Earnings Call Transcript - PTC Q2 2025

Operator, Operator

Good afternoon, everyone. Thank you for being here and welcome to PTC's second quarter conference call for 2025. I would now like to hand the call over to Matt Shimao, PTC's Head of Investor Relations. Please proceed.

Matt Shimao, Head of Investor Relations

Good afternoon. Thank you, Kate and welcome to PTC's 2025 second quarter conference call. On the call today are Neil Barua, Chief Executive Officer; Kristian Talvitie, Chief Financial Officer; and Robert Dahdah, Chief Revenue 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 U.S. 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 30, 2025 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, Neil Barua.

Neil Barua, CEO

Thank you, Matt and good afternoon, everyone. Q2 was a solid quarter of execution for PTC. We delivered 10% ARR growth and 13% free cash flow growth year-over-year. We also made progress delevering our capital structure as we said we would. In February, we paid down $500 million of senior notes that were due. With our leverage ratio now of 1.5x and continued visibility to solid cash generation, we continued share buybacks in Q2 and expect to remain active under our $2 billion share repurchase authorization. Our Q2 results reflected solid execution across our 5 focus areas: PLM, ALM, SLM, CAD, and SaaS. Across our geographic regions and verticals, our customers reinforced the importance of PTC's software to accelerate time to market, produce higher-quality products and manage complexity across their businesses. Q2 customer wins included significant Windchill PLM expansions at a med tech company and also at the aerospace division of a large European industrial conglomerate; a new Codebeamer ALM multiple wins with global automotive OEMs in Japan, India, and Europe; a ServiceMax SLM cross-sell win at a global industrial company; and lastly, a game-changing Creo CAD and Windchill PLM expansion with a well-known aerospace and defense company. You could read more about these wins in our appendix slides. Our Q2 execution gives us confidence in the progress of our go-to-market transformation. We said on our last earnings call that the foundation was laid in Q1 and Q2 was the start of the team finding its new rhythm. This is playing out as expected as we're seeing higher-quality pipeline velocity, solid hiring and enablement of quota-bearing reps and more consistent execution. I credit our go-to-market leadership team for their relentless focus on driving this transformation. I am more confident today than I was at the beginning of the year given our progress and be assured we are continuing to press harder. We also advanced our product portfolio and generative AI initiatives across all 5 focus areas, including: in PLM, we publicly previewed Windchill AI at the Hannover Messe trade show in Germany; in ALM, Codebeamer 3.0 is now GA; in SLM, we introduced ServiceMax AI; and in CAD, we launched Onshape AI Advisor and Onshape Government. In April, we bought a great company called IncQuery Labs that brings development and deep technical talent to accelerate our product roadmap in ALM, PLM, and critical integrations between the two. Overall, Q2 was a solid quarter supporting our customers, making progress in initiatives like our go-to-market transformation and advancing our market-leading product portfolio and generative AI strategy. We're still in the early phases of digital transformation across our customer base and there's no question about the critical role PTC will play in these transformations over the medium and long term. Now turning to the near term. As we discussed last quarter, we entered the second half with a strong pipeline. That pipeline remains intact and we have not yet seen material changes in customer behavior. However, we recognize growing uncertainty related to global trade dynamics and macro pressures which affect our customers. While no broad trends have emerged yet since the beginning of April, customer conversations as a result of these dynamics are progressing in a way that suggests our prior high end of 10% is now a stretch. These conversations indicate an increasing potential for deals in our second half to be smaller, done in phases or potentially delayed. Accordingly, we have moderated the high end of our ARR guidance to 9% growth. Also, to allow for the potential that macro conditions significantly worsen and its impact on customer buying behaviors, we are introducing a new low end of 7% to our guidance range. To be clear, this adjustment is about the potential timing and sizing of projects, not about fundamental demand. The long-term need for digital transformation remains extremely important to our customers. Despite this ARR guidance adjustment, our financial discipline allows us to raise the low end of our free cash flow guidance for 2025, a reflection of strong execution and profitability focus. Kristian will take you through our Q2 and updated guidance in more detail but I'd like to make a few final points that I feel are important. This near-term uncertainty poses questions and makes things difficult to predict but it ultimately reinforces the need for digital transformation and could serve as a tailwind over the medium term. The need to build a product data foundation, apply generative AI to that foundation and transform only gets heightened because of this uncertainty. Customers, for their survival, need to develop products faster, build a more resilient supply chain and optimize aftermarket service revenue streams. And that's why PTC is exceptionally well positioned to be the leader in bringing these critical needs into reality. We will navigate this near-term uncertainty and stay focused on the right things, helping our customers transform, progressing our go-to-market transformation and delivering enhanced products and generative AI capabilities across our 5 key focus areas. With that, I'll turn things over to Kristian.

