Ptc Inc. (PTC) Q2 2021 Earnings Call Transcript

Good afternoon, everyone. Thank you for being here, and welcome to the PTC 2021 Second Quarter Conference Call. I would now like to hand the call over to Emily Walt, PTC's Senior Director of Investor Relations. Please proceed.

Thank you, Abigail. Good afternoon, everyone, and thank you for joining PTC's conference call to discuss our second quarter 2021 financial results. On the call today are Jim Heppelmann, Chief Executive Officer; and Kristian Talvitie, Chief Financial Officer. Before we get started, please note that today's comments include 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 the reconciliation between GAAP and non-GAAP financial measures are included in our earnings press release and related Form 8-K. References to growth rates will be in constant currency unless otherwise noted. 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.

Thank you, Emily. Good afternoon, everyone, and thank you for joining us. I hope you and your families are staying safe during the ongoing pandemic. I want to start by congratulating Tim Fox, our long-time Senior VP of Investor Relations, who has left to take an exciting opportunity at ACV Auctions after the recent IPO. I collaborated closely with Tim over the years, and he added significant value to our Investor Relations program. We will certainly miss him, but we wish him all the best in his new role. Turning to Slide 4, I'm happy to report that we achieved another strong performance in the second quarter. Bookings increased in the mid-30s compared to a year ago when they fell 15% due to the pandemic. Organic bookings grew in the mid-20s. While much of this booking strength led to our second quarter's performance, some bookings have start dates in later periods, contributing to backlog or what we will refer to as deferred ARR going forward. It's encouraging to see that after several consecutive quarters of strong bookings, deferred ARR has returned to pre-COVID levels, as customers are making long-term investments in their digital transformation initiatives. This deferred ARR provides PTC with a growth foundation moving forward. The global economic environment continues to improve, with PMI numbers returning to or exceeding pre-COVID levels in many areas. This, along with the steady increase in vaccinations and stimulus plans from the current administration, is promising. From our perspective, the demand for our core products and SaaS offerings, combined with a strong pipeline heading into the second half of 2021, reinforces our outlook for the year. Our top-line performance was solid, with ARR growth of 18%, or 15% in constant currency, reaching $1.39 billion. This growth was fueled by our growth business, which showed strong results from our core business, outpacing market growth, and strong performance from Arena Solutions in its first quarter as part of PTC. On an organic and constant currency basis, we recorded 11% ARR growth in the second quarter of 2021, aligning with our guidance. If you refer to Slide 5, it's important to note that when we mention ARR, we refer to the annualized run rate of active recurring revenue contracts. ARR effectively means active ARR, which is the key metric driving our cash flow, in addition to the deferred ARR mentioned earlier. Given our strong bookings over the last three quarters, our total ARR growth, including deferred ARR, is up 12% on a constant currency organic basis for the second quarter. As you know, the timing of start dates and ramp deals can affect when a booking transitions into active ARR. Therefore, it's vital to consider total ARR, the sum of active ARR plus deferred ARR. We have been guiding on active ARR growth of 10% to 12% and anticipating approximately $80 million in deferred ARR as we exit fiscal 2021. We are now projecting more than $90 million in deferred ARR for the full year due to stronger-than-expected bookings in the first half of 2021 compared to our reported active ARR results. Given potential uncertainties around start dates and the volume of ramp deals, if a larger portion of our bookings flows into deferred ARR instead of active ARR in future quarters, it may pressure active ARR, even while total ARR remains unchanged. The opposite could also occur, benefiting active ARR. We want to provide more insight into total ARR growth rates to demonstrate the true underlying business performance. Whenever Kristian or I mention ARR without qualification, we will refer to active ARR by default, which remains our most important metric. We'll be cautious to specify any references to deferred ARR or total ARR clearly. Returning to Slide 4, to round out the top line, revenue growth of 28% was driven by strong execution, the impact of ASC 606 on revenue recognition, and, of course, the contribution from Arena. Regarding the bottom line, we delivered strong free cash flow of $116 million and non-GAAP EPS growth of 83%, reflecting top-line strength combined with ongoing operating expense discipline. Although unfavorable currency movements during the quarter impacted our full-year guidance, Kristian will provide more details on that later in the call. While the economic environment improves, PTC's growth largely results from our strong alignment with customers' digital transformation initiatives. As shown on Slide 