise business. Turning to slide 17 is fun highlighting customer stories, especially when that customer is solving a problem through innovation. Delta Development, an R&D company specializing in military applications for cooling and heating systems in extreme environments, was contracted to design and manufacture an autonomous portable refrigeration unit for deployment by medics on the battlefield. The company was seeking to reduce its IT overhead, which had been taking up 20% of the engineering team's product design time. By moving from an on-premise CAD system that took a lot of care and feeding to Onshape, the time loss associated with software installations, licensing, and regular system upgrades was eliminated. They both reclaimed the 20% of their design capacity and at the same time enabled real-time collaboration on 3D designs across the distributed team environment. Moving to ARENA on slide 18, ARENA continues its growth trajectory, delivering ARR growth of over 20%. ARENA is seeing strong traction with upselling as they increase penetration into current customer environments and keep retention rates high. By all measures, ARENA looks to be a great acquisition. I'm also pleased to note that we opened our first European ARENA sales operation during the quarter. Turning to slide 19, Nextracker, a flex company, is one of the fastest growing clean tech companies in solar, offering next generation solar power plants with smart solar trackers and energy storage solutions. The company lacked a single source to track and manage its engineering design and development processes. They needed a better way to manage product information across distributed teams, to enable automated approvals, and to improve tracking and accountability. With ARENA, Nextracker was able to reduce review and approval times by nearly 60%, eliminate time zone delays with global partners, and accelerate product introductions by 25%. ARENA has helped Nextracker significantly improve the way they design and get products to market. Naturally, I'm pleased that PTC has been able to complement the strong performance of Creo and Windchill in the traditional market with breakout performance from Onshape and Arena in the burgeoning SaaS market of tomorrow. The success we're having with Onshape and Arena in the small and mid-market is 100% complementary to Creo and Winchell's success in larger companies. Geographic performance was strong on a global basis and is shown on slide 20, reflecting the performance trends we've seen year-to-date. America's ARR growth of 21%, was driven by solid core performance and arena. Europe ARR grew 9%, consistent with several prior quarters, with strength in CAD, PLM, and improving growth in IoT as we work toward full recovery from COVID there. APAC delivered the fourth quarter in a row of mid-teens ARR growth, with strong performance in core and growth businesses. Summarizing the state of the business on slide 21, we're pleased with the general good health of PTC across all of its different dimensions and moving parts, and we look forward to wrapping up a great year of ARR and free cash flow growth here in FY21. With that, I'll turn it over to Christian to take you through more details on the financial results and guidance.
spk11: Thanks, Jim. Good afternoon, everyone. Before I review our results, I'd like to note that I'll be discussing non-GAAP results and guidance, and most of the growth rate references will be in constant currency. So let me start off with a review of our third quarter results, and then we'll review guidance for fiscal 21. Turning to slide 23, fiscal Q3 ARR of $1.42 billion increased 15% year over year, and on an organic basis, ARR grew 11%. Q3 free cash flow of $85 million was solid and in line with our expectations. Q3 revenue of $436 million increased 24% year-over-year as reported, or 19% in constant currency. 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 34% year over year. Turning to page 24, I'll begin with the balance sheet. We ended Q3 with cash of $366 million and $1.5 billion of gross debt with an aggregate interest rate of about 3.1%. We paid down $30 million on our revolving credit facility during the quarter. With our leverage ratio now less than three times, which we told you was our goal, we expect to be in the market buying back shares in Q4. Now, turning to guidance, slide 25 highlights a few of the key guidance assumptions. And while our assumption on the impact of currency on ARR has changed from neutral to an approximately 60 basis point tailwind, the rest of our guidance assumptions remain the same as they have throughout the year. So putting our ARR guidance into perspective and turning to slide 26, last quarter we told you that we expected fiscal 21 ARR to be 1.445 to 1.470 billion, a growth rate of 14 to 16%. This assumed 10 to 12 percent organic growth, 400 basis points from ARENA, and no FX impact. Our revised guidance range is now 1.453 billion to 1.478 billion, which is still 14 to 16 percent growth, and assumes 10 to 12 percent organic growth, 400 basis points from ARENA, and approximately 60 basis points of currency impact. Regarding ARR linearity in fiscal 21, we've delivered consistent, organic, constant currency growth around the middle of our guidance range for three quarters, and we continue to expect the growth rate to be consistent in Q4 as we close out fiscal 21. Free cash flow is still expected to be