Ptc Inc. (PTC) Q2 2022 Earnings Call Transcript

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to PTC's 2022 Second Quarter Conference Call. During today's presentation, all parties will be in a listen-only mode, and following the presentation, the conference will be open for questions. I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Good afternoon. Thank you, Savannah, and welcome to PTC's 2022 second quarter conference call. On the call today are Jim Heppelmann, Chief Executive Officer; and Kristian Talvitie, 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 to differ materially from those in the forward-looking statements can be found in PTC's annual report on Form 10-K, Form 10-Q and other filings with the US Securities and Exchange Commission 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, April 27, 2022, 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 directly 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, Jim Heppelmann.

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. To simplify things, please note that throughout my commentary, I will be discussing all growth rates in constant currency. I'm pleased to share that PTC delivered another strong financial performance in fiscal Q2. All of our metrics came in above our guidance, and the strength was broad-based across all segments and geographies. Of particular note, we saw organic ARR growth accelerate to 13% despite the self-inflicted churn caused by our decision to exit the Russian market. We ended Q2 with $1.56 billion of ARR. Bookings grew faster than ARR, and renewals were very strong. We also continued our track record of translating top-line growth into even better bottom-line growth. In Q2, our adjusted free cash flow performance was strong at $158 million, up 22% year-over-year and ahead of our guidance. The non-GAAP operating margin of 42% in the quarter was the highest we've seen. The margin expansion strategies we outlined at our December Investor Day are generating the results we expected. While we're monitoring the global macro and geopolitical situation carefully, we continue to see a strong global demand environment for our offerings. Driving digital transformation across the product life cycle remains an important priority for our customers. Bookings were up mid-teens year-over-year, and the strength was broad-based. Growth was strong in both digital thread and velocity and across all three geographies. Q2 was the sixth consecutive quarter that bookings have grown faster than ARR, which together with improving renewal rates creates an acceleration bias for ARR growth. To help you understand the resilience of PTC as you think about any potential macro volatility that may lie ahead, I'd like to expand on our business model dynamics to ensure you appreciate why our business model provides us with confidence in our ability to achieve our financial targets in the back half of the year. On the left-hand side of the slide, you can see that the 13% ARR growth we delivered in Q2 was based not just on Q2 performance but also on the momentum we built over the previous three quarters as well. ARR growth is a rolling four-quarter metric. Remember that, so long as bookings exceed churn, ARR will grow. Bookings currently exceed churn by a wide margin. To help you run your own scenarios, let me simplify the math, by giving you some big round directional numbers to work with. Let's say PTC has around $1.5 billion in ARR. And on a run rate basis, we're adding $300 million in annual bookings, while seeing $100 million in annual churn. Over the next year, the $1.5 billion of ARR would step up by $300 million and stepped down by $100 million to grow to $1.7 billion, which is 13% growth. Note that, because PTC provides sticky enterprise software, our history in 2009 and again in 2020 shows renewals remain steady through a macro downturn. To better understand the sensitivity then of ARR to macro changes, let's start with a hypothetical scenario where bookings stopped growing and remained flat indefinitely at $300 million. In that case, with churn being steady, ARR would experience double-digit growth for several years and high single-digit growth for several more years after that. If you're concerned about a downturn in Europe which represents 40% of our business, you could create an alternate model where 40% of our bookings declined by 25% for two quarters and then bounced back, in which case we'd still deliver 12% ARR growth over the forthcoming year. Frankly, no matter what scenarios you might model, you'll consistently see that PTC has a very resilient business. Our subscription model, which took us years of hard work to put in place, is a wonderful thing, and it will keep PTC in a growth leadership position in our industry for years to come. Moving on, let's take a quick look at our Q2 ARR performance by geography. In Q2, we saw strong ARR growth