Kristian Talvitie, CFO

Thanks, Neil and hello, everyone. Let’s begin with Slide 6. We consider ARR and free cash flow to be the most vital metrics for evaluating our business performance. To clarify our performance for investors, we provide ARR guidance and disclose our ARR results on a constant currency basis, excluding the effects of foreign exchange volatility. By the end of Q2, our constant currency ARR, based on our planned fiscal '25 FX rates, reached $2.326 billion, reflecting a 10% increase year-over-year. In Q2, our free cash flow rose 13% year-over-year as we continued to invest in our key focus areas. It’s important to note that the $279 million of free cash flow generated included $3 million in outflows related to our go-to-market realignment. Moving to Slide 7, let's delve deeper into our constant currency ARR growth by product group. Our ARR growth was 8% in CAD primarily due to Creo and 11% in PLM driven by Windchill, Codebeamer, and IoT. On a year-over-year basis, constant currency ARR increased by 9% in the Americas, 11% in Europe, and 10% in Asia Pacific. Now, on Slide 8, we ended Q2 with cash and cash equivalents of $235 million. At the end of Q2, gross debt stood at $1.393 billion with a leverage ratio of 1.5x. We diligently reduced our debt in Q2 with our gross debt balance decreasing by $155 million. As anticipated, we retired $500 million of senior notes due in February through a draw on our revolver and cash reserves. Furthermore, we consistently executed our $2 billion share repurchase program, using $75 million to repurchase 463,000 shares in Q2. Given the stability and predictability of our free cash flow generation, we aim to keep a low cash balance. Therefore, assuming we have excess cash, we plan to return it to shareholders. The share repurchase authorization in place offers us flexibility in this approach. As previously indicated, we plan to buy back around $300 million of our common stock in fiscal '25, with approximately $75 million in additional repurchases expected in Q3. For fiscal '24, our fully diluted share count was 121 million, and we anticipate it will remain roughly flat in fiscal '25. Now, let’s go through our guidance on Slide 9. The ARR figures presented here are based on our planned fiscal '25 FX rates as of September 30, 2024. We've updated our guidance for ARR, free cash flow, revenue, and EPS in light of our first half results and the potential for increased macroeconomic uncertainty in the latter half of our fiscal year. Neil noted that macro uncertainty could lead to longer sales cycles and smaller deals. Thus, we are adopting a more cautious outlook on how ARR may fluctuate in the second half of fiscal '25. I’ll provide more details on our constant currency ARR guidance in the next two slides. Regarding free cash flow, we have increased the lower end of our guidance for the year by $5 million to $840 million. As a reminder, our fiscal '25 free cash flow guidance of $840 million to $850 million incorporates around $19 million in cash outflows for severance and consulting fees linked to our go-to-market realignment. For Q3, we’re projecting free cash flow between $230 million and $235 million, accounting for approximately $4 million in cash outflows related to our go-to-market realignment. Currently, we have strong visibility into the expected range of free cash flow for fiscal '25 for several reasons. First, we have generated around 60% of our anticipated full-year free cash flow in the first half. Additionally, Q4 is typically our lowest cash generation quarter, and we expect invoicing seasonality in fiscal '25 to align with past years. By the end of Q3, we will have already amassed most of what we anticipate collecting for the year’s remainder. If customer demand is significantly impacted later, we will respond with disciplined cost controls. Furthermore, costs tied to customer demand, like commissions and