Good afternoon ladies and gentlemen. Thank you for standing by, and welcome to the PTC 2020 Second Quarter Conference Call. [Operator Instructions] I would now like to turn the call over to Tim Fox, PTC's Senior Vice President of Investor Relations. Please go ahead.

Great. Thank you, Valorie. Good afternoon everybody and thank you for joining us today on PTC’s conference call to discuss our fiscal Q2 ‘20 results. On the call today are Jim Heppelmann, Chief Executive Officer; and Kristian Talvitie, Chief Financial Officer. Before we get started, please note that today's comments include forward-looking statements, including statements regarding future financial guidance. These forward-looking statements are subject to risks and uncertainties and involve factors that could cause actual results to differ materially from those expressed or implied by such statements. Additional information concerning these factors is contained in PTC's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. As a reminder, we will be referring to operating and non-GAAP financial measures today during the call. Discussion of our operating metrics and these items excluded from our non-GAAP financial measures and a reconciliation between GAAP and non-GAAP financial measures are included in our earnings press release and related Form 8-K. And lastly, references to growth rates will be in constant currency unless otherwise noted. With that, let me turn the call over to Jim.

Thanks Tim. Good afternoon everyone and thank you for joining us. I hope you and your families are safe and well during this crisis. Before I jump into review of our quarter, I'd like to start by thanking our tens of thousands of customers around the world for their continued support and loyalty. Many of our customer relationships date back two and three decades now, which shows how important the relationships have been to both parties. We've been through several crises together and we'll get through this one too. I'd also like to thank PTC’s 6,000 employees around the globe for their hard work and commitment during the crisis. The way our team has embraced the remote work environment, while pushing forward to strategic initiatives and leaning in to support our global customer base, is a testament to the great culture we built here at PTC. Overall, we are very pleased with our fiscal Q2 results. We delivered 11% ARR growth, 25% revenue growth and 117% EPS growth. We did experience some bookings pressure related to the pandemic in the final weeks of the quarter, resulting in new ACV bookings being down mid-teens year-over-year. The impact came late in the quarter and was greater in Europe and Asia and within our smaller channel customers. Renewals were essentially unaffected by the crisis in Q2. Looking ahead, we’re mindful of the pressure that the pandemic would place on new bookings and our guidance reflects that. Still we continue to target double digit organic growth in ARR, revenue and EPS for the full year, despite factoring in the potential of severe demand challenges and modest renewal headwinds as well. I am very pleased that PTC remains able to provide such a strong outlook, given the very conservative guidance assumptions that Kristian will outline…

Thanks, Jim, and good afternoon, everyone. Before I begin – before I review our results, I'd like to note that I'll be discussing non-GAAP results and guidance and all growth rate references will be in constant currency. Let me start off with a brief review of our second quarter results and then spend the balance of the call on our outlook for the remainder of the year. Q2 ARR was $1.18 billion representing 11% year-over-year growth, which is consistent with the guidance commentary we provided last quarter and slightly better than on our March 10 business update call. Similar to other software peers, we did see a deterioration in new bookings in the last few weeks of the quarter. However, due to factors such as backlog and timing of start dates, we still achieved strong new ACV growth. And as Jim mentioned earlier, Q2 churn came in essentially on plan. So the net result of all that was 11% ARR growth. Q2 revenue of $360 million, was up 25% year-over-year driven by 35% recurring revenue growth. Operating margin of 29%, increased 1,400 basis points over Q2 2019 and lastly, non-GAAP EPS of $0.59 increased almost 200% year-over-year. Q2 free cash flow of $82 million was within our expectations and included $18 million of restructuring payments primarily associated with the workforce reduction actions we began in Q1 2020 and $2 million of acquisition related payments. Moving on to our balance sheets, we ended Q2 with $1.6 billion of debt, including $1.5 billion of senior notes and $148 million outstanding on our revolving credit facility. And we had cash and marketable securities of $884 million. As you know, in January we announced that we will redeem the $500 million of 6% notes due in 2024 on May 15 of this year. Following…

Thank you. [Operator Instructions] Our first question comes from Saket Kalia of Barclays Capital. Your line is open.