6, PTC's branding emphasizes that digital transforms the physical, meaning our portfolio of digital solutions enables industrial companies to enhance growth and profitability through transformative changes to their physical products and processes in engineering, manufacturing, and servicing. PTC's digital transformation narrative is extensive, and our portfolio includes innovative digital capabilities that correspond with high-value customer use cases across our CAD, PLM, IoT, and AR segments. Our new SaaS strategy introduces a significant avenue for pursuing new dimensions of digital transformation. With that context, let’s examine the contributions from our FSG, core, and growth segments. Moving to Slide 7, you'll see that ARR in our Focused Solution Group was nearly flat, but I'm pleased to report significant wins in retail and defense, which will support ARR growth moving forward. The ARR growth for our core business was in the double digits in constant currency, and our growth business saw a 27% organic constant currency year-over-year increase, consistent with our annual guidance. As time passes, the growth business is becoming a larger share of our ARR, and as we discussed at our Investor Day last December, we expect this to drive higher growth rates for the company over time. With Arena included, our growth business now exceeds $250 million in ARR. Let’s dive deeper into the core and growth segments. Turning to Slide 8, our CAD team achieved impressive growth in the high single digits. The demand recovery we observed starting in Q4 of 2020 continued this quarter, with strong performance across all major geographic areas. The positive response to the enhanced capabilities of Creo 7 and the increasing interest in Creo Simulation Live and Creo ANSYS Simulation clearly indicates that customers value optimizing design efficiency and accuracy. We are not stopping there. Just today, we announced Creo 8, featuring the Creo generative design extension module called GDX, built on our Atlas SaaS platform. GDX will deliver advanced AI-based generative design capabilities utilizing elastic compute in the cloud, seamlessly integrated with the Creo desktop CAD environment. Creo 8 also enhances our model-based design capabilities and advances additive and subtractive manufacturing processes while improving ANSYS-powered simulation offerings. The significance of a strong connection between design and simulation is highlighted by Speed Consulting. When a large aerospace customer required expert design guidance, real-time feedback combined with complete simulation capabilities enabled efficient delivery of structural, thermal, and vibration analyses. This long-time Creo customer quickly recognized the value of the deep CAD and simulation integration we provide in collaboration with ANSYS. Moving to Slide 10, our PLM business continues to show robust performance with another mid-teens ARR growth quarter. In Q2, PLM's performance showed solid growth across all three major regions, led by Asia Pacific. Due to its role in digital transformation efforts, PLM remains a key growth driver. Our PLM business performed well across various industries, including medical devices, industrials, and FA&D. Additionally, we secured several large wins and competitive displacements this quarter. One notable displacement occurred with Kimberly Clark, as shown on Slide 11, where they selected Windchill as their digital backbone for product development processes. The ability to closely integrate Windchill with SAP enabled Kimberly Clark to streamline processes across systems. Now, on to our growth business. We'll start with IoT on Slide 12. IoT achieved its third consecutive quarter of increasing year-over-year ARR growth, strong new logo growth, and nearly 50% increase in bookings, with ARR up 20% from the previous year. We are witnessing a solid rebound following the COVID-related travel restrictions and lockdowns from a year ago. Our pipeline is healthy, and churn continues to modestly improve, positioning us well for the second half of 2021. Slide 13 features Strama MPS, which provides custom machinery and plant engineering. They pivoted to producing PPE during the pandemic, and ThingWorx was utilized to quickly identify and rectify issues on a production line, enabling Strama to transition to high-volume medical mask production within about a month. Turning to our augmented reality business on Slide 14, the Vuforia team achieved impressive results in Q2, with ARR increasing 60% year-over-year, particularly driven by Vuforia studio and engine. Expansions comprised over 50% of bookings in the quarter, with strong growth observed outside the Americas, especially in Europe and APAC. I'm excited to announce that Vuforia Expert Capture has successfully been replatformed onto Atlas, benefiting from the scalability of the Atlas SaaS architecture. Customers can now scale their deployments enterprise-wide, enjoying the same collaboration, version control, content management, and approval workflows found in Onshape. This functionality would have taken significantly longer to implement without Atlas. We will also be launching another new Vuforia product called Vuforia Instruct in Q2, which will be based on Atlas as well. Moving to Slide 15, we see a great example of Vuforia Chalk's power from our ecosystem. When a