royalties, would naturally decrease, lessening the impact on our fiscal '25 free cash flow. Importantly, our free cash flow guidance is not on a constant currency basis, so we are mindful of foreign exchange volatility. Around 45% of our ARR is in foreign currencies, and roughly 35% of our non-GAAP cost of revenue and operating expenses are also in foreign currencies, providing us with a natural hedge. Nonetheless, substantial FX fluctuations may still influence our results. We will monitor currency rates as the year progresses, but we feel confident about our free cash flow guidance for Q3 and fiscal '25 given the controls we have in place. It’s crucial to highlight that we have consistent billing practices, primarily billing our customers annually and upfront for one year regardless of contract lengths. In the medium term, we expect our free cash flow to outpace our ARR growth, with non-GAAP operating expenses anticipated to increase at about half the rate of ARR. A core principle of our subscription business model and budgeting is the natural operating leverage we gain as our ARR increases. To support your financial models, we will provide revenue and EPS guidance. However, I want to reiterate an important point: revenue and EPS are hard to predict for PTC due to ASC 606 since our main sales are on-premise subscriptions, and revenue recognition from these contracts can vary widely based on factors not necessarily tied to the business's performance. I discussed this on our Q4 fiscal '22 earnings call, which may be helpful if you’re new to PTC; it’s accessible in the Investors section of our website. In summary, we believe ARR and free cash flow are the best indicators of our business performance, rather than revenue and operating income. Turning to Slide 10, here’s an illustrative constant currency ARR model that provides insight into our guidance for Q3 and Q4. You can observe our sequential net new ARR over the past ten quarters. The two columns on the right show our guidance range for Q3 as $30 million to $50 million of sequential net ARR growth, and for Q4, it’s $55 million to $85 million. The year is back-end loaded, supported by the pipeline’s size and shape, which is also affected by the characteristics of the expiring base. Unlike previous years, our expiring base was flat in the first half and is projected to rise nearly 20% in the second half, which is skewed more heavily towards Q4. Although the pipeline's shape is influenced by the expiring base, it is not solely determined by it. Neil noted that we haven’t observed a significant shift in customer demand, but we are starting to see some initial signs of customer caution amid recent macro uncertainties. With just two quarters left in our fiscal year, we have chosen to adopt a more conservative approach for our full-year guidance. It’s worth mentioning that for Q3 and Q4, the upper limits of our sequential net new ARR guidance ranges align with or are below the sequential net new ARR growth we’ve achieved in previous years. The lower end of our guidance allows for the possibility of deteriorating macro conditions. Moving to Slide 11, here’s a comparable illustrative model for fiscal '25. You can see our results from the last three years, and the column on the right indicates that we need between $157 million and $207 million of net ARR growth this year to meet our fiscal '25 constant currency ARR guidance range. Keep in mind that fiscal '24 saw a benefit of approximately $10 million due to deferred ARR. We anticipate churn will remain low in fiscal '25. Since transitioning to a subscription model, our business has demonstrated resilience as customers need to maintain software to continue designing and producing their products. While we sell to various departments, most of our focus is on engineering, where our customers' spending tends to be more stable. With that, I’d like to pass the call back to Neil.

