Earnings Call Transcript - PTC Q2 2026

Operator, Operator

Good evening, ladies and gentlemen. Thank you for standing by, and welcome to PTC's 2026 Second Quarter Conference Call. Operator provided instructions. I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Matthew Shimao, Head of Investor Relations

Good afternoon. Thank you, operator, and welcome to PTC's Second Quarter 2026 Conference Call. On the call today are Neil Barua, Chief Executive Officer; and Jen DiRico, 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 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, May 6, 2026, 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, Chief Executive Officer

Thank you, Matt, and good afternoon, everyone. PTC delivered a strong Q2. We grew constant currency ARR 8.5% at the high end of guidance and free cash flow 14% year-over-year, exceeding our guidance range. With the divestiture completed in March, we're moving forward as a more focused company, fully concentrated on our intelligent product life cycle vision. Our go-to-market transformation continues to gain traction. Rep productivity and renewal rates continue to improve, and we've built a large, high-quality pipeline for the second half, well-balanced across geographies, verticals and products. We also continued structuring deals for PTC's long-term benefit, increasing our deferred ARR for fiscal '27 and beyond. We're encouraged by the consistency and momentum we built over the last several quarters and are focused on delivering a strong second half. Now let's talk about AI and how it's driving momentum for PTC. I'll start with a concrete example from Q2. We displaced a competitor with Windchill+ at a leading automotive supplier. We won because we showed this customer two things. First, that Windchill manages the authoritative product data their business runs on; and second, a clear roadmap for AI agents that will drive productivity gains across the PLM workflows. This customer moved forward because they understood that to take advantage of AI, they first need to modernize their product data foundation. Importantly, we are seeing this theme resonate consistently across our pipeline. This is the first way AI is creating momentum by driving modernization demand. Our customers are recognizing that the strength of their product data foundation determines their AI ceiling. PTC enables product data foundations with our CAD, PLM, ALM and SLM systems of record. These systems are now evolving to systems of action in an AI world, where AI agents reason across product data and execute real work. The second way AI drives momentum is through the intelligence layer we're building on top of our systems. Consider what happens today when an engineering change is made to an MRI machine. That change spans multiple teams, takes months and costs significant time and money. Now imagine a world where AI agents are reasoning across the life cycle, reconciling the change across designs, bills of materials, supplier contracts, or instructions and bringing humans into the loop for approval at each stage. Months compressed to hours. As confidence in that intelligence layer grows, the scope of transformation expands from a single engineering change to enterprise-wide process optimization. As we move in this direction, we will continue building and embedding specialized agents across our portfolio that can access product data that no general-purpose AI model can reach. For example, our Creo and Onshape agents are the only agents that can access the underlying mathematical and geometric parameters within those systems to support complex 3D product design. Modifying a parametric part requires an understanding of shape, tolerances, material properties, manufacturing constraints and how a change propagates across assemblies. General-purpose AI models aren't built for this kind of work. And as customers mature their product data in our systems, the advantage compounds: more data, smarter agents and deeper workflows. We're scaling this aggressively, nearly doubling our AI releases in 2026 versus 2025, including our first AI-native products. And as these capabilities mature, they open clear monetization pathways from expanded platform adoption today to agent-driven value capture over time. We'll detail these as they take shape, but the direction is clear. As AI scales, value flows to the systems that provide the trusted data, context and workflow intelligence that make AI useful in a real-world industrial environment. PTC is increasingly well positioned at the center of how AI gets applied across the life cycle. Our strategy is clear. Our execution is more consistent, and we're building real momentum across the business. We remain focused on delivering a strong second half and creating durable long-term value for our customers and shareholders. With that, I'll turn the call over to Jen.