approximately $340 million for the full year, growth of approximately 60% year over year. Our $340 million free cash flow target also includes approximately $15 million of acquisition-related fees, an additional $5 million of incremental interest we expect to pay this year due to the arena-related debt, approximately $18 million of an unforecasted payment due to a foreign tax dispute, and also includes approximately $15 million of restructuring payments. This is offset by incremental cash flow from ARENA, and free cash flow is also net of approximately $25 million of capital expenditures. As a reminder, collections are stronger in the first half, offset by timing of expenses and headcount ramping throughout the year. And as you know, our bond interest payment will hit in the fourth quarter. So we've already delivered more than 90% of the free cash flow target for the year, which is in line with our expectations and has been. Now turning to the P&L guidance, we are raising revenue guidance and EPS guidance for the year. Our prior guidance for fiscal 21 was $1.710 to $1.740 billion, a growth rate of 17% to 19%. We're now expecting fiscal 21 revenue of $1.733 billion to $1.763 billion, a growth rate of 19% to 21%, which includes approximately 200 basis points from ARENA and approximately 100 basis points from FX. We're increasing operating margin guidance both on a GAAP and non-GAAP basis. Gap operating margin increases from 15% to 17% to 17% to 19%, and non-gap operating margin increases from 31% to 32% now to 32% to 33%. Non-gap EPS guidance previously was $3.18 to $3.39. and our revised guidance is now expected to be $3.35 to $3.60. That's growth of 30% to 40%. Turning to slide 27, our total ARR growth, which includes deferred ARR, was 12% on an organic basis in Q3. And we expect organic active ARR growth of 10 to 12% and are now expecting approximately 95 million in deferred ARR for the full year, which is up from what we told you last quarter of around 90 million. Wrapping up, we had strong financial performance again in Q3. We delivered double-digit ARR growth while maintaining discipline on our expense structure. as we continue to navigate what still remains a somewhat unsteady macro environment. Year to date, our performance has positioned us well to deliver attractive double-digit top-line growth and very strong free cash flow growth for the year. So with that, I'll turn the call over to the operator, and we can begin the Q&A.
spk04: As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star, then the number one on your telephone. Please limit yourself to one question only. If you have additional questions, please return to the queue. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And your first question will come from Saket Kalia with Barclays.
spk12: Excellent. Hey, guys. Good. Hey, guys. Good afternoon. And thanks for taking my questions here. I'll keep it to one maybe for you, Jim. Lots of fun stuff to talk about with with the business this quarter, but maybe just to get it out of the way. You know, I think we all saw some of the announcements by Rockwell and PTC in intra quarter. So I was wondering if we could get maybe your perspective on how some of those changes maybe, you know, sort of impact the economic relationship between you two and how, if at all, it maybe impacts long-term, PTC's long-term strategy in your view. Does that make sense?
spk09: Yeah, sure. Well, the biggest piece of news, of course, was Rockwell acquiring Plex, you know, for $2.2 billion or so. So I would say, first of all, everybody should know that Plex is 100% complementary to PTC. We have never, ever competed with Plex at all. And in fact, you know, knew Plex pretty well because it's run by Bill Brody, who's, you know, one of my better friends in life and reported to me for a dozen years or so. So Plex is a great company. We know who they were. We kind of had decided it wasn't quite the right fit for us to acquire. But actually, we're pleased to see Rockwell acquire them. And I think there's actually some opportunity for synergies between what Plex does and what PDC does. You might almost think that Rockwell is adding Plex in a way, you know, from my perspective to the innovation suite we built together. So I don't see any conflict at all. You know, I think Rockwell will be probably sharing some attention cycles. with Plex that maybe, you know, had been previously committed to PTC, so we'll have to see how that plays out. But, you know, in general, Rockwell is an important partner. They won our Partner of the Year award after they acquired Plex. So, you know, I think that the partnership is important. It's sort of built into the business as we run it today, and I don't see anything dramatic changing there going forward. There was also a question somebody else asked me, is Rockwell going to sell their PTC shares and, you know, I would say you probably should ask Rockwell, but certainly they have not suggested to us they're going to. And I think their public announcement said they were going to fund the Plex acquisition with new debt and cash on hand. So I don't think anything really changes in the relationship other than, you know, something new came in. And on one hand, it's bringing new capabilities that might help us against competitors collectively. And on the other hand, you know, we'll have to share attention cycles with it. So that would be my thought there, Socket.