across all geographies. Our ARR growth in the Americas was 12%. All product segments grew with the main growth drivers being continued strength in our core PLM and CAD segments and another strong contribution from our Velocity business. In Europe, our ARR growth was 15% despite the exit from Russia. We saw strong results across the board in Europe with growth primarily driven by our core PLM and CAD businesses and strong growth in the IoT and AR segment. In addition, our Velocity and FSG businesses delivered solid growth in Europe in Q2. I know that investors are concerned about exposure to Europe and the macro environment there, so I'd like to reiterate that: first, we're continuing to see strong bookings performance in Europe; and second, as I've demonstrated quantitatively, our model is highly resilient. Our ARR growth in APAC was 14% with our core CAD and PLM businesses again being the main drivers. In our largest product segment, Digital Thread Core, we delivered another double-digit growth performance in Q2 with 13% growth. Within this, CAD grew low double digits, while PLM grew mid-teens. Bookings grew faster in each case, reflecting on Q2 across the now 18 consecutive quarters of double-digit ARR growth that we've seen in the core CAD and PLM business. This was the best performance yet, which I attribute to a combination of strong demand for digital transformation, best-in-class sticky solutions sold in the recurring revenue model with low churn, and the growth tailwinds from our SaaS initiatives. In our core business, our solutions are very strategic, and we're executing well and taking market share. You may have noted we also launched Windchill+ during the quarter, which is our next-generation differentiated core SaaS PLM solution. Windchill+ contains the technology and operational improvements that enable higher profitability and is now becoming our lead Windchill sales play. Windchill+ is just the tip of the iceberg of a bigger plus strategy, and you'll see us follow with Creo Plus and similar premium SaaS offerings in FY 2023 and beyond. In Digital Thread, we saw ARR growth of 15%. While the sequential acceleration was modest, we made good operational progress and remain on track to get growth to a two handle by the end of the year. Following the launch of our new ThingWorx Digital Performance Management Solution, which we abbreviate as DPM, in Q2, we landed our first nine deals across various different industries, including aerospace and defense, high-tech, automotive, and food and beverage. Though these were starter deals, the average initial deal size was six figures. Rockwell brought in several of these DPM deals, and the DPM pipeline for both companies looks good going into the back half of the year. FSG had a great Q2 with 8% ARR growth. Servigistics retail PLM and Arbortext all performed well, helping to drive solid results in terms of renewals and churn. Growth was particularly strong in the Americas and Europe. With FSG, our strategy is to keep delivering value to customers by having dedicated focus on each of these products. And I'm pleased to see that strategy produced another strong quarter. Before I turn to our Velocity business unit, let me run through a couple of quick customer stories that will give you a taste of how customers are leveraging our digital transformation capabilities. I'll start with Bosch. Bosch is a massive global supplier of technologies and services. With 400,000 employees, including 75,000 engineers, a key challenge for Bosch is how to drive end-to-end digital transformation at scale. Bosch is leveraging their Windchill PLM system as a backbone in combination with Creo and ThingWorx to enable new and improved workflows. This specific example is about Bosch using model-based design capabilities of Creo Windchill. By moving beyond the world of 2D drawings and leveraging enhanced 3D Creo data across engineering, manufacturing, and inspection processes, Bosch is driving improved productivity and bringing products to market faster. Next, Cummins is the world's largest independent diesel and gas engine manufacturer and has an interesting ESG story that we help enable. Cummins has long made it a company goal to reduce their environmental impact, and digital transformation is a critical part of their journey. By using generative design and ANSYS-powered simulation upfront in their Creo-based design process, Cummins has been able to reduce material usage, create better products, and accelerate time to market. Turning to the Velocity business, year-over-year, ARR growth for our Velocity segment was 27% in Q2, with both Onshape and Arena growing multiple times faster than the market, which demonstrates there's a distinct and vibrant segment of the CAD and PLM market that prioritizes SaaS and agile product development. With Onshape and Arena, PTC has a unique ability to serve this market segment, and we're