PTC Inc.

Good evening, ladies and gentlemen. Thank you for standing by and welcome to PTC's 2026 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 Mike McGuire, PTC's head of investor relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to PTC's third quarter 2026 conference call. On the call today are Neil Barua, Chief Executive Officer, and Jen DiRico, Chief Financial Officer. Today's conference call is being broadcast live through an audio webcast, and a replay of the call will be available later today at www.ptc.com. During this call, PTC will make forward-looking statements, including guidance as to future operating results. Because such statements deal with future events, Actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results that differ materially from those in the forward-looking statements can be found in PTC's annual report on Form 10-K, quarterly reports on Form 10-Q, and other filings with the U.S. Securities and Exchange Commissions, as well as in today's press release. The forward-looking statements, including guidance provided during this call, are valid only as of today's date, July 29, 2026, and PTC assumes no obligation to update these forward-looking statements. During the call, PTC will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most comparable GAAP measures can be found in today's press release made available on our website. With that, I'd like to turn the call over to PTC's Chief Executive Officer, Neil Barua. Neil?

Thank you, Mike. PTC delivered another strong quarter in Q3. In particular, I'd highlight the $60 million of net new ARR we generated. Year-over-year constant currency AR and free cash flow growth both exceeded the high end of our guidance range. There are a lot of positives from Q3. Our intelligent product lifecycle solutions continue driving customer demand and business performance across verticals, geographies, and products. Our customers face growing pressure to shorten development cycles, improve resilience, and compete in an AI-driven world. They understand that their product data is a strategic enterprise asset to help drive better decisions and are turning to our CAD, PLM, ALM, and SLM systems of record to build their product data foundations. From an execution standpoint, we have turned the corner with our go-to-market transformation. We are seeing the results of the transformation in our customer wins. including deeper vertical expertise, executive-level engagement, and better cross-team collaboration. We had several notable wins this quarter, some of which are referenced in the appendix. But as an example, these results played an important role in a Q3 competitive PLM win with a major defense contractor to help modernize engineering operations for one of its critical business segments. Q3 also reinforced that our product and AI innovation is taking hold with customers. AI will be a tailwind for our business because AI requires our systems of record and the product data stored in them to be effective. Our systems structure product data in the context of engineering and service workflows, whether it's product design, a specific product configuration, or a service work order. We then apply AI to the structured contextualized data so it can complete increasingly complex tasks. We also provide the governance and access controls that are essential for safe and trustworthy AI use. We are encouraged by our AI progress and the potential in front of us. We continue delivering on our roadmap with the recent releases of Creo AI, our AI native PTC Orbit product, and the launch of Onshape Labs. Onshape is strongly positioned for AI. Its cloud native architecture, highly scalable data model and built-in collaboration make it ideal for AI workflows with humans in the loop. More broadly, our customers tell us our embedded AI capabilities are the fastest path to adoption and value because AI is delivered in the context of trusted systems and governed workflows. In Q3, we won our largest AI deal ever, a near seven-figure ServiceMax AI deal with one of the world's largest industrial automation companies. This is a long-term customer that built a strong product data foundation with ServiceMax. ServiceMax AI uses that foundation to deliver technicians relevant information via natural language interface, eliminating time spent searching documentation. The customer validated the approach through a pilot with service technicians, showing that ServiceMax AI can reduce technician preparation time by 50% and deliver 4% net productivity improvement across the service workforce. As our customers embrace AI, one of their top priorities is protecting their intellectual property, their designs, configurations, bills of material, source code, and more. They are hesitant to hand this data to the frontier model providers for security, regulatory, and competitive reasons. Instead, they need this data to remain inside governed enterprise environments with appropriate permissions, process context, and controls. They increasingly want frontier models to operate as infrastructure, while trusted systems like PTC's provide the data and workflow layer where critical product work is performed. From a commercial standpoint, AI is already increasing the strategic importance of our systems of record and the product data foundations they manage. We expect adoption to progress from focused workflows with clear customer ROI to broader deployments as customers connect more product data and teams across the lifecycle. That creates value for customers today over time expands our share of customer spend through direct adoption of PTC's AI capabilities. We expect these standalone AI capabilities to become a more meaningful contributor to ARR over the next few years. Overall, Q3 was a great start to the second half of the year, and our performance reinforced the major themes and proof points of fiscal 26. We are entering Q4 with stronger execution, Growing strategic relevance with customers with our intelligent product lifecycle strategy and increasing confidence that AI will expand the value of our portfolio over time. With that, I'll turn the call over to Jen.