Neil Barua, CEO

Thanks, Kristian. Before we move into Q&A, let me step back for a moment to frame where we are. Our strategy remains absolutely consistent since I started, deepened customer value through PLM, ALM, SLM, CAD and SaaS; verticalized our go-to-market execution and lead innovation through applied generative AI and making our products work well together. We executed solidly in Q2, strengthening our pipeline, advancing our go-to-market transformation and enhancing our product portfolio. At the same time, we're being clear-eyed about the external environment. Global trade and macro volatility have intensified recently. And while customer urgency for digital transformation remains strong, decision-making can become more cautious during these periods. That's why we proactively adjusted our ARR range to account for potential timing shifts in deal closure and sizing. Fundamental structural customer demand for our products remains strong. Our free cash flow strength, margin discipline and financial resilience remain firmly intact. We feel great about our long-term opportunity and confident in the near-term discipline we're applying. With that, let's take your questions.

Operator, Operator

Our first question comes from Daniel Jester with BMO Capital Markets.

Daniel Jester, Analyst

I guess this is for Kristian. Maybe could you dive in a little bit deeper about how you constructed the downside scenario for the 7% ARR? Any additional color about what that assumes from a macro perspective or deal size delay, et cetera, would be very helpful.

Neil Barua, CEO

Thank you for your question. This is Neil speaking. I'll start off, and then Kristian can elaborate on our approach. To frame our discussion around the adjustment from 10% to 9%, we want to emphasize that we're experiencing a strong pipeline as we move into the second half of the year. This was evident as early as April when we faced a wave of news impacting our customer base, particularly around trade policies and broader economic conditions. We've engaged in discussions with customers, including a major medical device company. They indicated that while they are committed to progressing with us on the product lifecycle management expansion, they may need to scale back the contract size when we reach Q4, depending on how the current environment evolves. This sentiment isn't widespread, but it’s significant enough for us to reassess our expectations for the pipeline, end markets, and regions, leading us to lower the upper end from 10% to 9%. On the lower end, we set it at 7%. Our evaluation of this figure included two main approaches. Firstly, we conducted a detailed analysis of the pipeline and its quality, which Rob will discuss further during the Q&A. We've seen gradual improvements in pipeline quality and activity over the years, but this quarter, we made a focused effort to understand when those prospects would convert into new annual recurring revenue, especially for Q3 and Q4, and to differentiate between renewals and new business. We paid particular attention to the industrial manufacturing and automotive sectors. Given a potential worsening of macro conditions and the absence of new trade deals in the next two months, we considered how this could lead to project delays or reductions in size. We conducted a thorough analysis both from a bottom-up and top-down perspective. We looked at historical data from past crises, including 2009 and the pandemic, to gauge how we might fare if faced with similar circumstances again. Based on that analysis, we believe that a 7% target is a solid lower bound under current conditions. It's important to clarify that moving to a 7% scenario would require a significant worsening of the factors influencing customer purchasing behavior. We haven't observed indicators of this happening yet, but we want to be transparent about the various challenges we might face, particularly regarding macroeconomic conditions that could fluctuate in the coming months as we approach year-end.

Operator, Operator

Your next question comes from the line of Adam Borg with Stifel.

Adam Borg, Analyst

Maybe Rob can provide some insights on the go-to-market strategy. I would like to discuss the steps that have been implemented, the confidence you have in those changes, and the internal indicators you are monitoring to determine if the adjustments to the go-to-market approach are effective. Neil, feel free to add your thoughts as well.

Robert Dahdah, CRO

Thanks for the question. I'm really pleased with all the work that’s been accomplished and put into action over the last 90 days. We transitioned our entire field organization to a vertical approach, which involved significant changes. I'm proud to say that the team handled it smoothly, achieving low customer churn while retaining our top talent and a highly experienced sales team. Overall, we delivered a strong quarter. We feel very good about the foundation that was planned and executed in the last quarter, which positions us well for future growth. This allows for more conversations with our customers and more outcome-focused discussions, and we're already seeing positive signs early in the pipeline. Overall, I am very pleased.

Operator, Operator

Your next question comes from the line of Saket Kalia with Barclays Capital.

Saket Kalia, Analyst

Kristian, maybe for you. First off, good to see this year's free cash flow midpoint go up. Maybe as we think about the $1 billion in free cash flow next year, just appreciating that it's a very different macro, what are some of the puts and takes that you want us to think about with that target as we just think about kind of the more prudent ARR outlook for this year? Does that make sense?

Kristian Talvitie, CFO

Yes, I think it's a fair question. I think it's definitely premature to really be answering it. We need to, first of all, finish out this year and see where we actually end up. We need to get through the annual planning process as well which has not happened yet. We need to look at some other factors like what's going to happen with interest rates, what's going to happen with tax policy, what's going to happen with foreign exchange rates. So I think those are some of the variables that we're looking at and contemplating.

Neil Barua, CEO

Yes. Saket, thanks for the question, too. I'd like to add, the go-to-market transformation, again, 1 quarter in, as you heard Rob, he's feeling the momentum. That needs to continue as we build and see that actually relate to how the pipeline is and the conversion rates and as we build that up organically here at the business. We also have to take a look at what happens in the macro environment, right and changes that are happening relatively rapidly. Some good. Maybe some bad. So we're putting that all into the mixer and making sure, as we come out, the framework, I think, still holds that we've been talking about. But all those details need to be squared away to make sure we put our best foot forward as we talk to you guys about next year. I will say, from a confidence perspective, hopefully, you've seen it, Saket, that delivering this type of free cash flow in an environment where our current guidance range is now 7% to 9% is a really strong indication of the strong execution culture we've built in this company.