Jennifer DiRico, Chief Financial Officer

Thanks, Neil, and good afternoon, everyone. With the divestiture of Kepware and ThingWorx completed on March 13, Q2 is our first quarter of reporting as a more focused business and our first quarter reporting against the updated guidance framework we laid out on March 16. The results reflect the discipline and consistency we're committed to delivering. At the end of Q2, our constant currency ARR, excluding Kepware and ThingWorx, was $2.388 billion, up 8.5% year-over-year, at the high end of our guidance range. Our Q2 operating cash flow and free cash flow both grew 14% year-over-year, and free cash flow came in above our guidance range. Turning to capital return. In Q2, we repurchased $250 million of common stock as we said we would. We also deployed the entire $375 million of net after-tax proceeds from the divestiture into an accelerated share repurchase program. In Q3 '26, we intend to repurchase approximately $250 million of additional common stock, and we expect a decrease in our fully diluted share count to approximately 115 million to 116 million shares compared to 120 million in Q3 '25. For the full year, we expect to repurchase approximately $1.225 billion to $1.325 billion of our common stock. And today, we announced that our Board has authorized a new $2 billion share repurchase program effective October 1, 2026, through the end of fiscal year 2028, replacing the current authorization at fiscal year-end. With that, I'll take you through our guidance. In fiscal '26, for constant currency ARR, excluding Kepware and ThingWorx, we continue to expect growth of approximately 7.5% to 9.5%. At the midpoint, our guidance is for $195 million of net new ARR. While there's no shortage of macro uncertainty, we're confident in executing on the factors we control, our execution, our discipline and how we're serving customers to deliver on our guidance. Looking at the second half of the year, consistent with what we said last quarter, our intent is to grow net new ARR in Q3 on a year-over-year basis and then deliver a more significant step-up in Q4. What gives me confidence in the second half is that our ability to capture demand continues, and we have clear visibility into a significant step-up in deferred ARR starting in Q4. In Q3, our constant currency ARR, excluding Kepware and ThingWorx, we expect growth of approximately 8% to 9%. This corresponds to a net new ARR range of $40 million to $55 million. Moving to cash flow, revenue and EPS. It's worth highlighting that the Kepware and ThingWorx divestiture did not meet the criteria for discontinued operations, and therefore, historical financial statement amounts have not been recast. This impacts the year-over-year growth calculations for cash flow, revenue and EPS because fiscal '26 includes Kepware and ThingWorx up until the divestiture on March 13, whereas fiscal '25 includes Kepware and ThingWorx for the full year. We expect to generate $850 million in free cash flow in fiscal '26. Embedded in that number are four items that net to a $100 million fiscal '26 impact and won't recur in future years. If you factor these out, you get to a fiscal '26 baseline of $950 million, which we believe is the right starting point to use when modeling growth for fiscal '27. We've included an appendix slide that walks through the moving pieces. For Q3 '26, we are guiding for free cash flow of $240 million to $245 million. While our focus is on ARR and free cash flow, we're also providing revenue and EPS guidance to help you with your models. In Q2, our revenue growth benefited from renewals with longer duration, driving our revenue and EPS results above our guidance range. To reflect the upside we saw in Q2 and also factor in recent currency moves, we are raising our fiscal '26 revenue guidance to $2.580 billion to $2.820 billion, and we are raising our non-GAAP EPS guidance range to $6.65 to $8.90. In closing, we continue to deliver. With the divestiture complete, we're moving forward fully focused on our intelligent product life cycle vision. Our AI roadmap is resonating with customers. Demand signals are strong and our execution is consistent. I want to thank the entire PTC team for their focus and discipline this quarter. What I see in our results gives me strong confidence in where we're headed. With that, I'd like to turn the call back to the operator for the Q&A session.

Operator, Operator

Operator provided instructions. Your first question comes from the line of Saket Kalia with Barclays.

Saket Kalia, Analyst

Neil, maybe for my one question for you. There's a lot of great stuff to talk about here vis-a-vis the quarter. But I want to zoom out from the quarter just a little bit. You've talked about PTC's midterm intention of getting back to double-digit ARR growth. And of course, the macro backdrop is always tough to predict. But I'm curious, how do you feel about attaining that goal at some point?

Neil Barua, Chief Executive Officer

Sure. Great question, Saket. Let me have Jen start, and then I'll add to the question.

