PTC INC. Q2 FY2025 earnings call

• Q2 was a solid quarter with 10% ARR growth and 13% free cash flow growth year-over-year. Paid down $500 million of senior notes, with leverage ratio at 1.5x and continued share buybacks. - Customer wins included significant Windchill PLM expansions, Codebeamer ALM multiple wins, ServiceMax SLM cross-sell win, and Creo CAD and Windchill PLM expansion. - Progressed go-to-market transformation with higher-quality pipeline velocity, solid hiring, and enablement of quota-bearing reps. - Advanced product portfolio and generative AI initiatives: publicly previewed Windchill AI, Codebeamer 3.0 GA, introduced ServiceMax AI, launched Onshape AI Advisor and Onshape Government, and acquired IncQuery Labs.

Constant currency ARR was $2.326 billion at the end of Q2, up 10% year-over-year. In product groups, CAD had 8% ARR growth led primarily by Creo, and PLM had 11% ARR growth driven by Windchill, Codebeamer, and IoT. Regionally, constant currency ARR grew 9% in the Americas, 11% in Europe, and 10% in Asia Pacific. Q2 free cash flow was up 13% year-over-year, with $279 million generated, absorbing $3 million related to go-to-market realignment. At the end of Q2, cash and cash equivalents were $235 million, gross debt was $1.393 billion, and leverage ratio was 1.5x, with gross debt balance decreasing by $155 million in Q2.

• Moderated ARR guidance range to 7% - 9% due to macro uncertainty affecting deal timing and sizing. The high end was adjusted from 10% to 9% as customer conversations indicated potential smaller deals or delayed closures. - Raised the low end of free cash flow guidance for 2025 to $840 million. Q3 free cash flow guidance is $230 million to $235 million. - Sequential net new ARR guidance for Q3 is $30 million to $50 million and for Q4 is $55 million to $85 million, with the year remaining back-end loaded influenced by pipeline and expiring base shape.

Growing uncertainty related to global trade dynamics and macro pressures which may affect customer buying behaviors, potentially leading to smaller deals, delayed closures, or phased projects. These dynamics could impact the timing and sizing of customer deals, requiring conservative guidance adjustments.

Q: Dive in deeper about how constructed the downside scenario for the 7% ARR?

A: Neil stated it's a bottoms-up and tops-down view. Bottoms-up involved assessing pipeline quality, velocity, end markets, renewals, etc. Tops-down looked at past crises and potential conversion rate reductions.

Q: How are go-to-market changes working?

A: Robert Dahdah said the team pivoted to a vertical approach with low churn, retained top talent, and the foundation set up well for future growth with more outcomes-focused discussions.

Q: Thoughts on $1 billion free cash flow target?

A: Kristian Talvitie said it's premature; need to finish the current year, complete annual planning, and consider factors like interest rates, tax policy, and foreign exchange rates.

Q: AI adoption discussion with customers?

A: Neil Barua said customers are interested, but generative AI bite sizes will take 12 to 24 months to fully take hold as they rely on a strong product data foundation.

Q: Components of 7% ARR range?

A: Neil and Kristian discussed bottoms-up assessment of each customer, potential smaller deals, and past crisis impacts where conversion rates dropped 20%-30% in severe scenarios.