Operator, Operator

Your next question comes from the line of Siti Panigrahi with Mizuho.

Siti Panigrahi, Analyst

And Neil, thanks for that clear explanation about what you're seeing with customer. I wanted to ask you, in this kind of environment, how are your discussions going on with your customer in terms of AI adoption and you guys introduced some of those AI products, both in Windchill and even ServiceMax and other areas as well. So how are the discussions going in terms of them adopting AI in this kind of environment?

Neil Barua, CEO

Yes, that's a great question. If you saw our presentation at Hannover Messe when we introduced Windchill AI and showcased Codebeamer AI, along with discussions about ServiceMax AI and the Onshape AI Advisor, you would have seen our numerous launches and proof points in the marketplace. The team is producing significant innovation, and the customer feedback has been excellent. There was a strong turnout for the demonstrations of our AI capabilities. One key takeaway from this process is that, as we noted a few quarters ago, having a solid product data foundation through our core systems, including PLM, CAD, ALM, and SLM, is vital for maximizing the use of generative AI. These two elements—our strong generative AI product innovation and the need for a robust PLM or ALM system across enterprises—set PTC apart. We believe this will be a significant growth driver for us, contributing to ARR growth in the mid to long term. In the short term, customers are showing great interest and engagement this quarter compared to last, thanks to our recent launches. However, it will take time for the most substantial aspects of generative AI to be fully realized; this will occur more gradually over the next 12 to 24 months.

Operator, Operator

Your next question comes from the line of Ken Wong with Oppenheimer.

Ken Wong, Analyst

This one's for you, Kristian, somewhat building on Dan's question earlier. As you think about that 7% range and that requiring significant erosion in macro, any way to frame some of the moving pieces financially in terms of churn? And I think in the past, during COVID, you guys had talked about net new ARR down a certain amount. Like how should we think about what are some of the components that would go into getting to that 7%?

Kristian Talvitie, CFO

Yes. Thanks, it's a good question. I would say that, first of all, the churn has been low now for a couple of years. We expect it to continue to remain low. Even in some of the prior macro situations that the company has been in, we haven't actually seen significant increases in churn rates. So it really is more down to new business and how that is coming in. Again, is it smaller bite-sized chunks, et cetera, et cetera? So yes.

Neil Barua, CEO

We decided to provide this guidance range differently than others who are still assessing the environment. Our intention is to be proactive. Regarding the Q4 figure you mentioned, the low end is $55 million in new ARR, and the high end is $85 million, which is at 9%. Last Q4, we achieved $84 million, and in 2023, we reached $76 million. When considering the $20 million downside protection, this was based on a detailed assessment of each customer and what might affect their contributions, whether positively or negatively. As for other crises, we analyzed past significant downturns and, personally, I do not believe we will experience something similar this time. However, if we did, previous data showed a 20% to 30% drop in conversion rates during severe industry downturns. From our top-down and bottoms-up analysis, we determined that a $20 million risk is a reasonable profile if circumstances take a turn for the worse in Q4.

Kristian Talvitie, CFO

Yes. And you'd see it more broadly across the business and throughout the channel and elsewhere in the direct space. It's not just the biggest deals in that case.

Operator, Operator

Your next question comes from the line of Jason Celino with KeyBanc Capital Markets.

Jason Celino, Analyst

So one of your competitors talked about seeing some positives in deal activity at the end of March but then things kind of normalized in April. It doesn't sound like a dynamic that you're kind of talking about today. But is this something that you saw? Just curious on how some of that demand activity might have changed. Neil, I know you talked about some of the convos you've been in but curious on this specifically.

Neil Barua, CEO

Yes, I found it hard to interpret what our competitors mentioned regarding their situation. However, focusing on our business, we had a strong quarter in Q2. You can refer to the customer appendix slides, where you'll see some significant competitive moves we made, resulting in meaningful displacements with major accounts. The demand environment remains robust. As we enter Q3, we continue to build on a strong, high-quality pipeline thanks to Rob's efforts. We believe the demand environment is solid. Our new guidance range reflects our cautious approach, considering ongoing uncertainties in the end markets most influenced by trade policies. We aim to stay ahead of these developments as they evolve. This is the range we anticipate.

Operator, Operator

Your next question comes from the line of Jay Vleeschhouwer with Griffin Securities.