Rockwell customer needed to install new equipment to avoid a costly production shutdown while Rockwell faced travel restrictions, their engineers used Vuforia Chalk to allow remote experts to virtually assist and coach on-site engineers through the installation. As a result, the customer maintained production levels without any revenue losses. Now, on to Slide 16. Onshape had a very strong quarter, achieving notable bookings growth, with a healthy mix of new logos and expansions. The majority of Onshape's business still comes from SolidWorks replacements. Our education sector remains robust, and we are beginning to see our first education enterprise renewals following the free one-year education program we launched last year due to the pandemic. Onshape's ability to provide seamless collaborative CAD capabilities is meeting a significant market need. On Slide 17, Loop Medical is developing a painless blood collection technology for routine lab testing, making the collection process safer and more economical. Thanks to the Atlas platform, Loop can operate their CAD and data management on their current MAC environment, avoiding the need for bulky virtualization technology. More importantly, Loop can facilitate real-time collaboration for their global teams, accelerating the design process. Finally, moving to Arena on Slide 19, it has been exciting to see the Arena team excel in their first full quarter as part of PTC. ARR growth was in the mid-teens, with bookings increasing over 50%. Arena is experiencing strong upselling success and growing presence within current customer environments, maintaining high retention rates. The integration is going smoothly, and the roadmap for cross-selling programs to expand geographically and target higher markets is progressing well. Arena is working with innovative companies, like RefleXion, which is developing the first biology-guided radiotherapy system. By using Arena as their system of record, controlling product design and quality, and integrating it with RefleXion's ERP platform, they created a unified solution for product and quality management. The positive momentum we’re witnessing in our growth business, both in terms of ARR and product innovation, positions PTC favorably for long-term growth. Turning to Slide 20, I've referenced our Atlas platform several times concerning Creo, Vuforia, and Onshape. These examples are early indicators of our strategic plan to transition PTC's entire portfolio onto the Atlas platform over time. While we will continue to offer on-premise versions of core products indefinitely, a growing number of our customers wish to enjoy the benefits of SaaS without abandoning their existing enterprise systems. PTC is effectively transitioning Creo and Windchill similarly to how Microsoft has with Office 365. When workloads move from on-prem to SaaS, the ARR typically doubles. Hence, this is expected to become a significant growth source for PTC in the mid to long term, much like Office 365 has been for Microsoft. This new growth driver gives us confidence in sustaining strong core business growth for years ahead. Now, let’s touch on our geographic performance, which was robust across the globe, reflected in Slide 21. Americas ARR growth of 21% was fueled by Arena, augmented reality, and solid core performance. Europe saw ARR growth of 8%, consistent with previous quarters, with notable strengths in AR and high-teens growth in IoT. APAC achieved mid-teens ARR growth for the third consecutive quarter, with strong performance across all segments. Now, turning to Slide 22, I want to highlight our key alliance partners. Our alliance with Microsoft delivered year-over-year bookings growth of 30%, driven by increased demand for AR and a 40% year-over-year increase in joint deal count, indicating the evolution of our partnership. To further support growth, we’ve added PTC field resources in Asia Pacific and the Americas. Before moving on from Microsoft, many of you may have seen the announcement that Kathleen Mitford is leaving PTC to join Microsoft. This is a significant opportunity for Kathleen, and I'm glad she will remain in our ecosystem. Fortunately, we have a successor in place and have promoted Catherine Kinekor, known as CK, to be our new Chief Strategy Officer. Congratulations to both Kathleen and CK. Next, we have Rockwell. Our alliance had one of our strongest bookings quarters to date, showcasing substantial year-over-year growth, particularly in the Americas and APAC. More than 30% of the deals were new logos for PTC, with key sectors including manufacturing, distribution services, and process manufacturing. Our partnership with ANSYS continued to gain momentum in Q2 with double-digit ARR growth. Last week, PTC was recognized as the 2020 ANSYS Growth Partner of the Year at their Simulation World Conference. As mentioned earlier, customer sentiment regarding Creo Simulation Live and Creo ANSYS Simulation has been very positive. In conclusion, I want to summarize my comments on Slide 23. We are well-positioned at the midpoint of fiscal 2021, with customers advancing their digital transformation initiatives and adopting more of the full PTC product portfolio. Along with being in an excellent position for FY 2021, the strong growth in deferred ARR lays the groundwork for robust growth in FY 2022 and beyond.