spk12: Got it. Very helpful. I'll have that in queue. Thanks, Jim.
spk09: Thank you.
spk04: And your next question will come from Matthew Broom with Mizuho.
spk07: Thanks very much. Hi, Jim and Christian. I guess just on that general theme, it'd be interesting to get your sort of updated thoughts on M&A and in particular given You know, recent market events, how you view the electrical CAD market as an adjacent opportunity. You know, clearly you did make an acquisition in that space yourself last year.
spk09: Yeah. So you're probably referring to some activity between Autodesk and Altium, I'm guessing. So Altium is one of three main printed circuit board designers, you know, software companies. And then, of course, there are other companies that provide integrated circuit software. The integrated circuit software really doesn't have a touchpoint with our world of CAD and PLM, but the printed circuit board design software does. We have a partnership with Altium. You know, I'd like to find ways to strengthen that partnership. I don't really see us trying to acquire them. For one thing, we'd have to top out of best price, which, you know, I don't know that we're in the mood to do. And then secondarily, I don't think they want to be acquired. So I feel like there's a good opportunity there for us to do more in the partnership, both on one hand with Onshape and Arena, which are a nice fit in the lower part of the market with Altium, but also with Creo and Windchill, which are also a nice fit. So there are many Creo and Windchill customers who put circuit boards in their otherwise mechanical products. And the same would be true of Onshape and Arena. So there's lots to do there in terms of a partnership. I don't see us trying to acquire them, you know, in the near term, given the circumstances as I know them. We did make a small ECAD acquisition, actually a company called ECAD MCAD, but it really was a very small deal. And it really was at the interface of ECAD and MCAD. It was not ECAD capabilities. but it was the ability to import and real-time synchronize between an MCAD product like Onshape and an ECAD product like Altium. So it's actually going to prove useful in some of the integration activities that we want to do. But anyway, Altium's a good company. I'm perfectly happy if they remain standalone, and we at PTC look forward to strengthening our partnership because there's lots of synergy on both sides of that partnership. Got it.
spk07: Makes sense. And then I can maybe just quickly ask about general interest and demand for generative design within your customer base. How have you seen adoption within Creo and how close are we to seeing GD become an integral part of any sort of mainstream design process for cars and planes and so on?
spk09: Yeah, I think there's a lot of companies exploring it, trying it out, doing what-ifs and proofs of concept. And frankly, they get some pretty good results. But it is a very different way of doing engineering. We always thought of computer-aided design. But actually, the computer wasn't so much aiding the designer. It was just simply documenting the ideas. But this really is computer-aided design, where where the software is providing ideas to the engineer as opposed to just capturing the engineer's ideas. That's a different process that people have to wrap their head around. You know, I'll follow AI around. But like I said, the results are pretty spectacular sometimes. So there's definitely a lot of interest. I think it'll take a while to mainstream. You know, but certainly it's going to be a wave of growth in Mechanical CAD, you know, over the next five years. I just, I don't think it'll come on super strong in the near term. All right. Perfect. Thanks very much.
spk04: And your next question will come from Jason Saleno with KeyBank Capital. Your line is open.
spk01: Great. Thanks for taking my question. Jim, you know, Onshape seems to be doing great. You know, 40% growth, very impressive. The AR business doing also quite well. But the growth segment, you know, did decelerate a bit to that 23% organic content currency growth level. Is the overhang still on the IoT side? You know, what gets that turnaround?
spk09: Yeah, well, if you look at scale, Jason, about 75%. of that growth segment in terms of scale is IoT. IoT is a much bigger business because we started it sooner and really had a lot of success with it. So in a way, right now, as IoT goes, it has a big influence on the overall performance of the overall growth segment. So most of the slower growth was in IoT. uh and most of it is still related to hangovers from uh from covid so uh if we if we kind of look at what's happening on the sales front with uh with iot i mean sales have improved year over year they're still not back to uh where we want them to be but in general what we're seeing is a good quantity of deals but smaller deal sizes which i just attribute really to conservatism around people doing IoT projects in factories and in general as they come back to speed following COVID. You might remember, too, that we mentioned clearly at the beginning of the year that we had a two-point headwind to growth in our deferred, what we at the time called backlog, but deferred ARR was a two-point headwind. Well, a lot of that headwind landed in IoT because that's the place where our sales were softest. last year so some of that is now coming home to roost now you know it's not just what did we sell in the quarter but it's how much backlog did we also uh take advantage of you know maturing in the quarter and and that's another pressure that you know we'll work our way out of as uh as we kind of round trip the covet impacts of uh you know the first uh or the back half of uh fiscal 20 in the front half of fiscal 21. no let's say most mostly in fiscal 20. right
spk01: Okay, great. Excellent. Thank you for the call. I'll get back into you.