Thanks, Neil. And good afternoon, everyone. Q3 was a quarter of strong and consistent execution, highlighted by 60 million of net new ARR and broad-based strength across our key financial metrics. We continue to see solid demand capture in our go-to-market motions and encouraging early traction across our AI offerings. Given the momentum we have built and the opportunities in front of us, we are entering Q4 from a place of strength and are well positioned for a strong finish to the year. This is why we have chosen to increase the midpoint of our annual ARR growth guidance to 9.25%. At the end of Q3, our constant currency, ARR, was $2.448 billion, up 9.1% year-over-year, excluding Keppra and ThingWorx, above the high end of our guidance range. In Q3, we generated operating cash flow of $261 million and free cash flow of $249 million, exceeding our guidance range for both metrics. Turning to capital returns. In Q3, we repurchased $525 million of common stock, more than double our previously provided target, reflecting opportunistic open market share repurchase at what we viewed as a compressed stock price. This outsized repurchasing decreased fully diluted share count to 115 million shares in Q3. For the full year, We expect common stock repurchases to be approximately $1.625 billion, an increase to our previous guidance of $1.225 to $1.325 billion. We expect our fully diluted share count to decrease to approximately 116 million shares for the full year, compared to 121 million shares in FY25. With that, I'll take you through our guidance. In fiscal 26, for constant currency ARR, excluding Kepler and ThingWorx, we have raised the low end of our guidance and now expect growth of approximately 9% to 9.5%. At the midpoint, we are guiding for a net new ARR of $214 million. This increase to the midpoint of our guide and the tightening of our guidance range reflects both our go-to-market execution as well as the pipeline visibility the team has prioritized over the past two quarters. Consistent with our commentary in prior quarters, we expect a considerable step up in net new ARR in Q4 compared to Q3. Our competence in Q4 stems from the combination of strong demand generation and a meaningful increase in deferred ARR that we expect to convert into ARR during the quarter. In Q4, for constant currency ARR excluding Kepler and ThingWorx, our expectations correspond to a net new ARR range of $79 million to $92 million. Moving to cash flow, revenue, and EPS. As a reminder, the Kepler and ThingWorx semester did not meet the criteria for discontinued operations, and therefore, historical financial statement amounts have not been recast. This impacts the year-over-year growth calculations for revenue, EPS, and cash flow, as Fiscal 26 includes Kepler and ThingWorx up until the divestiture on March 13, 2026, whereas Fiscal 25 includes Kepler and ThingWorx for the full year. With that, we continue to expect to generate approximately $850 million in free cash flow in Fiscal 26. For Q4 26, We are guiding for free cash flow of approximately $15 million, lower year over year due to the capital gains outclosed from the divestiture of Kepler and ThingWorx that are expected to occur in Q4. While the business remains focused on ARR and free cash flow, we're also providing revenue and EPS guidance to help you with your models. In Q3, revenue of $600 million was below the midpoint of our guide. reflecting only the shortened duration of a single large contract expansion. Deal durations across the broader business continue to hold. When coupling our Q3 performance with our current expectations for Q4, we feel comfortable raising the midpoint of our fiscal 26 revenue and non-GAAP EPS guidance. For fiscal 26, we are updating our revenue guidance to $2.69 to $2.75 billion. and we are updating our non-GAAP EPS guidance range to $7.87 to $8.42. In closing, I'm proud of Team PTC's execution and the progress we've made across the business. The intelligence product lifecycle remains highly relevant to our customers and we are increasingly optimistic about the role AI can play in accelerating value creation across our portfolio. I'd like to thank our employees for their continued dedication and focus. With that, I'll turn the call back to the operator for the Q&A session.