Thank you, Jim, and good afternoon, everyone. Before I go over our results, I want to mention that my discussion will include non-GAAP results and guidance, with all growth rate references in constant currency. Let's begin with a review of our second quarter results, followed by our guidance for fiscal 21. In the second quarter, our annual recurring revenue (ARR) reached $1.39 billion, reflecting a 15% increase year-over-year, and organic ARR grew by 11%. Our free cash flow was strong at $116 million, aligning with our expectations. The revenue for Q2 totaled $462 million, an increase of 22% year-over-year, supported by strong execution and the effects of ASC 606 on revenue recognition, along with a minor contribution from Arena. This revenue growth combined with our financial discipline resulted in a non-GAAP EPS growth of 83% year-over-year. Looking at our balance sheet, we finished Q2 with cash totaling $326 million and gross debt of $1.5 billion, carrying an average interest rate of 3.1%. We reduced our revolving credit facility debt by $80 million during the quarter, achieving a leverage ratio below 3x, which has been our goal. We are currently assessing the timing for reinstating our share repurchase program. Now, moving on to guidance. The only significant change in our assumptions is related to foreign exchange movements. With these assumptions in mind, we still project fiscal '21 bookings growth in the double digits year-over-year. Last quarter, we indicated that we anticipated fiscal '21 ARR would range from $1.47 billion to $1.5 billion, reflecting a growth rate of 16% to 18%. This forecast included 10% to 12% organic growth, a 400 basis point contribution from Arena, and a 200 basis point benefit from currency fluctuations. Our updated guidance now ranges from $1.45 billion to $1.47 billion, corresponding to a growth rate of 14% to 16%, while maintaining the previous assumptions regarding organic growth and Arena, and we no longer expect any foreign exchange impact. Regarding ARR consistency in fiscal '21, we believe growth rates will remain steady each quarter on an organic constant currency basis. We anticipate free cash flow for the full year will be around $340 million, representing approximately 60% growth year-over-year. As indicated at the start of the year, over 60% of this free cash flow is expected to occur in the first half. As we conclude the first half, we have achieved two-thirds of that target. To remind you, this $340 million target accounts for about $14 million in acquisition-related costs, an additional $7.5 million in incremental interest from Arena-related debt, an unexpected $14 million payment due to a foreign tax dispute, and around $16 million in restructuring payments. This is balanced by incremental cash flow from Arena and a foreign exchange benefit of about $10 million. The free cash flow figure excludes roughly $25 million in capital expenditures. We've noted stronger collections in the first half, which are offset by the timing of expenses and workforce ramp-up throughout the year. Additionally, we expect 65% to 75% of the remaining target free cash flow to be realized in the third quarter due to the upcoming bond interest payment in the fourth quarter. Now, regarding our P&L guidance, we are increasing our revenue and EPS estimates for the year. Our initial revenue guidance was $1.69 billion to $1.73 billion with a growth rate of 16% to 19%. We are now forecasting fiscal '21 revenue in the range of $1.71 billion to $1.74 billion, which indicates a growth rate of 17% to 19%, including about 250 basis points from Arena and minimal or no impact from foreign exchange. We are also raising our operating margin guidance for both GAAP and non-GAAP measures. The GAAP operating margin guidance is lifted from 15% to 16% to between 15% and 17%, and the non-GAAP operating margin guidance is revised from 30% to 31% to between 31% and 32%. Our updated non-GAAP EPS guidance is now set at $3.18 to $3.39, reflecting a growth rate of 24% to 32%. In summary, we have demonstrated strong financial performance once again in Q2, achieving double-digit ARR growth while maintaining discipline in our expense structure despite navigating a challenging macroeconomic environment. The strong results in the first half position us well for continued top-line growth and robust free cash flow throughout the year. Now, let’s turn it over to the operator for the Q&A session.