spk04: And your next question will come from Andrew Oven with Bank of America. Your line is open.
spk10: Yes, good afternoon. Hey, Andrew. Hey, how are you? Jim Christian. A question about Onshape. You sort of talked about a more mature model and sort of approaching the larger enterprise customers. Can you just talk about, you know, about where we are in sort of, A, how large a large enterprise is, and where are you in sort of transitioning this product towards your more core customer base away from small and medium businesses? And if I understood you correctly, frankly, thank you.
spk09: Yeah. Okay, Andrew, those are good questions. So, first of all, when I used the term enterprise, I was using it as defined by the Onshape team. which generally means an account that would take 15 seats or more. I guess kind of a small definition of enterprise, you know, for the rest of us at PPC, but that's their definition. So I would say the definition of enterprise used by Onshape is a medium-sized company. And the commercial business is small companies. Now, I would tell you that it's just a different buying market, and our – CREO software and our Winchell software, for that matter, does not participate effectively in the market where Onshape and Arena are making hay right now. So it's all complementary. And in fact, honestly, we're borrowing a page from Dassault's strategy of 20 years ago when they had SolidWorks in the mid-market and, you know, Catia and Inovia in the high end of the market. And those two products prospered side by side for 20-some years until they both grew a bit old and tired. But it's a strategy that works. It's market segmentation. And so I don't think that you're going to see Onshape and Arena put a dent into Creo and Windchill because, amongst other things, Creo and Windchill are adopting the SaaS technology called Atlas that makes Onshape so special. So when Onshape's stealing larger accounts, it's basically, by and large, stealing them from SolidWorks. and then Cherry Pick and a few others here and there. But they're starting to get some accounts whose brands you recognize. You might remember we had Garrett Turbo present at an investor day, I believe it was. That's a pretty large company who went from CATIA to Onshape and really went for all the qualities of SaaS that they loved and, of course, ease of use and other things of Onshape. So I think Onshape is an attractive product. It needs to mature more before it really could be a viable replacement for the high-end products, generally speaking. But I think it will start to pick off a lot of medium-sized accounts and an occasional larger account who maybe is over-served by the more expensive, more complicated technology they're otherwise using.
spk10: That's a great answer. Thanks so much. I'll get back in the queue.
spk09: Thanks.
spk06: Operator?
spk13: Operator, are you muted?
spk04: And your next question will come from Ken Wong with Guggenheim. Your line is open.
spk08: Thanks for taking my question. I just wanted to circle back on Rockwell real quick. I saw you guys mention that Rockwell became the largest IoT reseller. Just wondering, is that a new dynamic there? As we think through some of those earlier discussion points you had with Socket's question, is that a position that you think sustains going forward based on what we know?
spk09: Yeah, well, Rockwell as a reseller has been growing and growing and growing, and most of that reselling is in the field of IoT and AR. Let's be clear on that. And we have many other resellers, but they're largely in CAD and PLM. So Rockwell has become an important reseller, for sure, of IoT and AR. And I don't see that ending. When I talk to Blake about how this fits in with his strategy, even post-Plex, Blake says, hey, I need an IoT platform. I need an AR platform. You know, I even want to have a CAD and PLM platform available to me when required because, you know, his competitor Siemens has that stuff. Not all of IoT and AR, but some IoT and lots of CAD and PLM. So we remain important to Blake, and there's nothing he acquired in the Plex acquisition that supplants any of the capabilities that PPC brought them in the factory talk innovation suite. So I think it's Blake and Rockwell's strategy, as I understand it, to add Plex to what they're already doing with PPC. And I don't have any issue with that whatsoever because I think it's complimentary and, like I said, maybe even some upside opportunities. I just noted that we're going to be sharing some mind share with Rockwell, who now has kind of another another child in the family, let's say, that's going to need some attention too. So I don't think it's going to materially change our partnership.
spk08: Got it. Thanks for the insight, Dijon.