Thank you, and we will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you're called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. To be able to take as many questions as possible, we ask that you please limit yourself to one question only. If you have additional questions, please rejoin the queue. Again, it is star one to join the queue. And our first question comes from the line of Joe Verink with Baird. Your line is open.

Oh, great. Thanks for taking my question. I want to ask, there's been a lot of coverage even since just the last earnings report on how open source models and commercial models are starting to engage more with CAD and PLM systems. I think there's also been a renewed focus on the importance of industrial data. And there's been new ventures trying to take a stab at the engineering ecosystem with various data strategies, synthetic data strategies. I guess all that leads me to ask, what does PTC make of all of this over recent months? And are you noticing any changes out of customers' own thinking that maybe warrants changing your own approach?

Joe, thanks for the question. Let me say a few things on this one. So, you know, as you know, PTC has been in this space for over 40 years. You know, we've seen new entrants. Thank you for joining us. with our customers. That obviously now includes AI. So if I comment specifically on your question around AI-focused startups, we see a lot of talk about new interfaces. But I want to be crystal clear. The structural advantage here at PTC is at the data and process level. If you think about making airplanes, cars, medical devices, you need strict governed workflows and with all your product data in context in a manner that can be audited and traced for regulatory reasons and it's super complex and sophisticated work and that's why PTC systems of records are so valuable so we've been doing that for 40 years Joe and have close relations with our customers and we don't see this suddenly changing in any of our customer conversations you can see the momentum that we've built here at PTC That's a result of the innovation, the trust that our customers have in modernizing with us the Product Data Foundation, building AI with that context. We're obviously, in summary, I'll say we're obviously watching all that's happening in the ecosystem, but we're really focused on what we are seeing the energy around and the actual results, which is driving more customer demand, enhancing our products, building new products, and making more progress with AI. So we're really... energized by the position we're here within the questions you're asking, Joe.

And our next question comes from the line of Matt Hedberg with RBC Capital Markets. Your line is open.

Great. Thanks for taking my question, guys. I guess for either of you, given what seems like a stable selling environment, it was really good to see you take the low end of the constant currency ARR guide up this year. Neil, you spent a lot of time talking about new product innovation, and I think we have to be patient with AI, but it seems like it's coming. Jan, you talked about deferred ARR balance growing. I guess I'm wondering, I know it's still early for fiscal 27, but can you outline a path to low double-digit ARR growth? I guess what has to happen from your perspective, because it feels like there's increasing tailwinds at your back. Thanks, guys.

Yeah, thanks for the question. You know, I laid out context on last quarter's call around this, and even with the increase in our guidance from 9% to 9.5%, that context still remains. And what I shared last quarter was that for us to accelerate growth, what you'd need to believe at a minimum is that we can, on a net new ARR business, perform on a like-for-like basis next year as we did this year. and then you add in the deferred error that we already have on our books, you would see an acceleration. And I would say we're doubling down on that statement, even with the fact that the now midpoint of our guidance for this year is 9.25% versus 8.5% a quarter ago.

And our next question comes from the line of Daniel Jester with BMO Capital Markets. Your line is open.

Great. Good evening. Thank you for taking my questions.

Maybe we could just spend a moment hearing the feedback that your customers had on some of the new products that were announced. I know you spent a lot of time with them in Chicago in June. So I'd love to hear what they're sharing with you about them. Thank you.

Yeah, thanks for the question. So, you know, what I want, the majority of the feedback we're getting is an energy and excitement from our customers around The innovation that's super relevant to what the customers need, whether it be the releases that we're making with the releases that we're going to do for BTC Jetstream or Orbit or all the AI releases that we're doing, it is accelerating our customers' appetite and requirement to use PTC to get the benefits of AI. And so that's showing up now in a number of these examples that we gave, but more broadly than the examples across what we've been seeing the last number of cores, which is an energy and an urgency to go modernize their product data foundation because they want to take advantage of this new innovation and they got to get their digital house in order using PTC In many cases to displace other tools to standardize across our great products because to get the value of our AI capabilities, to get the value of the new innovation, they need to modernize with PTC and that's showing up. And so I was very enthused by the feedback we got from Chicago. extremely enthused by the way over the course of this year and starting in Q4 of last year as we're saying we've now turned the corner of customers really understanding the value proposition of PTC, how we're approaching them, the messaging, the innovation around it. So we're energized about the feedback that we've gotten since then and during the course of the last number of quarters.