continuing to ramp both our Velocity product and go-to-market investments. Moving to Slide 12, I'd like to take you through a Velocity example showing how Arena is empowering Filtronic's global team to deliver innovative products faster. Filtronic is using Arena's SaaS PLM solution to control product design and supporting documentation and to enable collaboration across globally-distributed teams. The benefits of providing complete visibility into critical product and quality processes are significant. For example, engineering change cycle time was cut by 50%, and the issue resolution time has been cut in half as well. Turning to Slide 13, we announced two transactions last week and I'd like to recap both and provide some additional context. First, we announced an agreement to acquire Intland Software, a next-generation application life cycle management or ALM company for $280 million. For background, PTC entered the ALM market a decade ago when we acquired MKS and their integrity suite. ALM has become an important and well-established offering within PTC's portfolio and is sold both standalone and as a key subsystem of our Windchill PLM offering. The Codebeamer family of software products from Intland is a next-generation ALM suite that's fast becoming the new standard in safety-critical and regulated industries, especially in the large automotive industries where products are increasingly differentiated by the software. Bringing Codebeamer into our ALM suite will bolster both ALM and PLM growth potential by significantly increasing our product strength and market momentum. Intland is a great company that matches their strong product with strong growth and surprisingly good profitability for their size. We expect to achieve both revenue and cost synergies with this acquisition. When it closes, the acquisition is expected to add roughly a percentage point of inorganic growth to our FY 2022 ARR results. Intland will join our existing ALM unit, so Codebeamer ARR will be reported as part of our FSG segment. We expect this acquisition will increase the growth rates of FSG going forward, which we now expect to be consistently growing in the mid-single-digit range. Second, we announced an agreement to sell a portion of our professional services business to long-time partner ITC Infotech to further power our SaaS strategy. This move is a continuation of a long-term strategy we've been executing to focus PTC's efforts on high-margin software while we look to a partner ecosystem to deliver the professional services that unlock the value of that software in the customer setting. As we ramp up the SaaS initiatives we described at our December Investor Day, a key component of the program is the lift and shift efforts required to move on-premise customer deployments into our SaaS cloud. With a large installed base, we're looking at the need for potentially thousands of services projects in the coming years. These projects are ones where PTC needs to play a direct role because at the end of each project we will be taking ownership of the running system and carrying it forward. Rather than put our own professional services organization back onto a growth vector as we scale up to perform these projects, we're instead planning to transition some of our key PLM talent into a new ITC unit called DxPServices, thereby allowing the lift and shift capacity to scale on ITC's P&L rather than ours. This new DxPServices unit will be our partner to run joint lift and shift projects with DXP doing the upgrade and de-customization work that happens at the customer site and PTC assuming the resulting system into our centralized SaaS operations. This is a professional services transaction, so it has no bearing on ARR. Kristian will comment further on the expected financial impact of these two transactions. We expect both will close in Q3. To wrap-up then, I'm very pleased with PTC's position and the opportunity that lies ahead. Our portfolio of products is unique and compelling and aligns well with customer demand. Throughout the first half of FY 2022, bookings and renewals have been strong, and growth is accelerating as we enter the second half of what will be our fifth consecutive year of double-digit ARR growth. We're poised to further accelerate growth as SaaS tailwinds blow harder in the coming quarters and as we gain momentum with DPM and other IoT and ARR initiatives. Our profitability continues to expand following the changes we implemented at the start of the year, and as our start-up businesses continue to mature on up in J curves. Our model has proven to be highly resilient even in the face of a slowdown like during the pandemic in 2020. We're raising our guidance for the second quarter in a row and I think the company has never been in a better position to create shareholder value. With that, I'll turn it over to Kristian for more details on the financial results.