spk04: And your next question will come from Blair Abernethy with Rosenblatt Securities. Hey, Blair.
spk13: Thanks. Hi, guys. Jim, nice quarter, guys. I just want to dig in a little more on Arena. And now that you've owned it for seven-ish months, how are you thinking about the go-to-market there for the team? And is it vis-a-vis Onshape's pipeline? Are you working those two in parallel? Are they coming together? What's sort of your thoughts there as we kind of move through into next year?
spk09: Yeah, OK, great question. So first of all, we're very pleased with the performance of Arena. It has, in fact, accelerated since requirement. Now, there are several things we're doing that I feel like aren't fully in the game yet. One of them is a link to Onshape. And in fact, we've built some technical integration between the two products, which is easy to do because they're both SAS-based. And that technical integration has generated some rave reviews from customers. And if you think about it, any customer who wants SaaS for PLM, you know, China, they have the religion, and they really want SaaS for everything, including CAD, and vice versa. So we do think there will be some cross-selling there. That benefit might accrue more to Onshape in the near term because arena accounts tend to be a little bigger, you know, like one- and two-seat CAD accounts might not need PLM. But Arena accounts, you know, could generate a fair number of cad seats, 15 or more. So I think there will be some benefit in both directions. It might help Onshape first. But then the thing we can really do for Arena is to globalize the sales force because Arena really is a U.S.-based business, a tiny bit of business in Europe and essentially none in Asia other than sometimes an American company might have some users in Asia, but they're not Asian companies. So we, PPC, of course, are much more globally balanced, and we have the capabilities to help them kind of spread their operation around the world pretty quickly, and that's underway, and I mentioned we opened the European sales operation. By the way, Arena and Onshape both have basically inside sales go-to-market operations. They don't have sales reps all over the place. You still need a European operation and the right time zones and all that, but... It's a cost-effective go-to-market model as opposed to kind of the PPC larger accounts where we have outside reps, you know, living in all the different countries around the world next to the customers and so forth. So I think we're going to be able to generate some acceleration for Arena to even higher levels next year, but, you know, we still need to plan all that out. But we certainly have something to work with.
spk13: Great. Thank you.
spk04: And your next question will come from Adam Borg with Stifel. Your line is open.
spk06: Great, and thanks so much for taking the question. Maybe just first on the IoT business, Jim, you talked a little bit about there being a hangover. Just curious if you could comment a little bit more about the pipeline as you head into the important fourth quarter.
spk09: Yeah, well, I think if you look at any ARR stream at PPC, its growth rate is a function of bookings, churns, but also start dates, backlog, price increases, and so forth. And, you know, again, where IoT has been held back is kind of in deal sizes on new bookings and in, you know, sort of a softer, what we used to call backlog, now called deferred ARR. So when we look, though, at the pipeline, the forecast, I mean, we feel pretty confident. It looks pretty good. So, you know, I think we're going to end the year on a strong note. I certainly... Expect that based on the forecast and the pipeline. And I think we're in a better position going forward into next year. Bookings certainly are up year over year. Like I said, just not back to where we want them to, and that's more deal size than transaction count.
spk06: Super helpful. And maybe just as a quick follow-up, you talked in an earlier question about the replatforming efforts for Creo and Windchill. And obviously, that's not a non-trivial undertaking. So just curious kind of how's that going and, you know, what percent of your R&D efforts are really focused on replatforming today and how that should evolve? Thanks again.
spk09: Yeah, well, this is not going to be a big bang approach. It's going to be kind of a systematic module-by-module approach. And then in the end, we'll have it all replatformed. But if you look at what we did with – the generative design extension, that's a good model to explain what we're trying to do. And that is we want to be able to take key subsystems from Creo Windchill in particular and build them on Atlas and deliver better value, more capabilities, better cost profile to customers through SaaS and then take another module. And so a customer might incrementally buy more and more SaaS from us over time. And we envision this taking a few years. And then at some point, just flip the switch and say, I'll just take it all to SaaS. So, again, don't think of it as big bang. Think of it as incremental. Yes, it's a big development effort. The good news is we're not trying to invent the platform we're replatforming onto. That platform has been under development for seven or eight years by the Onshape guys. That's Atlas. And it's a fantastic platform. I mean, really great. So I feel like, you know, time will tell, but – In the end, with Onshape, we're going to get a really great SaaS-based CAD system, but we're actually probably going to get something even bigger, which is the singular platform that powers PTC's next generation of software that's going to breathe another decade or so of growth into our Creo and Windchill product lines.