And our first question comes from the line, Saket Kalia with Barclays.

Tim, I would like to focus on Slide 20 for a moment as it is very helpful. I understand that the diagram represents a vision rather than strict guidance. I'm interested to hear your thoughts on how you see PTC transitioning to a SaaS model. It appears that you plan to have most of your major products available in a SaaS format by fiscal '22. So, my question is whether you intend to actively encourage your customers to adopt this model or if you plan to let it evolve naturally. Additionally, for Kristian, could you discuss how this long-term plan to shift towards SaaS might impact the fiscal '24 free cash flow target? Apologies for the numerous questions, but I hope that makes sense.

Yes, it does. And it's actually a good question. So, there's a lot you can read into this slide, but if you notice the other logos, then Onshape and Atlas, start a darker greener color and as they move to the right, become more or less the same color of Atlas and Onshape. And that's because we call this strategy an insidious SaaSification strategy, which means it happens step-by-step. And it's already started. Vuforia already has the first offerings on Onshape like Expert Capture, which is one of the biggest ones. We're about to ship the second Vuforia product on Atlas, which will be called Vuforia Instruct coming out later this quarter. We mentioned that Creo is shipping a capability on Atlas now for generative design called Creo GDX, and you'll start to see that coming from Windchill and ThingWorx. So, what we're going to do is begin to offer incremental or, in some cases, replacement modules on SaaS. And then over time, the whole suite of each product line will become available on SaaS. So, a customer could begin adopting a part of it, get comfortable with the idea, start to generate some incremental revenue for us. And then in year 2 or 3 or 4, even flip the switch and go 100% to SaaS, so that's what that diagram intends to show you is that these products are all climbing on board, but it's not an all or nothing. It's step-by-step moving toward that all state where they're fully based on Atlas, and we have really a dream unified SaaS portfolio. I'm so excited about that because a lot of these products have divergent heritages and they're on different architectures today integrated together, but still on different architectures. And we have like a spring-cleaning opportunity here, thanks to the power of Atlas to unify on a single platform. And everybody at PTC is aligned behind this. So, we're making great progress. And if you think in a year or two, Windchill and Creo will have $1 billion of ARR. So, if we can get some even modest degree of penetration on a two-for-one ARR uplift, it's a lot of growth in those businesses. So, it's not going to be a lot here this year, it's not going to be a lot next year, but by the time we get out to '24, '25 it is going to be a lot. I will tell you, though, that any guidance we gave you doesn't really contemplate this. This is kind of a new factor. I mean, I'm maybe moving into Kristian's question here, but our original thinking on SaaSification would be there was more all or nothing, and then we decided that this so-called insidious strategy is much more interesting for everybody, customers and PTC. And so, we're now factoring this into the next rev, if you will, of our long-range plan, and it's going to be impactful. But again, the real big impact is farther to the right even in years yet to come on this chart. So, it's going to be a big deal, but not a big deal in the near term. Anything you want to add to that?

No.

I answered your question for you. I was on a roll. Okay. Next question.

Next question is from Matt Hedberg with RBC Capital Markets.

Jim, what stands out to me over the past few quarters is that you've mentioned several CAD and PLM replacements, which is encouraging. Can you elaborate on what is driving this trend? Is it related to your SaaS vision, even though many of these changes are currently on-prem? Do customers see the direction in which you are taking the portfolio? Additionally, how do you view the pipeline for these displacements? Could the pace of these changes potentially increase as we progress?

Yes, I believe there are several factors at play. First, Windchill is an excellent PLM system. It functions exceptionally well and is consistently rated best-in-class in analyst surveys, making it a strong standalone offering. Second, it is part of a unique portfolio. Referring to the digital transformation discussion on Slide 6, our Windchill solution exists alongside a distinctive selection of products. Unlike other PLM vendors, we offer IoT and AR capabilities, as well as an open architecture PLM system, which sets us apart, especially when compared to companies like Dassault. Customers appreciate the product for its quality, and they are also drawn to it because of its integration within a superior larger portfolio. Additionally, they recognize PTC as a leader in technology advancements, including in the SaaS domain.