Jay Vleeschhouwer, Analyst

Neil, Kristian, Rob, perhaps almost irrespective of the tariffs morass, maybe we can talk about the underlying growth dynamics of the business organically. For instance, when we think about your 2 largest pillars, CAD and PLM, it would seem that the active base growth there for each is in the mid-single digits and that seems likely to continue if churn remains low. So over and above that mid-single digit for your 2 largest businesses, how are you thinking about perhaps pricing or pricing power? Dassault is going to be raising prices 2% to 5% in July. Does that give you some cover for pricing for yourselves? How are you thinking about ongoing cross-sell opportunities with ALM, SLM and so forth? Or on the other hand, does the new environment mean that customers will begin to disaggregate the deals and do maybe 1 3-letter acronym at a time?

Neil Barua, CEO

Jay, I'll begin with the demand side, specifically regarding seat size, and then Kristian or Rob can address the commercial optimization aspect. At the start of the year, we implemented a vertical strategy in our go-to-market efforts aimed at increasing our share of wallet in the sectors where we excel. Rob is leading a focused initiative to enhance our execution across a growing demand opportunity, which is improving monthly as the urgency for deal transformation increases. This is the core of the rigorous work we're undertaking. It will take some time to see significant results, potentially a few quarters, but our goal is to broaden the usage of Windchill and Creo, promote cross-selling of ALM, and integrate SLM within a vertical framework, all supported by a robust generative AI technology layer that capitalizes on our strong system capabilities. This is still a developing aspect for the future. In Q2, we observed instances of CAD consolidation, where we approached various sectors to ask, ‘Can you consolidate your CAD?’ This occurred in Q2, and the structured efforts by Rob and CK to ensure this proceed are central to the rationale behind our go-to-market transformation, which is our guiding principle. Rob, would you like to start discussing commercial optimization?

Robert Dahdah, CRO

Yes. I mean, where we can come in behind that and just extra structure is to make sure that the comp plans are aligned to support those moves and we have the folks bought in at the field level. And it's doing the right thing by the customer and the company rewards them as well. And so that's a very important part of it. So we have alignment there and we'll continue to work to make sure that that's set up well, especially as we develop really strong outcomes-oriented talk tracks that we can engage with our customers on. Historically, at a horizontal level, some of the positioning was really from our perspective out to the customer. When you start talking in the vertical format, you start talking back from the customer's problem that you're trying to solve to the way we can help them solve it. And so that really adds extra credibility to the discussion and elevates the conversation. And I think we're in a good position there as well.

Operator, Operator

Your next question comes from the line of Nay Soe Naing with Berenberg.

Nay Soe Naing, Analyst

If I could start with some of the conversations, customer conversations that you mentioned that suggests that you might have some of the deals postponed or the deal sizes come in smaller than what you'd expected. You called out an example on the med tech end market. I was wondering, are these conversations happening across the board? Or are these conversations happening more so in some of the verticals than others? If you could also comment from a geo perspective between CAD and PLM, that would be super helpful. And then my second part of the question is the top end of the guide now, 9%, can I ask, what is assumed in that, please? Is it that the current macro uncertainty continues for H2? Or what would happen if we have meaningful global trade agreements in this quarter and next quarter, please?

Neil Barua, CEO

Yes, that's a great question. I'm pleased you asked. To address the first part regarding our conversations, they vary depending on the customer's situation, their level of transformation, and their competitive context. For instance, I can't generalize that all automotive OEMs are withdrawing guidance and halting purchases from software vendors due to being in a state of indecision. For example, this morning we announced a significant multiyear strategic partnership with Schaeffler, a major industrial parts manufacturer closely tied to the automotive sector, which will transition them to our SaaS framework. One might wonder why they would make such a commitment in this environment, but they realize the need to be more agile. In other cases, some automotive OEMs or parts manufacturers are earlier in the process of evaluating their transformation needs and examining how Windchill could benefit them. They’re reaching out to us, expressing their interest and indicating that they are in the selection phase, which may take another four weeks. However, if the tariff issues remain unresolved after that time, they may have to reconsider, potentially delaying their decisions into the next quarter or opting for a smaller commitment. Thus, there are no sweeping trends across regions like Japan, EMEA, or North America. While there are common patterns, we are closely monitoring each pipeline opportunity individually. Regarding the second part of your question about our adjustment from 10% to 9% and the possibility of improvement, we're aware that we've already lost 30 days of opportunity. Since early April, we've been in discussions with a major European food processing equipment manufacturer, which plans to move ahead with digital transformation but is currently focused on managing excess supply until tariffs are clarified. They indicated that for the next six weeks, their priority is logistics, and they will return to digital transformation later, hoping for a resolution of trade policies. Even assuming that resolutions are achieved, we still feel that we've lost time in the final five months of the quarter. This timeline is particularly critical for us, unlike companies with a year-end of December 31. Hence, we are projecting a range of 7% to 9%.