Jennifer DiRico, Chief Financial Officer

Yes. It's a great question, Saket. So thank you. So first, let me just start by saying the trends and the dynamics that Neil talked about in his prepared remarks are very real. We're seeing continued customer demand due to the need for AI modernization and getting their product data foundation ready. Also, we're seeing strength in our go-to-market execution. We continue to see strength in our renewal rates and demand capture, and all of that is pointing in the right direction. The next thing I'll just call out is we've talked a lot about building the deferred ARR balance, especially for '27 and beyond, and we're making very good progress on that. And so if I take a step back and I look at what needs to be true for next year, the first thing I'll say to you is if we see no more incremental performance from what we saw this year from our go-to-market team, coupling that with the deferred ARR balance that we have visibility to, we'll see growth increase. And ultimately, we still have to finish out the year, right? But ultimately, we like the visibility that we have right now.

Neil Barua, Chief Executive Officer

And Saket, thanks for the question. We've still got the year to close out here. But like the dynamics of all the hard lift that we put in around the transformation around go-to-market, the product transformation — you can see the release cadence increasing at the most substantial velocity year-over-year that PTC has seen in decades almost, plus the go-to-market execution — we're seeing the buildup of the pipeline, and we'll talk a bit about the AI thrust that we've been seeing around making it even more relevant to modernize customers' environments using PTC solutions. That's why we're feeling the wind in our back right now. We've got to keep executing, but the team is starting to deliver and the customer environment is changing in our favor. So we feel good about the setup here. We've got some work ahead of us for the second half, but things are starting to work out here at PTC. We've got to keep our heads down and keep executing.

Operator, Operator

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

Jay Vleeschhouwer, Analyst

Neil, I'd like to tie together a comment you made a quarter ago and again tonight, having to do with accelerated product releases, which is, given PTC's history, I think a very important thing to say and to do, particularly given your lagging in terms of releases prior to Creo 5 and some of the Windchill releases. And then the other thing you said tonight to tie together to that is customer modernization. Perhaps you could just talk about the adoption capacity or inclination of customers today to absorb everything that you're doing now at this accelerated pace, which personally I think is much better than it was 10 years ago. And also how this factors into how you're thinking about incoming business from expansion with existing customers versus displacement?

Neil Barua, Chief Executive Officer

Sure. Thanks for the question. One of the things we're really proud of that we're seeing is we had a PTC/USER Summit last week in Las Vegas. The feedback around the relevancy of what our customers need to actually create a product data foundation is at the highest level; users that have been with PTC for decades are saying it is evident in our Windchill roadmap and our Creo roadmap, Codebeamer roadmap and down the line. The buildup of this modernization, as you asked about the product data foundation — get to the highest Windchill version, move to Windchill+, get to the latest Creo version that we're releasing here in May — the appetite and necessity to do that is at a higher level than we've seen in recent memory, partly because of two things. Number one is the AI thrust. Those systems of record that we've had for so long that we're advancing used to be operational infrastructure; now they are AI foundational infrastructure. Without all of those versions and the uptick that we're seeing around modernizing that product data foundation, AI won't work at scale, and our customers are realizing that. So two things are happening. One, we're releasing products that are highly relevant to the customers that use our products, which is great. That's feedback that we're getting that is very exciting for the business and most importantly for our customers. Two, there's now an inevitability around making sure customers are progressing towards consolidating their PLM estate onto Windchill. You're seeing that in the customer examples we gave this quarter to get ahead of and to make sure that they're AI-enabling their foundations to actually change business processes. I will remind you, Jay, our customers are complex; adoption of new technology still takes a lot of effort, introspection and detailed analysis before they move mission-critical elements of their business onto new versions, new platforms and AI-enable it. That's great for PTC because we're the trusted area that provides the context for AI to work, and our customers are looking to us to guide them through that journey.

Operator, Operator

Your next question comes from the line of Daniel Jester with BMO Capital Markets.

Daniel Jester, Analyst

Maybe another big picture one. If you go back over the years, the PLM segment would typically grow higher than the company average and higher than CAD. And if I look at the recast ARR for the second quarter, that gap seems to be narrowing. With the new portfolio mix in PLM and the product innovation coming and the macro perspective, it would be helpful to get a perspective of the relative growth rates you would expect of the two segments going forward.