Thanks, Jim, and good afternoon, everyone. Before I review our results, I'd like to note that I'll be discussing non-GAAP results and guidance, and ARR references will be in both constant currency and as reported. At the end of Q2, our constant currency ARR was $1.564 billion, up 13% year-over-year. Our SaaS businesses in both the digital thread and Velocity business groups saw continued solid ARR growth in Q2 and represented a larger mix of our overall business both year-over-year and sequentially. We delivered above the ARR guidance range we provided for Q2, which was for constant currency ARR of $1.54 billion to $1.55 billion. On an as-reported basis, year-over-year ARR growth was 11%. Foreign exchange was a $32 million headwind, and our as-reported ARR in Q2 was $1.532 billion. In March, following the Russian invasion of Ukraine, we announced that we would discontinue business operations and sales in Russia. Exiting Russia had a $4 million adverse impact on our Q2 ARR. We've accounted for the $4 million impact as churn in Q2. Cash from operations of $142 million in Q2 was in line with our guidance. Considering the $32 million foreign exchange headwind to ARR, this was a strong outcome reflecting expected seasonality and another quarter of solid collections performance. In Q2, free cash flow of $140 million grew 21% year-over-year and included $18 million in restructuring and other related payments. Adjusted free cash flow was $158 million, up 22% year-on-year. Free cash flow and adjusted free cash flow were both ahead of our guidance due to strong cash from operations and also because CapEx in Q2 came in slightly lower than we had anticipated. The main takeaway on cash flow is that despite the headwinds related to foreign exchange, we've been executing well and delivering on our targets. Q2 revenue of $505 million increased 9% year-over-year. As we've discussed previously, revenue is impacted by ASC 606. So we don't believe that revenue growth rates are the best indicator of our underlying business performance, but would rather guide you to ARR as the best metric to understand our top-line performance and cash generation. FX impacted revenue by about $6 million in Q2, and our revenue on a constant currency basis was $511 million. Before I move on to the balance sheet, I'd like to provide some color on our non-GAAP operating margin which expanded to 42% in Q2, as Jim noted earlier. This compares to 37% a year ago. Revenue is impacted by ASC 606, so other derivative metrics such as gross margin, operating margin, and EPS are all impacted as well. Still, it's worth mentioning that our costs in Q2 benefited from the restructuring we announced in Q4. We now have a more optimized operating structure, and we believe the improvements we've driven are sustainable and will enable us to deliver non-GAAP operating margin for fiscal 2022 roughly in line with our year-to-date performance. We ended Q2 with cash and cash equivalents of $307 million. Our gross debt was $1.28 billion with an aggregate interest rate of about 3.4%. During the second quarter, we generated cash proceeds of $43 million through the sale of our equity investment in Matterport. This, in conjunction with cash from operations, we used to pay down $175 million on our revolving credit facility in the second quarter. Regarding our share repurchase program, as we communicated last quarter, we've completed our planned repurchases for fiscal 2022 with $5 million settling in Q2. For the remainder of the year, we'll focus on deleveraging. Looking forward to fiscal 2023 and on a go-forward basis, assuming our debt-to-EBITDA ratio remains below three times, our goal is to return approximately 50% of our free cash flow to shareholders via share repurchases. Next, I'm also trying to factor in the somewhat challenging hiring environment. If possible, we'd like to see that we could say 6,700 to 6,800. I'm just trying to be pragmatic. We expect both will close in Q3. As you can see on the slide, we expect to report – we expect as-reported ARR to be lower than constant currency ARR for Q3 and fiscal 2022. This is because of the FX headwinds and rate movements which have moved significantly since September 30, 2021. Based on the exchange rates at the end of Q2, we expect as-reported ARR for Q3 to be impacted by $32 million. And for fiscal 2022, we expect the FX headwind to be approximately $34 million. We do believe constant currency is the best way to evaluate the top-line performance of our business because it removes foreign exchange fluctuations from the analysis, positive or negative. We're raising our fiscal 2022 constant currency ARR guidance based on our strong performance in the first half and despite our exit from Russia. The new range is now $1.64 billion to $1.665 billion, which translates to constant currency ARR growth of 12% to 13% for fiscal 2022. For Q3, we're guiding constant currency ARR to be $1.58 billion to $1.595 billion. At the midpoint, this equates to 13% constant currency growth. We continue to expect IoT and AR to reach ARR growth of 20% or more by the end of the year. And our FSG and Velocity businesses continue to do very well in the market. That all said, the main driver of our fiscal 2022 ARR guidance raise is the strong customer demand we're seeing in our core CAD and PLM offerings, which represented 70% of our ARR in Q2. We're maintaining guidance for fiscal 2022 cash from operations at approximately $430 million as our strong execution and operational discipline are helping us to offset FX headwinds and the Russia exit. Our guidance for Q3 cash from operations is approximately $110 million. We've updated our CapEx guidance for fiscal 2022 to approximately $25 million, which is down from about $30 million that we set at the beginning of the year. And we're expecting approximately $5 million of CapEx spend for Q3. Therefore, we're raising our full-year free cash flow target to approximately $405 million and guiding for Q3 free cash flow of approximately $105 million. We continue to expect our normal seasonal pattern in our fiscal 2022 cash flow generation primarily driven by invoicing seasonality. The majority of our collections occur in the first half of our fiscal year and we continue to expect expenses to increase in the second half of fiscal 2022 as we ramp hiring in our SaaS investments because of these dynamics Q4 is expected to be our lowest cash flow generation quarter. Our free cash flow guidance for fiscal 2022 includes $40 million to $45 million of restructuring payments compared to our expectation a quarter ago of $45 million to $50 million as some employees have otherwise departed PTC and some employees that were expected to depart have moved into new roles where we've been looking at. Both of these are good things. In addition, our fiscal 2022 guidance assumes approximately $5 million of transaction-related payments that were incurred in the first half of fiscal 2022. Therefore, consistent with raising our free cash flow guidance, we're also raising our adjusted free cash flow target to approximately $455 million. For Q3, we expect approximately $10 million of restructuring payments and approximately $5 million of transaction-related payments incurred in the first half, bringing our adjusted free cash flow to approximately $120 million. At the midpoint, we're expecting to report a strong increase in our ARR adjusted cash flow methodologies, which will contribute positively to the overall business. So, in summary, we believe we will continue to execute well on our strategic initiatives and look forward to an encouraging year ahead.