And our next question comes from the line of Jason Salino with KeyBank Capital Markets. Your line is open.

Hey, great. Thanks for taking my question. You know, this one's for Neil. You know, we've seen some really cool things with AI and, you know, designing stuff with LLMs and it kind of leads to, you know, better engineering efficiency. So my question is how this might play in like the engineering, you know, market. You know, some industries are growing, some aren't, you know, So how do you see AI affecting underlying engineering headcount growth?

So let me start with we see AI as accelerating the utilization of what PPC has to deliver, first and foremost. How that happens is actually, I'll give you an example. Onshape, which is an incredible board in the cloud, We're seeing that actually being utilized by AI foundational models, AI startups to actually complete the design process to accelerate and enhance design processes that are done either by agents or human beings, but using Onshape as the central point to execute that. We see that as massive lift. In fact, the API calls to Onshape by AI-related startups is tripling just in a few months, and it's just started to do that, which is indicative of that gating momentum around using PTC's system of records, the Product Data Foundation's to use and get value of outcome of AI. And so we're seeing that happen. We gave you the example of Service Max. In the service world, how AI is now giving real outcomes and efficiencies and real hard dollars to our customers on deploying it. So our point of view right now is that AI is going to be an accelerant over time. In some cases, the examples I gave to you already is happening. but we believe this will be a mid to long-term accelerate on AI individual modernization opportunities while at the same time doing what's happening with Onshape which is I want best-in-class AI interface to a CAD tool So let me actually give all the competitive tools that we're using for CAD and actually have Onshape be the actual product data foundation for our CAD tool to leverage AI. We saw that in a massive win. In fact, Onshape's largest win ever was this quarter with a company called Winnebago, where that's actually what has inspired them to move to Onshape. We're seeing that within Arena, Service Max, Onshape, and now lastly in some of the things that we're doing with Windchill, CodeBeamer, and Creo. So we feel good about that over time having scaled outcomes for our customers using AI.

And our next question comes from the line of Andrew De Gasperi with BNP Paribas. Your line is open.

Thanks for taking my question. I wanted to maybe follow up on the prepared remarks you discussed this large Q3 windshield deal that was a competitive win. Just wanted to maybe understand, like, is something changing the market that has led you to win that deal? Maybe can you elaborate a little more like what went behind that? Thank you.

Sure. Happy to talk about it. So, you know, just as a matter of fact, the The number of displacements or the aggregate value of displacements year over year has doubled at PTC, which is indicative and shown in some of the customer slides that we said. But across the board, we're starting to win more customer displacement. And what's driving that in this example is customers are realizing with the vertical expertise, with all the go-to-market transformation, the messaging, the product alignment, are realizing to take advantage of great technology like AI, but also to remain relevant in a geopolitical fraught world, supply chain risk, et cetera, they need to modernize their product data foundation, and they're choosing PTC. We have the most advanced products, we have the most advanced AI roadmap, and we've proven it across the verticals that we operate in with real depth and our sales and marketing team are doing a much better job than 18 months ago showing that consistently and that's why our customers are choosing to come with us, expand the portfolio with us, in some places win new displacements across other products that are actually in their ecosystem that they want to consolidate onto PTC. And that's what we saw in this specific example. But it's happening at scale now across the board.

And our next question comes from the line of Saket Kalia with Barclays. Your line is open.

OK, great. Hey, guys. Thanks for taking my questions here, or question, and a nice quarter. Neil, maybe for you, I want to pick up on that thread a little bit because it's super interesting as a trend to talk about PLM as sort of a system of record for AI for your customers. And maybe the question is, can you just talk about how urgent that conversation is becoming with customers? And as you think about sort of that multi-year opportunity, there's clearly opportunity to displace competitors, right? That's happening at an accelerated pace. But do you think you could also expand the TAM for PLM as well? Sorry, there's a lot there, but does that make sense?