Operator, Operator

Your next question comes from the line of Joshua Tilton with Wolfe Research.

Joshua Tilton, Analyst

Guys, can you hear me?

Neil Barua, CEO

We can hear you.

Joshua Tilton, Analyst

Also 2 parts and sorry to keep pounding on the guidance. But I guess, hypothetically, if you guys have 10 customers and 3 customers or you're having these conversations with where it suggests things can get rightsized or delayed, does the midpoint of that 7% to 9% range, does that assume that just those 3 customers push out? Or is there cushion within the midpoint of the guidance for those conversations that you're having today to kind of be more broader-based? And then the second part of my question is I go back to kind of a follow-up to the last one. These conversations that you're having to customers, are they really so scary that what was previously the low end of the guidance last quarter has now become the high end of the guidance?

Neil Barua, CEO

Let me begin with the last question first. The situation has dramatically changed, particularly in the end markets that PTC serves, since April 4. You are all observing this. Many of our end market customers are withdrawing their guidance, indicating uncertainty about their future plans and even what they see for the upcoming quarter. This leads to discussions about what is essential versus what is nice to have. In some instances, partnering with PTC and expanding their technology offerings is crucial to remain competitive in this challenging environment, which explains our 7% to 9% range. However, in other cases, this could result in delays, extending decision timelines, or opting for smaller commitments. I wouldn't characterize this as alarming. We've navigated through crises before, and our team has the experience to handle it. The situation has significantly affected our end market customers' ability to make clear decisions about their business and future investments. Hopefully, as the weeks advance with more stable trade deals and clearer business navigation, things will improve. To provide clarity, we aim to be very transparent with you about our guidance of 7% to 9%. We have outlined how the lower end of the range may look. Additionally, we have noted that our strong pipeline and go-to-market transformation are progressing well, though it will take several quarters to fully manifest. Our strategic priorities are yielding positive results, as evidenced by customer purchasing behavior in Q2. We are diligently working to maximize demand from our pipeline, which informs our guidance range.

Operator, Operator

Your next question comes from the line of Tyler Radke with Citi.

Unidentified Analyst, Analyst

This is Pierre on the line for Tyler Radke. Just a quick one for me. On the macro uncertainty, I was just wondering if you're seeing a risk uncertainty for a specific product or if it's in a specific vertical, if there's any more color you have to provide on that at all.

Neil Barua, CEO

Yes, this issue is not related to a specific product. All of our products are essential and used globally, and we rely on companies to produce various goods. Our products form the foundation of many great offerings in the market. Therefore, this is not a product-specific concern. It revolves around how customers approach investment decisions amid uncertainty regarding the guidelines they need to operate their businesses, such as supply chain dynamics and input costs, among other factors. They now have to consider these elements in light of the events that occurred at the beginning of April. That should address both questions. Sure. Thank you, everyone, for joining us and for your questions today. We'll be on the road in the weeks ahead, participating in investor conferences. In May, Kristian will attend the JPMorgan Conference in Boston and Matt will attend the Bank of America Conference in New York. In June, Kristian will attend the Baird Conference in New York, the Wolfe Virtual Conference and the BMO Virtual Conference. Amit Jain will participate in the Rosenblatt Virtual Conference and Matt will attend Mizuho Conference in New York. Kristian and I will host 2 investor visits, Rob might join us, too, to our headquarters in Boston. For the May visit, you could reach out to RBC and for the June visit, you can reach out to Stifel. Thank you again for the engagement today. Look forward to speaking to you all soon.

Kristian Talvitie, CFO

Thank you.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.