Neil Barua, Chief Executive Officer

Great question. I would characterize the ARR numbers you're looking at as backward-looking. We've been very articulate that the reason we went through all the transformation and heavy lift over the last few years is to accelerate growth, and you're starting to see that in the guidance range for Q3 and the step-up we have for Q4. You saw an indication of Jen's view around how the setup is configured for '27 and beyond. The metrics we look at — demand capture, renewal rates, pipeline growth — in those areas, particularly in PLM, we see strong incentive by our customers to move onto this modern product data foundation led by Windchill, Codebeamer, Creo, et cetera. So we see PLM growth in those forward-looking indicators as very positive. We've got continued pipeline growth. We have to execute, but we feel good. On CAD, we see great strength in Onshape and growth in Creo, but those markets grow at a different rate than PLM. So you'll start to see those charts shift over the next number of quarters as ARR and deferred ARR flow into the P&L.

Jennifer DiRico, Chief Financial Officer

I think you hit it.

Operator, Operator

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

Adam Borg, Analyst

Great to hear the positive tone on the call and that the go-to-market change is working. I'd love to talk a little bit about the macro more broadly. You have a big European footprint. It's great to see Europe up 8% constant currency. Maybe talk about what you're seeing in that theater specifically, and any other commentary by vertical, especially given the big win you announced with BMW from an automotive perspective.

Neil Barua, Chief Executive Officer

Thanks for the question. In this stage of transformation, we focus on demand capture, renewal rates, and pipeline growth more than backward-looking ARR. The verticals where we're seeing strength include electronics and high tech, which aligns with the data center modernization that's occurring. Those customers are coming to us to build their infrastructure and need a product data foundation to accelerate products for their customers. Also, earlier this morning we announced an Army PLM standard decision; the U.S. Army put the stamp of approval that Windchill is the standard for PLM systems, which helps broaden our footprint across federal agencies and demonstrates strength in aerospace and defense. We're seeing that across geographies. Regarding automotive, we continue to play in that sector differently than some competitors, where our automotive thrust centers on Codebeamer and Windchill and, in some cases, Onshape. We're seeing that differentiation matter as software-defined vehicles accelerate, and it's a strong area for us.

Operator, Operator

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

Joseph Vruwink, Analyst

On the comments pertaining to AI and driving momentum to PTC, it makes a lot of sense why getting your product and technical data in better order is important before any forward AI initiative. But I wanted to ask about what customers are telling you when it comes to that incremental investment beyond the core, what you're calling the new intelligence layer, and how and when this becomes incremental for PTC. Can you speak to commercial strategy and pricing? And how do you make sure that incremental piece is something that ultimately you capture versus another solution provider or a startup?

Neil Barua, Chief Executive Officer

Joe, let me start with what we're hearing from customers and how they're approaching our AI capabilities, then Jen can add on commercial strategy. The AI roadmap conversations we have with customers typically start with a POC to test our releases, and in many cases they test in smaller groups before scaling operationally. In parallel, they must have their data structured as context for AI. Modernization of the product data foundation is the primary thrust driving demand capture. For an example, ServiceMax AI was implemented initially in a small POC at a large industrial company. The business and IT leaders drove the initial test, but it didn't capture scale until we engaged the mission-critical field technicians and demonstrated the ROI to them. Once those users saw the solution, adoption accelerated and the engagement grew into a seven-figure AI SKU expansion on top of ServiceMax in North America, with global expansion discussions underway. That example illustrates the typical path: customers POC new AI releases, evaluate ROI with the people who will use them, and then scale adoption. Because PTC provides the authoritative, governed product context, customers come back to us when they want to scale, which is our real value proposition. Jen, do you want to add the commercial piece?

Jennifer DiRico, Chief Financial Officer

Sure. Echoing what Neil said, we expect to see monetization begin and grow over time. It will take some time; we expect to see some monetization in '27 but not overly material. As you know, we are largely seat-based today, and customers are asking to purchase that way. However, we have multiple ways of meeting customers where they are, including if they want to bring their own agents. So we can support hybrid models. It's early days in terms of different commercial models, but we're ready for them.