And your next question comes from Jay Vleeschouwer with Griffin Securities.

Following up on the earlier question from Saket regarding portfolio development and evolution, when we think about the larger context of what's been going on now for a number of years in engineering software, we hear a great deal about so-called digital trends, but it would seem to be more interesting for a company to leave a digital fabric to overdo the analogy. And maybe talk about how you think about that instead of a trend, but perhaps a more encompassing fabric of capabilities through or by the portfolio. Maybe this is another way of asking you to comment on your closed-loop management strategy.

Yes. I mean, Jay, I think you're absolutely right. What's better than a thread is a bunch of threads working together in a fabric that's even stronger and covers more. And I think that really is an interesting strategy. This closed-loop life cycle strategy that you and I both talk about is very unique to PTC. It's CAD and PLM, plus IoT and AR. And now this really interesting new dimension of SaaS. That's a differentiated strategy. I always say our PLM competitors don't have IoT or IoT competitors don't have AR and so forth. And there's so much synergy between these products. We cross-sell all day long because customers like the value proposition. So I think it's a differentiated strategy. And the products are independently good, but they show up as a team, and the team is phenomenal, the portfolio. And I think it's just really helped us. We have a story that customers like and it really relates, like you see on Slide 6, to their digital transformation strategies. They see in PTC, a company who can solve a whole bunch or transform, if you will, a whole bunch of different aspects of their business in engineering, manufacturing, service, somewhat in sales and marketing, even the customer interaction with the product and the business model, there's a lot we can do that's unique to PTC.

And our next question comes from the line of Joe Vruwink with Baird.

I just wanted to get your thoughts maybe on how this fiscal year is evolving relative to your initial expectation. There's been a quite a bit of upside in the first half so far. And just given the guidance update, it actually seems like the year is going to be pretty front-end loaded in terms of growth. We heard from this morning where they're seeing kind of this release of pent-up demand happening in 1Q and 2Q around large deals and so maybe normal seasonality is changing for them as well. I guess, are you seeing things take place or transact in the first half where when you look to the second half, you're maybe mindful of things being pulled forward? Or is it just the case that you'd like to get a little bit closer to that timeframe before maybe making more meaningful revisions to the full year outlook?

Yes. I think, honestly, like as we sit here at the midpoint of the year, performance to plan is in bookings is really pretty darn strong and the forecast for the back half. Part of the reasons we want to share this deferred ARR thing with you is to show you that some of the great bookings we've been landing, lands in deferred and rather than give you caution that start dates matter, we said, why don't we just be transparent and show you the data. Because it really is pretty impressive. And while we're at the midpoint of guidance on active ARR, we're kind of at the high end of guidance on total or as we sit here at the midpoint. So I think a lot of it just is this delicate balance of deferred versus active inside the total. And we're just going to give you transparency to it, so you know where we're heading, and you can see the business for what it is.

Yes, it's Kristian. I think I would add that we started the year projecting 9% to 12% ARR growth and $340 million in cash flow. After the first quarter, we revised our expectations to 10% to 12% organic constant currency growth, maintaining the $340 million cash flow target. Now, we are reiterating the same target, so I am not entirely sure what has changed. We have indicated that the growth trend should remain consistent throughout the year, which averages to about 11%. We just achieved an 11% ARR growth. Therefore, I am uncertain about the reasons for the confusion. Additionally, I want to highlight that our business performed quite well last year, particularly when comparing to some of our competitors who, excluding the Medidata acquisition, reported significant declines. While they are experiencing slower growth against substantial decreases, we are demonstrating strong growth on top of already strong performance. Some companies that struggled significantly during the COVID period, in contrast to us, will likely report larger figures simply as they recover to prior year's levels. However, if you examine our two-year compound annual growth rate, everything is growing, even through the COVID period, whereas many of our competitors are still reporting numbers below their 2019 figures.

And our next question comes from the line of Gal Munda with Berenberg.

I just had a question around the generative design and the exciting news that you basically announced a couple of years after you acquired first of you launched it as part of Creo extension now. What I'm thinking about is how did these modules effectively increase your addressable market in terms of the pricing, maybe how you're thinking about what proportion of your customers are realistically potential customers of it? And do you think that there would ever be a cross-sell into competitive CAD environments as well? Or do you think that's more of a view into kind of potentially getting replacements into, say, existing SolidWorks customers?