And our first question will come from Joe Vruwink with Baird. Please go ahead.

Hey, thanks. Hi everyone. I guess I'll start with a question on macro and obviously I appreciate the backdrop as dynamic and your model at this point is built to withstand a lot of what I'm about to ask. But can you maybe just contrast how customers are maybe talking to you about strategic investments and some of your more complex implementation areas like PLM or IoT? Maybe contrast how this is different today than it would have been in mid-2020 or other periods that maybe have parallels to the past? And does it seem like customers are kind of separating strategic from the macro, appreciating that the things they're committing to today do have longer-term benefits?

Yes. I mean absolutely Joe, Jim here. Keep in mind that PTC is really helping customers plan and engineer and plan the production processes for products. We're not helping them, by and large we're not helping them much to produce the product. So the supply chain problems really are production problems. And if you're having production problems, most companies don't see that as a reason to stop planning the next generation of products because suddenly a production problem will be solved at some point. And then you'll be competing for who has the best next-generation product and I hope you didn't take the year off. So we don't really see any connection. Thankfully, we didn't see much connection in 2020 either in that particular way. So I think the pandemic in 2020 put a lot of momentum into digital transformation. People realize you can't execute a hybrid workforce, for example, without a system of record for product data. It just doesn't work. So that momentum is carrying through and people are forging ahead with their strategies to implement, for example, PLM and CAD to advance their digital transformation initiative even if their factories are idle because they're waiting on semiconductors or in some cases wire harnesses that used to come from Ukraine and all that type of stuff.

Okay. That's great. One follow-up just on how your approach to the Windchill transition to SaaS might be evolving just as you publicly announced that now you have had a chance to have conversations. It seems like a lot of your peers are talking about scaling up their own cloud migration efforts. I'm just wondering if you're kind of getting the inkling that that could play out for PTC as you're dedicated to Windchill at this point onwards?

Yes. If you go back to our Investor Day, I'll remind you that we really feel like we're starting the third phase of our SaaS project. The Windchill part of it started back in the first phase. So for us, we've had a lot of success with cloud, and it's one of the growth drivers for Windchill. It has been over the last 18 quarters. I think the difference is we didn't like the profitability of the cloud part of the Windchill cloud business as we used to do it. So this Windchill+ is really our shift to the multi-tenant model, which to the customer doesn't look much different. But to PTC, it looks quite a bit different and produces quite a different outcome in terms of profitability. So I think customers liked the Windchill in the cloud before. They still like Windchill in the cloud because PTC likes Windchill in the cloud better now. And that's causing us to open the floodgates a little more because it's a more attractive business for us now.

Great. Thank you very much.

Our next question will come from Adam Borg with Stifel. Please go ahead.