Yes, I can. Thanks for the question. That's actually what we're starting to see, which is, again, go back to the strategy of the intelligent product lifecycle. Make sure our customers have the strongest product data foundation by which they can then layer on intelligence, in some cases, and in aggregate, AI, which is what we're doing in parallel. Part of our intelligent product lifecycle strategy is to make sure we democratize product data across the enterprise, which in effect increases TAM. So as a case and example, PTC Jetstream, the product that we announced at PTC Next, which is live in beta right now and is getting released in the beginning of Q1 in GA of 27, that actually takes the incredible things that are derived from design and configurations from Creel and Windchill and propagates that to the supply chain by which they could actually utilize that capability to have faster times by which companies that are deploying JetChain could actually design, produce, and manufacture and service products. So we're seeing that as one leverage point. The main thrust here in summary is that as we're getting the expansion of PLM, the modernization of PLM, The consolidation of PLM into the best-in-class PLM system in the world, which is Windchill, we're now being able to leverage things like Jetstream, leverage AI modules within Windchill to do more. Last point I'll make is ARENA, which is our born-in-the-cloud PLM solution, is also doing the same thing. We have advanced our AI capabilities in ARENA much faster and what we're seeing there is that there's a SCA, we call it supply chain intelligence within ARENA. What it's doing is it's embedded into PLM. It's increasing the number of eyeballs and seats by which are needing PLM, consolidating other systems onto our system, but allowing an expansion of our capabilities in other parts of the organization that PTC never played in. To your point, our energy when we set forward with a strategy and summary of the intelligent product lifecycle to make PLM the pinnacle, the nerve center of what we're doing, has now allowed us to expand and create innovation, AI, as well as core capabilities to expand to other personas. And we're starting to do that, we're starting to see it, and we're very enthused about what that looks like.

and our next question comes from the line of Ken Wong with Oppenheimer. Your line is open.

Great. Thank you for taking my question. With the fiscal 3Q net new ARR at $60 million above prior 3Q levels and the upper half of fiscal Q4 also above historical levels, Neil, when looking at the sales operations now, are we where you envisioned when you initially started the go-to-market changes? Are there still more benefits to come?

So, Ken, thanks for the question. Just to rewind the tape to baseline where we are right now, where we're taking things. We started this transformation as many of you followed us 18 months ago. We've talked about the progress and improvements over that time. You know, it's this sustained level of execution we've seen, quite frankly, over the last four quarters since Q4 of last year. that gave Jen and I the confidence to assertively tell all of you we've turned the corner. We're very proud of our Q3 performance because it really, from what we are seeing, solidified our go-to-market team having reached a new operating standard. Ken, we talked about the data points we've been watching over those 18 months. Rep productively, renewal rates, pipeline quality and diversity, velocity, displacements, they've all steadily improved. and then you take the qualitative elements which are in my opinion just as important the deeper vertical expertise executive level engagement we are now in most of the deals talking to c levels and ceos that didn't happen 18 months ago that's happening now at scale cross team collaboration how we structure deals for the doing the right deals for ptc and the customer and our enablement efforts are are all making us and have made us stronger than they were at the start of the transformation. And these factors are influencing our deals, as you're seeing now in the results. And so the summary of this is we're not stopping there. We have turned the corner, and we now have a new operating standard. We are showing it with real results, and we will continue to improve upon all those metrics that we talked about with the momentum now and the wind at our back.

And our next question comes from the line of Blair Abernethy with Rosenblatt Securities. Your line is open.

Thanks very much. Neil, I just want to take the question back to AI. You've been adding a lot of product features in the last year or so and obviously more coming. I just kind of wonder, how are your thoughts right now around monetizing some of these new features? I mean, a lot of it's going to be table stakes with competitors doing similar kinds of moves, but Where do you see the biggest monetization opportunities for PTC?