Yes. There's a couple of different things happening with generative design. And just to be clear, we first released it as part of the desktop application. And for compute horsepower, we used the graphics card. That gets you quite a bit of compute horsepower for certain types of compute-intensive codes like generative design. But what we've done now in the second iteration is put it on Atlas, where there's elastic compute, you can have the biggest computer in the world running your generative analyses for you. Let me also say, one of the next steps will be the pipe that generative design capability into Onshape. Because it's actually running on the same platform as Onshape now. We just got to build it out into the UI and the functionality of Onshape. So what we'll do with generative design is, for sure, will go back to the Creo base. And we will upsell this new module. It's a purchase you add on. And then we'll go into the Onshape base, and we'll do the same thing. I think that generative design is a brand-new idea. It's a transformational idea, but some of these ideas started a little slow and then really take off once people understand what they can do. So I expect we'll see that pattern. And then I do think it will give us more competitive alternatives because opportunities. Because I think what we have is unique and special. And I think that if somebody is thinking about switching off SolidWorks, if they want to go to a high-end product, they'll be impressed by Creo. If they want to go to a simpler product that's simpler to own and so forth, they'll look at Onshape and say, wow. So I think it does give us an opportunity to take some market share. But the first and primary opportunity is the opportunity to drive more growth in the installed base.

And our next question is from Ken Wong with Guggenheim Securities.

Jim, there has been considerable discussion in the design sector regarding infrastructure spending potentially serving as a boost, particularly for your peers in the AEC space. I would like to hear your thoughts on whether PTC could also benefit from this trend.

Yes. I think not so much in the AEC field, but where AEC booms so does construction vehicles and equipment like that. So about a third of PTC's business comes from a category we call industrial. And that would be everything from Deere, Caterpillar, Bobcat style equipment. Volvo go on and on. Two carrier HVAC equipment or products that end up in new buildings and so forth. So I do think it will be helpful. I think that our industrial customers, in general, are really seeing a surge of growth right now, in part on the rebound from COVID and then might even see a little bit more with the infrastructure spending. So I think it will be helpful, but we haven't factored a lot of that in. We're kind of sticking to the guidance we gave at the beginning of the year and executing well against it, could prove to be a tailwind or an upside. But at this point, we're not changing our guidance explicitly or specifically because of that factor.

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

Just a question about Onshape and Arena. What are the opportunities to accelerate ARRs from here? What steps can you take? And the bookings are good. So when could we see acceleration? What's the feedback from the customers?

Yes. I mean I think with both Onshape and Arena, Onshape actually has a very high growth rate, both for bookings and for ARR. In Arena, and so we just need to keep adding sales capacity and continue building out the product and do all the things you do with the growth business is working. Arena is a little bit of a different story because almost all of their sales come from the United States. And so the first thing we're going to do is globalize Arena and sell it around the world, just like all of our products, including Onshape is sold. A second thing we're going to do is integrate it to Onshape because customers that get excited about Onshape also get excited about Arena and vice versa. So I think there are some short-term investments like in globalization that we can do for Arena that will be productive quickly. And we're already moving to put those resources in place to open up branch offices, if you will, outside the U.S. and to add more sales capacity and so forth. Arena was owned by a private equity company, and they were managing it for cash flow. And I think you'll see us manage it for growth, knowing that the cash flow will follow. And we have the luxury and kind of know-how to build businesses like that. So that's what we're off doing right now with Arena.

And your next question is from Matthew Broome with Mizuho Securities.

So we've had some optimism in the channel regarding the potential for 5G networks to facilitate sort of remote sensor enablement and ultimately drive more demand ThingWorx over the next couple of years. Just how significant do you anticipate the 5G rollout could be to overall ThingWorx adoption in the near term?

Well, I think it's very helpful. It's one more reason why industrial companies should go back into their factories and look to make changes. If somebody's going to put in 5G, they're going to put in an application like ThingWorx at the same time because if you suddenly have all this access to data and mobility and high-speed connectivity, what are you going to do with all the data? And that's really where ThingWorx and ultimately, Vuforia and products like that fit in. So I think 5G is helpful. It's a tailwind. We've been building a decent business without 5G, but 5G is certainly in the category of nice tailwind more so than anything else.