spk06: Excellent. Thanks so much.
spk04: Your next question will come from Matt Hedberg with RBC Capital. Amen.
spk03: Great. Yeah. Thanks, guys. This is Matt Swanson for Matt. So, Jim, really appreciate the commentary around the secular tailwinds towards digital transformation. But when we're starting to think about your customers as they're presumably returning to on-premise, have you seen any changes in conversations around SaaS more broadly? And I guess thinking more about what's driving your customers towards SaaS, and especially from that enterprise segment that might not be a good fit for Arena or Onshape, what those customers are kind of doing right now as maybe a long-term plan as they watch what you're developing on Arena?
spk09: Yeah, Matt, well, there's an interesting, you know, it's a good question, and an interesting survey we do where we reach out to our Creo and Winchell customers and test their receptivity towards SaaS. And that receptivity expanded dramatically over the last year. I mean, like from a minority to a very strong majority of them are saying, I want SaaS. Now, if you think about it, Creo and Winchell are very sticky products. So they're saying, like, I want SaaS, but I don't want to switch. Because switching CAD systems, especially when you're a big user of a high-end CAD system and you've got years and years worth of data, I mean, that's a project. But if I could... Within Creo, go to SAS. That'd be wonderful. If within Windchill I could go to SAS, that'd be wonderful. Now, why do they want to go to SAS? Well, they realize, first of all, you know, a mobile workforce. And everybody has some hybrid working, you know, office strategy going forward. The thing is, if the software, if your CAD software, for example, runs on a big desktop computer in the office, well, then how do you work from home? Do you set up another big desktop computer at home? And then how do you shuffle the files back and forth? I mean, it's just hard. It'd be better if all the data was never on the desktop. It was always in the cloud. Same with the application. So, for example, during the COVID initial shutdowns, Windchill worked great. because Windchill's web-based, and the data actually is in some web server somewhere. So you just go home, and you jump on whatever computer you have there, even a phone or tablet, and you log in through your web browser, and you're doing Windchill stuff. Creo, and everything like a Creo in the market, it's a different story. That's a big, what we'd call a fat client executable, typically with a whole bunch of modules installed, typically integrated to other you know, software on that same computer. It might be simulation. It might be CAM software, whatever. So there's a whole ecosystem of software set up on that computer. How do you recreate that at home? It's hard, and there's licensing obstacles and whatnot. So what a lot of people did is they used virtual desktop infrastructure. That is, from a computer at home, you logged into the computer at work, ran the software on the computer at work, and piped the user interface onto the computer at home. If you did that, it really makes for a pretty crappy workday. This is not really the way to do things like CAD. You know, CAD is optimized for graphics performance and so forth, and all that optimization is completely lost when you're piping the display across the Internet. So you really want something that's designed to never put the data and ideally don't put the application on the desktop computer in the first place because if it's not there, that means you can move around. So with Windchill, you can move around, but people like to offload more of the cost. These are complex systems. So mobility is one thing they want. Work from anywhere, anytime. Work from the office three days a week, work from home two days a week. But the second real thing is cost. They'd like to get rid of the system administrators. They'd like to get rid of the servers, file servers. There's a lot of cost tied up in that stuff. And they're saying, if you guys could just let me pay for the value I get for the software and not for an infrastructure and the care and feeding of it, it would be great. A third thing we talk about is real-time collaboration. You know, again, CAD systems are kind of based on the premise of check in and check out. That means I'll take the file, lock it, So you can look at it, but you can't change it until I declare I'm done changing it. Well, there's a lot of IP in one file, and a lot of times people are saying, well, you know, like any other kind of software I'm used to, we're working in the same stuff at the same time. How come I can't do that with CAD? Again, you can with SAS. So I can go on. There are more qualities that are important to people. But let's just say what Creo and WinShow customers really want. is all the benefits of Onshape and Arena without switching from Creole and Windchill. And that's what we're trying to bring to them.
spk03: Yeah, no, that, that, that makes a ton of sense. It's a really compelling value proposition. If I can add one more on digital transformation, um, you mentioned PLM as kind of part of that, of that growth group there. Can you talk a little bit about the progress of moving deeper into customers with PLM kind of beyond those traditional use cases? You know, it's something we've been talking about for a long time and I think it's, you know, always seemed really interesting.