Operator, Operator

Your next question comes from the line of Matt Hedberg with RBC Capital Markets.

Matthew Hedberg, Analyst

I wanted to ask what drove better rep productivity. It sounds like a lot of AI and data modernization. But curious if you have additional color there. Also, what caused the longer duration in Q2? And Jen, is that sort of your assumption as we get into the back half of the year?

Jennifer DiRico, Chief Financial Officer

I'll start with the longer duration. This was based on some key renewals that wanted to extend their contracts with us over a longer duration, and we see that ultimately as a very good thing for PTC. As I mentioned last quarter, we saw a similar trend, and we flowed that through the overperformance in our guidance for the year.

Neil Barua, Chief Executive Officer

On rep productivity, about 16 months ago we brought in a new CRO and transformed the go-to-market organization to be vertical-focused. We made major changes and indicated it would take 18 to 24 months to see momentum; we're about 15 to 16 months in. The go-to-market machine is starting to work well based on demand capture, renewal rates, pipeline generation and customer feedback around our messaging and vertical expertise. We continue to improve and will keep executing across our intelligent product life cycle vision and AI strategy. That transformation is a large driver of improved rep productivity.

Operator, Operator

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

Joshua Tilton, Analyst

Huge congrats on the quarter. Apologies if this was discussed already. The guidance for ARR for the rest of the year implies net new ARR has to grow in the back half. Can you give one level deeper of what you're watching or what is giving you confidence around that growth in the second half?

Neil Barua, Chief Executive Officer

Jen, why don't you do that? Please ask as many questions and repeat them as possible. We enjoy discussing what's happening at PTC right now.

Jennifer DiRico, Chief Financial Officer

Sure. As we think about the second half guidance, we feel incrementally more confident. Two points: first, we believe we've derisked the lower end of the range. Second, if you look at what we need to do in the second half of this year versus last year, it's about $127 million of net new ARR in the second half, which is about $7 million more than we did last year for the second half. Given that we've already said we built durable ARR as deferred ARR into Q4, the step-up is largely around the deferred ARR we've banked and the team performing in line with last year. So we're increasingly confident about the Q4 step-up.

Joshua Tilton, Analyst

That was super helpful. Can I just clarify one thing? Am I supposed to read into your response that ex deferred ARR in the back half the actual net new ARR is flat year-over-year?

Jennifer DiRico, Chief Financial Officer

Approximately.

Operator, Operator

Your next question comes from the line of Hoi-Fung Wong with Oppenheimer.

Hoi-Fung Wong, Analyst

As you exit Q4, you'll be tracking above the net new ARR run rate you had exiting last year. Should we think of that as the right framing going forward that you'll be at least back to where you were on a net new ARR basis? Or is Q4 abnormally propped up by the deferred backlog that's flowing into that particular quarter?

Jennifer DiRico, Chief Financial Officer

When we think about our go-to-market, our focus this year has been to continue building long-term durable contracts to increase deferred ARR. That's not a one-time thing; that's how we're working with sales teams and customers. You can continue to expect that trend to continue. When we think about next year, even if we saw no improvement in performance from this year, you'd start to see growth year-over-year. We won't guide to specifics around net new ARR trends here, but that's the best way to think about it.

Operator, Operator

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

Nay Soe Naing, Analyst

I've noticed you've been calling out a displacement win for a few quarters. Is this a product of what you and Rob put in place in the past few quarters, or are your investments and product releases around AI also helping your competitive edge? Second, are the displacement wins primarily in Windchill or more broad-based across the portfolio?