Thank you for taking my question. Regarding IoT and AR, you mentioned them last quarter, and in the slide deck today, you highlighted the ongoing emphasis on upselling and cross-selling to the installed base. I would appreciate an update on your strategy for future upsells and cross-sells, as well as a reminder of the benefits to customers from integrating PTC's core CAD and PLM with your IoT and AR solutions.

Yes, let's focus primarily on IoT, as it is a much larger area. There are actually three main use cases for IoT. The first is smart connected products, which are the products we manufacture. The second is smart connected factories, or smart connected operations, which refers to the products our customers buy and use in their factories. The third involves our Navigate strategy, which integrates information from various systems to create an environment that enhances productivity for lightweight users. All of our discrete manufacturers create products and operate factories. Therefore, we believe that for reasons of efficiency and success, we should concentrate on selling to our existing customer base more intensively rather than attempting to sell to anyone. Troy Richardson has implemented a stronger emphasis on cross-selling, and we are beginning to see positive signs, particularly in DPM, where Rockwell sold through the Rockwell base. Most of the deals we've closed have come from our customer base at PTC, which is encouraging, and we believe there is potential for more growth in this area.

That's great. And maybe just as a very quick follow-up. It's great to hear the early success on DPM and just on the Rockwell partnership as well and seeing some success there. Maybe just two seconds on the state of the union on where we are with Rockwell overall.

Yes. Coincidentally, Scott Genereux, the Chief Revenue Officer from Rockwell happened to be at PTC today, so I had lunch with him and we talked it over. The truth is, DPM is a better fit for Rockwell than is ThingWorx as a platform. Rockwell is leaning in, and their consulting arm Calypso is really leaning in, and PTC is leaning in. So I think there's some promising green shoots there. We were pleased to see Rockwell participate in DPM success right from the start. I think it gives us a better foundation, if you will, to build success. It's a better fit for what both PTC and Rockwell are capable of. We're both solution providers. This is a solution versus a platform.

Our next question will come from Jay Vleeschhouwer with Griffin Securities. Please go ahead.

Hi Jim, Kristian, how are you? Jim, starting with you on the Intland acquisition, could you contrast the rationale for that acquisition and the addressable market from that acquisition as compared with the rationales you spoke of 11 years ago almost at a day when you bought MKS, which ultimately became a relatively small part of the business? So what's different now in terms of let's say an ALM arms race that makes Intland genuinely compelling and perhaps put it in the context of the overall closed-loop life cycle management strategy?

Okay. I'll take the first one on Intland versus Integrity. I mean, Jay, it is fundamentally the same story. I think we've had reasonable success with the Integrity product, but we had some challenges with the Integrity product that I think are fixed in this next-generation Codebeamer offering. Keep in mind that ALM is both a business by itself and it's a key subsystem of our PLM system, which therefore means it fuels our PLM success as well. When I look at Integrity versus Codebeamer, number one is SaaS. We didn't have a SaaS solution. We didn't have a path to a SaaS solution with Integrity. It's much older technology. The second thing is Integrity had its own built-in source code management tools. The entire development community has really shifted to tools like GitHub. It's very, very hard to sell against things like GitHub, which, amongst other things, tend to be free. So it turns out that Codebeamer is designed to work with all these other modern tools out there. The third thing is Codebeamer is really viewed as a sexy, best-in-class user experience, all that kind of stuff. So we're really with Codebeamer leapfrogging far ahead of where we were with Integrity, leapfrogging the competition, and we now have an offering that allows us to go back on the offense into automotive companies, back into medical device companies, aerospace and defense companies.

Yes. Hey, Jay. Given all the moving parts, it's obviously difficult to pinpoint precisely, but I'd say we're probably somewhere in the 6,700 range.

Okay. So headcount would probably end up being flat net by the end of the fiscal year, but on a larger base of revenue.

Yes, that's right. And I mean, I'm also trying to factor in the somewhat challenging hiring environment. If possible, we'd like to see that we could say 6,700 to 6,800. I'm just trying to be pragmatic.