And your next question is from Adam Borg with Stifel.

Maybe for Jim, just on Rockwell, it was great to see the strength in the quarter on the partnership. And I was just curious, it's always been a couple of quarters since that new extended agreement that you guys have had, expanding beyond IoT. And I'm just curious, was this strength that you've seen, just focused on the IoT and AR side? Or was there any early green shoots around Rockwell being able to sell Windchill and Onshape?

No. I mean, honestly, and I would characterize it as IoT and AR. Rockwell, and I think I was transparent on this. That new agreement gave Rockwell the right to sell more products because sometimes they come across those opportunities. But it wasn't really changing the center of gravity of the partnership. I think if you look at what's driving a little more momentum with Rockwell, it's two things. First of all, Rockwell brought in some new talent. And I'll just say from the sidelines as a partner, these guys are making a difference. They're shaking some things up and really creating some energy. And then the second thing is Rockwell had a good quarter overall. Particularly on the orders front. I saw they announced today and their order book was up double digits and so forth. So I imagine some of those orders ended up flowing our way. So I think it's really more improving the economic situation in the world of industrial automation, coupled by new talent. It's not really a mix shift in the product lineup to sell it.

And next question is from Sterling Auty with JPMorgan.

This is mile on for Sterling. I was hoping you could just maybe give more of a demand breakdown between CAD, PLM, IoT, and AR? And then are there any vertical end markets that you aren't seeing a bounce back in demand yet as the economy is reopening?

Okay. The first part of your question was breakdown demand between Creo and Windchill? Did I get that right? The whole portfolio? Well, I think the demand sort of mirrors the growth rates. As you might expect, some of the products with the highest growth rate, of course, in order to sustain those growth rates, they have the highest bookings. And in some cases, higher churn as well with newer technologies and so forth. And then when you get to a product like Creo, churn is very low. So we can build a growth business of less aggressive bookings coming in the top. So I would say, yes, demand is strongest for Vuforia and Onshape. At the next level, it's really ThingWorx. And then below that, PLM and below that CAD, just in terms of demand. But it's again a function of the maturity of these products. It's a function of the growth rate of the markets, which is sort of a function of the maturity of the markets and so forth. Hopefully, that hits your question. I guess it was the second part, I mean.

And for our last question, we have Jason Celino with KeyBanc Capital.

PLM, very helpful slide, as always, it's been quite strong for a couple of quarters now, but maybe taking a step down in terms of the strength, customer size wise? Any comments on is it enterprise, mid-market, SMB? Or is it truly more broad-based?

It truly is broad-based. And let me just say, Jason, that's 14 quarters in a row of double-digit growth in the core business. So it's not just a couple of quarters. It's 14 now. And it's always been PLM leading CAD and the two together, representing double digits and double digits right through COVID, by the way. So that's impressive. Certainly compared to some competitors who weren't posting numbers or anything like that. But I'd say it's broad-based. I mean, there's a few pockets like medical device in med tech in general, which is a regulated industry around the globe. We're especially good at that. Windchill tends to take a large percentage of those deals in the larger accounts. And believe it or not, Arena takes a lot of those deals in the smaller accounts is kind of more of a mid-market solution. But they, too, in their market space, are particularly good at regulated markets. But I mean, we've had good success in aerospace, good success in the automotive business. It's just really is pretty broad-based. It's a fair amount of expansions, but then a good number of new logos and competitive displacements, thanks to a differentiated story as well.

And there are no further questions at this time. I will now turn it back over to Ms. Emily Walt for any closing remarks.

Thanks, Abigail. I'd like to thank everyone for joining us on the call today. PTC will be participating in a number of virtual investor events this quarter, and you can find all the details on our investor website. We'd also like to highlight our LiveWorx series, which you can see the agenda and register at [email protected]. We look forward to seeing you on the conference circuit in the coming months. And again, thank you for your interest in PTC. Have a great evening.

Thank you, everybody. We'll see you on the road or see you in 90 days.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.