Neil Barua, Chief Executive Officer

Great question. We're seeing displacements across multiple areas. For example, a recent Codebeamer win at Hamilton Medical is a displacement in ALM. On CAD, Onshape is very strong in robotics and automation and is displacing legacy tools; it's a cloud-native CAD offering that customers find compelling. On Windchill, displacements occur because we solidified core functionality and focused the company's investments, and customers choosing to modernize often consolidate onto Windchill. Arena, our cloud-native PLM, is also gaining traction because we added AI functionality and invested aggressively. Codebeamer has matured and scales very well for complexity at scale in requirements management. ServiceMax is best-in-class in service management and has forward-looking AI. Put it all together with an energized, coordinated go-to-market transformation and messaging, and you have the recipe for why momentum is returning to PTC. It's the result of work over the last two years starting to show up.

Nay Soe Naing, Analyst

That's really helpful. Sounds exciting. One more for Jen: on the new $2 billion share buyback authorization across two years, that seems like the vast majority of free cash flow over the next two years. Is this opportunistic given valuation multiples today, or is it a fundamental change in capital allocation versus the previous approach?

Jennifer DiRico, Chief Financial Officer

When Neil and I think about capital allocation, we hinge on three pillars: organic investment in the business, inorganic via M&A, and share buybacks. We evaluate return on investment for each. Given the current stock price and our belief in the long-term durability of the company, share buybacks have been a very good use of capital. The authorization provides flexibility in FY '27 to continue if it makes sense. We're not guiding future specifics here, but the philosophy remains balanced across the three pillars.

Operator, Operator

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

Tyler Radke, Analyst

Neil, you talked about some large wins in the technology space. With an explosion of code being generated and the physical equipment needed in data centers, how are you benefiting? What increased levels of complexity are driving demand for PTC products, and are you seeing that in renewals with large customers who are growing faster than before?

Neil Barua, Chief Executive Officer

Great question. Customers building data center infrastructure are under pressure to deliver products quickly and at high quality. They look for bottlenecks in engineering workflows from design to manufacturing — precisely where PTC excels. Many have fragmented PLM systems, manual processes, and haven't standardized on tools. When they want to supercharge engineering with AI, they discover they need a structured product data foundation first. That urgency drives modernization demand for PLM, ALM and CAD — Codebeamer, Windchill, Onshape, and Creo — and we're seeing that across data-center-related customers. The picks and shovels supporting data centers are underpinned by PTC's offerings.

Operator, Operator

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

Sameer Kalucha, Analyst

Can you hear me? This is Sameer calling in. I have a question about the specific data that only Creo and your products can use and not a third-party agent. How do you create that data moat, and who owns the data? Also, do you work with systems integrators or third-party IT services providers to enable the IT infrastructure modernization needed for AI at customers?

Neil Barua, Chief Executive Officer

Sameer, on the second point: yes, large-scale product data modernization often involves systems integrators in our ecosystem. Many SIs lead implementations with us, and in some cases PTC provides services directly. On the Creo-specific question: we have an unfair advantage because we own and deeply understand the CAD systems. We're embedding AI into Creo and have done so with Onshape. The CAD system contains the construct and context of 3D design — geometry, mathematics, tolerances, materials, manufacturing constraints — and that proprietary understanding enables us to train AI effectively on that data set. Third parties can provide interfaces, but our agents that live in our CAD systems will have materially better capabilities because they understand the underlying model and how to make design changes propagate across assemblies. That creates a significant data moat and advantage for our AI offerings in CAD.

Operator, Operator

Your next question comes from the line of Blair Abernethy with Rosenblatt Securities.

Blair Abernethy, Analyst

Can we go back to Windchill+ for a minute? Where is demand coming from — net new customers to PTC? What about on-prem conversions? Are you seeing customers convert to Windchill+, open add-ons, or continue on-prem expansions?

Neil Barua, Chief Executive Officer

Modernizing the product data foundation often includes moving to SaaS, which is why Windchill+ is gaining traction. The product is moving at pace, and we're seeing customer momentum and references build. Windchill+ adoption is predominantly net new customers consolidating legacy systems onto a simpler tech stack, and that's an area where we're very focused. On-prem conversions continue as customers first modernize their data foundation by expanding on-prem solutions and removing third-party or manual processes; over time many will convert to SaaS, and that's fine. Some customers will always require air-gapped on-prem systems. We support both on-prem and SaaS, and our AI releases target both deployment models.