spk09: Yeah, I think, uh, I think what's really come into light, it always was true, but it's really much more appreciated now, is that PLM is the system of record for products. So PLM, in an industrial company, it's absolutely as important as your CRM system, which is the system of record for your customers or your customers. HR system for employees or whatever. So when companies think, I really want these processes to be digitized and mobile, you become mobile and global and all that, you realize we need a reliable source of product data that everybody in engineering, manufacturing, service, marketing, sales, whatever, can transact against. So we need one single system. And we all need access to it. And so we're starting to hear that more and more, that it's not about making the engineers more efficient, which was kind of the first generation of PLM. This is more about making sure that everybody across the company has access to the right product data because everybody's making decisions about products, you know, pricing them, selling them, supporting them, manufacturing them. And we need to have accurate data, and it needs to be two clicks away. And that's what PLM is now being recognized as, the system of record for products. And industrial companies can't get very far down the journey of digital transformation without saying, hey, shouldn't we have a system of record for our products? I mean, honestly, they're product companies. So I think PLM is really emerging into something different. A quick example would be that Navy contract we won. You know, it's about product support. It's about everybody supporting ships, having access to data about ships and the systems they contain, support data. And so we're using PLM concepts to support the operation of ship, not the engineering and manufacturing, but actually the operation of ships that were engineered and manufactured years ago. And it's kind of a good example of digital transformation versus engineering productivity.
spk03: All right. Thanks for the time, guys.
spk04: Thank you. And your next question will come from Jay Vlischauer with Griffin Securities. Your line is open.
spk02: Thank you. Good evening. hey um jim at your partner conference last week uh aside from the sessions on uh sales programs and plans and the like it was a very interesting roadmap session which is the thing i want to ask about it noted that as part of your creo strategy you have what was called five dimensions and for on shape six dimensions to the strategy plus uh various dimensions to the strategy for the plm of course The question I have about the Creo and Onshape strategies is that's a fairly good list of executable. So how do you think about the ones that are perhaps most important on those lists for you to achieve or perhaps the most difficult to achieve, which aren't necessarily the same thing? And then secondly, you referred to Microsoft a number of times. They're on the cusp of launching their manufacturing cloud, and I'm wondering how you're thinking about the opportunity for you in terms of drafting along with what they do with manufacturing cloud.
spk09: Okay. So first on the priorities, Jay, I don't have those lists in front of me, and I hate to off the top of my head try to represent them all back to everybody. But what you should think of is, you know, there are large engineering teams behind these products. In the case of Creo, you know, 400-plus people working on it. In the case of Onshape, not near that many because it's a smaller, tighter product, yet younger product. But there's room with the level of resources we have on these products to have four or five priorities. You know, that's down from 20 or 30 that they would otherwise do. They're trying to narrow down and focus on the key ones. So I think we have the capacity to execute four or five initiatives at a time in both of these products. We can't execute 10 or 20, but certainly four or five big ones. And, you know, I guess you were wearing your hat as a partner that day on that conference. But, you know, we're just trying to share with our partners where we're going, what we think is important, and, you know, frankly, where we think the money is. That's what's going on there. With respect to Microsoft and their manufacturing cloud, there's a lot of conversations going on between PTC and Microsoft about how to align PTC with that manufacturing cloud. They want us to. We want to. It's just a question now of figuring out what to do to make that happen. You know, the fact that our former chief strategy officer, Kathleen Mitford, just went over there is actually quite helpful because Kathleen and I are quite close, and we've had some conversations since she's gone over there, and, you know, she's now able to, you know, help me, let's say coach me, and I'm able to coach her to, you know, make the companies better aligned together. So there's a lot of good stuff happening with Microsoft. Again, three Partner of the Year awards. I think the manufacturing cloud will be good for us, but there's some work to figure out, you know, once they put it out there, how do we tightly align with it.
spk02: Thank you, Jim.
spk04: And that is all for our question and answer session for today. I will now hand it back over to Emily Wolfe for the closing comments.
spk00: Thanks, Peter. I'd like to thank everyone for joining us on the call today. We'll be participating in a number of virtual investor events this quarter, and you can find all the details on our investor website. We look forward to seeing you on the circuit in the coming months. And again, thank you for your interest in PTC and have a great evening.
spk13: Thanks, everybody. Thank you. Have a good day.
spk04: This concludes today's conference call. Thank you for participating.
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