Sure, Blair. Two parts answer here. The first part, just a reiteration. The incredible thing about AI for PTC, the first element of success for us is the acceleration and urgencies for our customers to actually get their house in order, meaning modernize their product data foundation with our core systems record. So use more Windchill, use more CodeWeaver, use more Onshape, ServiceMax, et cetera. So that is the tailwind that we're seeing already. You're seeing in the results, we see it in every single customer conversation, first and foremost around AI. Second is the embedded AI capability. So we've done that across, and we've talked about this in the last call, we're doubling the number of AI embedded and many more. Some examples that we gave already in the script around last quarter, we saw a global HVAC company accelerate and expand to near seven figure digits and Service Max AI deal. We have templatized that, and the next quarter we won for a different company, a near seven-figure ServiceMax AI deal, and that pipeline is growing substantially. On ARENA, we talked about the supply chain intelligence on every single one of the expansion opportunities. By the way, ARENA's kicking, you know, getting some real momentum. That has also included the AI capabilities. and then lastly, as I mentioned on Onshape, that is actually inspiring API usage, monetization of API, et cetera. I will say though, in temperament of all that, while we're super excited about what AI is doing in the conversations leading to monetization of the product data foundation and some of these highlights that we're making, our customers are very methodical. They start with a pilot. They then move to, did the pilot actually create return on investment. Did it get adopted? And then they choose to scale. We've seen that happen in service tax. We've seen that happen in arena. Our view is that will happen across our environment. And so when we talk about the standalone AI monetization and summary to answer your question, Blair, we see that as a medium to longer term standalone economic opportunity and in parallel allowing us to accelerate displacement and expansion with our product data foundation because they want to get to the AI end story with us in that medium to long-term time period.

And our next question comes from the line of Jay Fleecehour with Griffin Securities. Your line is open.

Thank you. Good evening. Neil, it's been very interesting to hear the repeated references this evening to displacement and modernization, especially displacement, since that was something I wanted to ask about. But it does tie back to something else we've been hearing from your principal competitors. Siemens at their conference the week before yours spoke about displacement and their modernization. Last week or so on their call spoke about their and what they think is going to prospectively be more displacement and churn over the next number of years. So at a time when all the principal vendors, including yourselves, are thinking in terms of engineering software musical chairs, how do you think about pipeline handicapping, pipeline management not becoming perhaps overly dependent on displacement or decommissioning and the various two-letter acronyms that you have on offer.

Yeah, Jay, thanks for the question. Let me be really clear. Expansion and greater monetization of these amazing customer relations we've built for the last 40 years is the predominance of how we're scaling the current business. What I'm telling you is that the acceleration of displacement is happening faster this year than it did last year and we are enthused by it and we are pushing on it. As an example, Onshape is really accelerating the curve against some of the names you mentioned and they're taking share and they're going to keep taking share and we're going to fuel that engine. It is differentiated and we're going to keep going. That doesn't take our eye off the ball, as you know, Jay, from building BTC Jetstream, which is an incremental TAM expansion for existing customers, not just getting new customers, but actually delivering more value to our existing customers. So, Jay, we have learned this and that was a core part of my strategy when I came in. We're not taking our eye off the ball of the customers that have plenty of money to spend with a trusted advisor like us that need us to actually Modernize their capabilities with PTC. And while we're doing that, Jay, in those environments, we're taking share from other organizations. As an example, in the example that we gave in the script, it was a multi-CAT environment. It was a multi-PLM environment. They did an RFP and they found out that we had the stronger capabilities to put it all together and we had a stronger AI roadmap that they believed that we could execute on versus marketing message. So they've now consolidated their CAD estate on PTC. They've consolidated their CAD estate on Windchill. We call that also a displacement because we're taking share from others in the existing account. We're not taking our eye off that ball. There's no way.

And our next question comes from the line of Adam Borg with Stifel. Your line is open.

Awesome. And thanks so much for taking the question.

Maybe for Neil or Jen here.

So just on capital allocation framework, clearly the organic focus and turning over all the stones and rocks from over a year ago is paying great dividends here. So organic investment continues. And we also have seen a lot of share buybacks, right, accelerating that as well. And of course, the three legs, the third leg of the capital allocation tool is M&A. which you've been pretty quiet on. So as the organic flywheel continues, as the go-to-market machine matures, how are we thinking about M&A? Anything changed there? And just why not get back into some M&A here as everything seems to be firing? Thanks so much.