Operator, Operator

Your next question comes from the line of Yun Suk Kim with Loop Capital Markets.

Yun Suk Kim, Analyst

Neil, is Windchill+ one of the key drivers behind the deferred ARR strength and the go-to-market focus on deferred ARR? Is the need to adopt AI and modernize product data driving momentum around Windchill+ as well?

Neil Barua, Chief Executive Officer

Deferred ARR buildup is coming from multiple product SKUs: Codebeamer ALM strength and displacements and expansions there, Onshape driving aggressive displacement opportunities, and Windchill as the nerve center of the product data foundation, which is a major element of modernization. Our born-in-the-cloud PLM solution is also seeing expansion. So deferred ARR is clicking across those categories. Regarding SLM and ServiceMax, we went through a tough period but believe the negative churn digestion is behind us; we're back to a normalized environment with a strong pipeline and getting momentum similar to the rest of the portfolio.

Yun Suk Kim, Analyst

Can you expand on what AI products you have available today that are GA and what you plan to release going forward?

Neil Barua, Chief Executive Officer

We released eight AI capabilities last year that we've been refining with customers. We have 14 more releasing in 2026, including an AI-native product we'll highlight at PTC Next in Chicago in June. Areas moving from POC to operational scale include ServiceMax AI with multiple agents for field service, Onshape AI features that simplify user workflows and are seeing rapid adoption, and supply chain intelligence in our born-in-the-cloud PLM. Momentum will build with incremental AI releases through September, and we're getting strong customer feedback as we refine for adoption.

Operator, Operator

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

Andrew Obin, Analyst

As you talk about AI, there's a tension between proprietary data and interoperable agents and data graphs. How do you manage that tension at the customer level? And does that mean you need to beef up proprietary capabilities organically or via M&A because PLM is at the heart of it?

Neil Barua, Chief Executive Officer

We are building the intelligent product life cycle in phases. Phase one is modernizing product data foundations. Phase two is embedding agents in our core systems of record — Onshape, ServiceMax, Windchill, Creo, Codebeamer — to create productivity gains. Our vision is more expansive: agents will need to interact across domains for broader outcomes, and we're building an intelligence layer for agents to communicate. Customers are coming to us because they see PTC as the trusted source that understands the data and can train agents appropriately. We expect other agents outside engineering will exist, including customer-built agents and third-party agents, and our agents will interact with them. Our approach is to build the best agents for our domain, enable interaction across ecosystems, and deliver outcomes customers want.

Andrew Obin, Analyst

So your goal is to build agents that dominate your own ecosystem rather than just be open interfaces for other agents?

Neil Barua, Chief Executive Officer

Yes. We aim to build the best agents that deeply understand PTC systems like Windchill and deliver material productivity gains. Those agents will also be able to interact with other agents built by others, but our advantage is in domain expertise and context within our products.

Operator, Operator

Your final question comes from the line of Alexei Gogolev with JPMorgan.

Alexei Gogolev, Analyst

Neil, you've repeatedly referenced a large and high-quality pipeline for the second half. Can you talk about changes since Q1 in cycle times, approvals, or ramp deals? What's different that you're hoping to see in the second half versus the second half last year?

Neil Barua, Chief Executive Officer

We're seeing a higher quality pipeline as a result of the go-to-market transformation. Rob and CK aligned resources, messaging and vertical focus to build a pipeline with larger, more strategic deals and higher velocity. The pipeline quality has increased since last year for the second half. We still have approval processes and macro uncertainties to navigate, but two things help: internally we're a stronger organization from the work we've done, and customers are feeling urgency because AI won't scale without a strong product data foundation. That combination is driving more engaged conversations and better demand capture. We have to execute, but we're encouraged by the setup.

Operator, Operator

That concludes our question-and-answer session. Please remain on the line as I now turn the call back to Neil Barua for closing remarks.

Neil Barua, Chief Executive Officer

Thanks for joining us and for your questions today. We'll be on the road in the weeks ahead, participating in investor conferences. We look forward to seeing you then.

Operator, Operator

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