PTC Q3'26 Earnings Call

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 fraud 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 PPC, 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 Sacket Calia with Barclays. Your line is open.

Okay, 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, you know, 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?

Yeah, Zach, thanks for the question. And 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. A 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 Creo 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 Jetstream 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. So 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, So, Neil, when looking at the sales operations now, are we where you envisioned when you initially started to go-to-market changes, or are there still kind of 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. You know, like our – and 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 doing the right deals for PTC and the customer, and our enablement efforts 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 that 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. Just as, you know, 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 windshield, use more code meter, use more Onshape, ServiceMax, et cetera. So, that is the tailwind that we're seeing already. You're seeing 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 releases this year versus last year, many of which are already on the field. 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 ServiceVax AI deal. We have templatized that. And the next quarter, we won for a different company a near seven-figure ServiceVax 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, gaining 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 modernization 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 fax. 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, in 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 displacements 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 Fleecehauer 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, Dassault on their call spoke about their architecture 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 opportunities, and perhaps further distinguishing yourself with your multi-solution sales 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 displacements 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. We're going to keep going. That doesn't take our eye off the ball, as you know, Jay, from building DTC 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-CAD 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. So 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 Stiefel. 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 third leg of the capital allocation tool is M&A, which you've been pretty quiet on. So, you know, as the organic flywheel continues, as the go-to-market machine matures, how are we thinking about M&A? Anything change there? And just why not get back into some M&A here as everything seems to be firing? Thanks so much.

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. And 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. Could you explain what this is and whether it represents kind of a recurring commitment early 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 Neso 9 with Berenberg. 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 the 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 uh prevent 27 to be um as good as 26 if not better thank you let me let me start look we we still have a few months left here to close out q4 and you know 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 four straight quarters of real demand capture, how that's affecting deferred AR. That gives us a lot of energy as we think about subsequent years. But I'll tell you in terms of what could be the risk there, we still have to execute. We have to close out this quarter. We have to continue to build on the momentum of the demand capture that we've seen for four straight quarters, make it a fifth quarter, deliver the ARR the way in which we are expecting and inspired by, 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, you know, 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 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 9 to 9.5, so 9.25% in itself should signal we have strong confidence 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 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 four quarters in a row of watching the progress of all the hard work we put in that transmission actually show up. And that's been happening across quarters before this quarter. It's now showing up. And as we've talked about, we believe it's sustainable and we'll continue to improve upon that as we think about subsequent years. So that's on the internal side. Second is, you know, we made a tough decision on divesting an asset, and having that behind us versus, 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 homogeneously 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 PTC saying, you're a 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, I appreciate the comments you made on sort of the early look at FY27 and, you know, 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 contribution versus the expected deferred contribution in FY26? I know you've given some stats in the past, but obviously I'm sure things may have moved around a little bit this quarter.

Sure. 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. 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 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? How should I think about this dynamic? Thank you very much.

Yeah. I completely appreciate the question. As I've said kind of in the last couple of quarters around the mix between channel and direct, oftentimes this 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 metrics that we're seeing from our quarter market transformation. I would add that overall, the productivity of our sales team has increased just based on the amount of reps continuing to hit quota at this point in the year versus last year. So we're seeing that transformation take effect and we're really pleased with the performance.

And 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 or 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