Sure. Let me start, Jen. You could add to this. I would say on the M&A framework, we continue to look at M&A that can accelerate the current roadmap and we've done several they're extremely small in nature so they probably don't even register on your news headline but they're enough for us to accelerate our capabilities in response to what we need to deliver as roadmap in fact like a smaller one that we just did recently allows a windshield extension framework capability and technology that accelerates the ability for our customers to move from an on-premise situation with windshield to a windshield plus arrangement We continue to do those. We will continue to do those things in terms of what's important for our organic roadmap to accelerate that. I would say the big M&A that our capacity would allow us to do, we're very focused in on there's enough things to do here organically with some of the smaller tuck-ins. to really gain a lot of customer value. That's how we see it currently. And if things change, we'll let you know. But that's our current position and how we think about the business.

And our next question comes from the line of Siti Panagrahi with Mizuho. Your line is open.

Thanks. Most of my questions are asked, but one clarification, Jen. On your cash flow statement, there was a $50 million off. outflow towards solar energy equity investment. Just could you explain what this is and whether it represents kind of a recurring commitment probably into 27?

Yeah, thanks for the question. We did make an investment to solar as we think about extending our green footprint, and there will be over time impact savings from a tax perspective over the medium term.

and our next question comes from the line of NASO 9 with Barenberg. Your line is open.

Hello, hi, thanks for taking my question. I suppose, you know, by all accounts, everything points to the fact that the setup going into FY27 will be much better than setup coming into FY26. If we look at the deal pipelines, the larger deals that you've signed, the fact that the deferred revenue levels Q4 next year will be higher than this year, and of course your AI product roadmap and features as well. I was wondering, is there anything that maybe we should be mindful of that could prevent this from happening, prevent FY27 to be as good as FY26, if not better? Thank you.

Let me start. Look, we still have a few months left here to close out Q4. And we've been, as a reminder, very focused on making sure, as I mentioned, in the go-to-market transition, structuring deals appropriately that's good for PTC, good for customers. That's been building this deferred ARR. We talked about in the last call around how we see that on Thank you for joining us. and then make sure that as an organization we're aligned to how do we continue to push on the new innovation? How do we monetize that? How do we expand wallet share? What does that look like? All the enablement around it and the inspiration that we need to do the team. We're underway of doing that, but all those things need to happen to make sure that next year we are building on the accelerated momentum that we already know that we're heading into 2027 with.

and our next question comes from the line of Josh Tilton with Wolf Research. Your line is open.

Hey guys, can you hear me? Awesome. I've been bouncing around with a ton of prints tonight, so I apologize if you guys already addressed this. I'm just going to knock both my questions out kind of in one long stream of consciousness. But for me, I think what I'm trying to understand is what changed from last quarter to this quarter that we saw such an amazing level of outperformance. Congrats on, by the way, on the ARR figure. Not just necessarily switching from no net new ARR growth to ARR growth, but, like, what in the environment changed that lets you guys outperform so much relative to the expectations that you set for us 90 days ago? And then my follow-up is just, you know, also a big congrats on the raise. but you guys are now calling for net new ARR growth in Q4. Can you just talk to like the confidence level you have on that implied Q4 net new ARR number versus kind of the confidence level you had going into this quarter? That would be great.

Yeah, absolutely. So I'll start on the Q3 side of things. We were really pleased with two elements of the business performance. First, really strong demand capture. And then second, overall our retention rates performed better than anticipated. and so both of those things really landed where we were able to outperform the high end of the guidance for our Q3. On the Q4 side of things, in terms of our competence, right, what has changed is as we think about, I shared last quarter, right, first of all, our guidance is nine to nine and a half, so 9.25% in itself should signal we have strong competence in being able to get there, but the context I shared last quarter was around our performance on net new ARR and deferred. And what I said was if we perform on a similar basis for net new ARR for the second half of this year versus last year, plus the deferred ARR, you'd feel comfortable getting to the midpoint. And now, of course, we've narrowed the guide. The low end of the guide is higher than the midpoint, and that points to our pipeline visibility, continued strength and execution, and overall our ability to deliver on the guidance. Neil, I don't know if you want to add anything else.