Yes. I mean, Jay, you look at this data, we have a lot of positions open on one hand. We have attrition on another hand and then we're spending some employees through this transaction. So it is a little hard to net those out because it's difficult to pin down attrition and pin down hiring success. But headcount won't go up dramatically here in the context of all that; it will probably be flattish, I mean, as a reasonable approximation.

Our next question will come from Yun Kim with Loop Capital. Please go ahead.

Great. Thank you.

Hey, Jim. You expect the amount of professional services work to increase as part of the Windchill+ adoption over the next several years. Obviously, you are taking advantage of that opportunity and offloading some of the professional services business to partners, and your transaction with ITC illustrates that. But given the tight IT labor market out there, do you feel comfortable that you have enough professional services capacity to meet the potential demand for the - around the Windchill+ lift and ship adoption that you expect over the next several years? And overall, if you can just revisit the state of your partner ecosystem around implementation and deployment capacity? And if you have any kind of investments that you're making beyond this transaction you announced today? Yes. I think we have tremendous scalability in our ecosystem. But just for the benefit of everybody, let's turn the clock back a little bit. If you go back 10 years, about a third of our revenue was services. Now, it's 9% going down to 6% or so as a result of this transaction. Over those years in our quest for margins, which was very successful, we said let's stop chasing services. Let the ecosystem take that differential from us and add 10 times that on their own. So literally, the ecosystem is doing billions of dollars of services around our stuff. It's not a single partner. It's many, many, many partners with some having names like Accenture, Deloitte, Cognizant and Calypso, and many having smaller firms you never heard of. So there's a lot of capacity out there. The thing is, these projects we can't just give to a partner because in the end, we're taking the systems into our running system. It has to be done very carefully. We have for many years subcontracted work to ITCI. We could have subcontracted these projects to ITCI, but I said, I don't really want that in our P&L because subcontracted projects tend to have even less margin than projects we do with our own employees. Therefore, rather than build up a subcontracting business, because we didn't want to go hire all those people, we just entered into this arrangement.

Okay. Great. And then just a quick question, I don't think anybody asked yet, but Jim, what is your expectation regarding the Windchill+ adoption at least over the next several quarters in terms of the pace of adoption?

Well, we've been doing a lot of adoption of Windchill in the cloud; that phase one offering. So, we're just going to pivot that to Windchill+ now. Windchill+ is not just Windchill in the cloud. It's Windchill+ a bunch of things plus cloud, plus all the Atlas benefits plus single sign-in across the suite plus our workflow engine, our BPM workflow engine, plus our visualization in the cloud capabilities. So we're really trying to create a differentiated offering in part to help justify the higher price point, but also to make it more attractive to go to the cloud. Just for fun, I tell people think of like a first-class seat in an airplane versus a coach seat. It isn't just that the seat's bigger. You wouldn't want somebody to say, well, I want to sit in coach but have a bigger seat at a lower price point. That's sort of like saying could I have a system integrator put my Windchill system into the cloud for me? So what we're doing is offering a bundle of things. It's a bigger seat. It's a bigger TV, it's better food. You get to board first. You've got plenty of room for your luggage, quicker access to the restroom. These are all things that would be associated with a first-class seat and can't be unbundled and bought off a Chinese menu. So that's really what we're doing with Windchill+ and then we're going to follow the same strategy with the rest of the products as we're ready. Okay. I think that was our last question, Matt, right? So thank you all for spending some time with us here today. Matt tells me we're going to be very active on the circuit here in the next 90 days. We're going to be at like half a dozen different conferences. I'm going to a few myself, and Matt and Kristian will be at others. So we might see you on the road, and I hope so. I haven't seen a lot of you in a long time. It would be nice to see you face-to-face. And if not, we'll look forward to talking to you again in 90 days. As you can see, we really feel good about the business. We've put in place a lot of strategic moves. They're mostly working. We've put in place profitability moves that are working pretty well, and that's a good combination to have strong growth and strong profitability, and it bodes well for us, particularly given the resilience of our model in good times and in bad. So, I'll leave you with that thought and look forward to seeing you sometime in the next 90 days. Bye-bye.

Thanks, everybody.

And that concludes today's call. Thank you for your participation, and you may now disconnect.