I'd point three things on what we've seen. And we talked about this last quarter around, you know, we see demand capture. You all didn't see it in that new ARR. We said it's coming. It's coming now. And we also mentioned today about turn the corner. We've created now this go to market motion that's got this new operating standard. It's Thank you for joining us. You know, in front of us or dealing with it has now opened up our focus to make sure the intelligent product lifecycle is 100% focused on the company. That makes a difference. And the last piece is the customer environment. I believe we're seeing now an understanding from an end market that is highly sophisticated, that doesn't just look and listen to marketing talk and deploy new solutions. It has to work because it's engineers. and the products have got to be manufactured and there has to be quality and regulatory and safety concerns with that. They have now understood to really get the value of AI, you need to actually do things before just deploying an AI solution. You need to put together the strong product data foundation consistently and homogenously across your industries and your groups. You have to then in parallel do all the heavy lift of providing context and working with your AI partner to actually show value and adoption. And those things are actually different even in the last 90 days on a reverberation back to BTC saying, you're our trusted advisor, you understand the context of our data, it's flowing through your system of records, help us build this so that we have real ROI versus a random buy of an AI product that doesn't work a quarter later. So that's a theme that we're seeing and inflecting coming back to us in terms of the conversations.

And our next question comes from the line of Tyler Radke with Citi. Your line is open.

Yeah, thank you for taking the question and nice job on the results and guidance here. Jen, appreciate the comments you made on through the early look at FY27 and the deferred ARR dynamics. Can you just remind us as we look at your net new ARR for Q4, obviously a nice step up versus a year ago, how much are you assuming for the deferred ARR contribution there? And then as we look at FY27, what is the expected deferred Thank you.

So, first I'll say is we continue to be really pleased with our ability to build deferred ARR both in Q4 and for FY27 and the future. I'm not going to give too much detail around the impact on Q4, but what I can tell you is, like I said, it's a meaningful step up and we feel really confident about our visibility there. and then as we think about 27, we have approximately two times the amount of deferred ARR that we had at this point last year for 2026. So it's meaningful.

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

Yes, thanks for taking my call. Just a question ARR by channel. You know, it's 12.6 year over year, I think, versus direct 7.8%. And it's been like this every quarter, this fiscal year. And just trying to understand, I think, the commentary you've sort of really talked about reinvestment in the direct channel, in the direct, but the channel is still growing faster. So when do we see the pickup? Does it flip next year? You know, how should I think about this dynamic? Thank you very much.

Yeah, I completely appreciate the question. As I said, kind of in the last couple of quarters around the mix between channel and direct, oftentimes the space is based on customer preference and how they want to consume and what channel they'll go through. And in our largest deals, we often see both a direct and a channel partner. And so that's all you're seeing there. We continue to see really strong growth in our direct team. Actually, Neil talked about all the productivity and the continued strong strength that Our final question comes from the line of Alexi Gogolev with JPMorgan Chase. Your line is open.

Good evening, this is Ella on for Alexi. Thank you for taking our question. So we're curious, as organic product development becomes a greater focus for PTC, are you expecting to venture into completely new greenfield product areas? Or do you expect your new products to be closely connected to your existing product lines, like with PLM, ALM, SLM, and CAD?

Yeah, thanks for the question. We have so much to do within executing our intelligent product lifecycle strategy that includes all those core systems that you're talking about, the expansion, the displacement, the layering of AI capabilities, the layering of intelligence layer on it, and then ultimately also moving all that product data to other personas as we talked about the supply chain, to manufacturing over time, like those are all core and we're experts at it. We have vertical expertise around it. We're now getting executive level engagement on it and there's plenty to do there and we feel very good about the monetization across those vectors focusing on that strategy to result in really good results that we're proud of to show you here in Q3, but we're just getting started.

And that concludes our question and answer session. I will now turn the conference back over to Mr. Neil Barua for closing remarks.

Thank you, everyone, for joining us and for your questions today. In the weeks ahead, we'll be participating in the Oppenheimer Technology Internet and Comms Conference, as well as the Citi Global TMT Conference. We look forward to seeing you then. Thank you.

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.