Hey, Saket.

Okay, great. Hey Jim, hey Kristian. Thanks for taking my questions here. Hey Jim, maybe, first for you. Can you talk a little bit about the pipeline in the IoT business? I think we said in the prepared remarks clearly not a lot of big deals being signed there in this environment particularly closer to the end of the March quarter. But how about interest/pipeline for IoT for the remainder of this year?

Yes, Saket. Just this morning actually we did go through the pipeline kind of in preparation for the call. And the IoT pipeline is pretty strong. The question for us is close rates and the risk that some of that pipeline pushes back a quarter or whatever, from Q3 to Q4 and Q4 to Q1. So we have plenty to work with. Plenty to support our forecast that, as Kristian said, is well above the guidance range we've given you. We're being conservative around close rates in the forecast and being double conservative in the guidance, because we're worried about software that has to be implemented in bigger ticket purchases might get delayed. I doubt it's going to get canceled. But it's just what we saw at the end of the quarter was, if you needed to buy software, you had to implement. But everybody is being sent home and you don't know how to implement it, we'll then want to just wait until we all come back to the office and buy it then. And so that to me is the risk. But it's not really a question of pipeline, it's really a question of close rates. And that's generally true across the board.

That makes a lot of sense. Kristian, maybe for my follow-up for you, can you just talk a little bit about the slightly higher churn assumption? You talked about sort of where that comes from downgrades versus smaller customers. But I'm curious, as you think about that assumption in the guide, are you starting to see any headcount reductions at your customers that would maybe contribute to that forecast? Or is that maybe another element of conservatism?

Yes. So again, here, we haven't really seen major headcount reductions in our customer base. But an effort to, again, provide a prudent and conservative outlook. We thought that was the right thing to do to factor in some extra churn. It's a dicey market environment right now.

Yes Kristian said this, but to reiterate, we've not seen COVID-related churn thus far.

Got it. Very helpful guys. Thanks very much for the color.

Thanks again.

Thank you. Our next question comes from Joe Vruwink of Baird. Your line is open.

Hey Joe.

Hey Joe.

Hey, hello everyone. I just wanted to be clear on, I guess, guidance versus internal expectations. So are your internal expectations that you referred to closer to what you're actually seeing in the market today and guidance presents a dramatically, I'll say, worse scenario ultimately? Is that a fair characterization?

Yes. I mean, we have a forecast. That's our internal expectation. Keep in mind, new bookings were down 16% last quarter. Going forward, our forecast would have it down more than 16%, but still above the entire range that Kristian gave you. So the truth is none of us know what's going to happen in the coming quarters. We just don't. So rather than assume it's going to be good and get surprised when it's bad, we're assuming it's going to be kind of bad. And hopefully, if there's a surprise, it will be to the good side. But certainly, we're looking at a forecast that's above the high end of the guidance range.

And again just to follow-on to that, just to put the guidance range, the midpoint where new bookings down, call it, in the 30% range in Q3 and Q4. That's the kind of the levels of deterioration that we saw back in 2009, right? We've provided that even at our Analyst Day scenario. And the low end contemplates something even more difficult than that environment.

Okay, that’s helpful. And then a lot of companies seem to be going back to the 2009 playbook. Obviously, PTC has provided a lot of detail with the mid-March update, and now just in regards to how new ACV trended during that period of time. I guess when you compare and contrast the pieces of the portfolio that were around in 2009, has anything held up, I guess, surprisingly better? And then when you look at the pieces that have been added, and obviously, you spoke to Onshape and the strength there, but with some of the newer pieces over the last decade, can you maybe speak to how that's helping provide the resiliency or helping provide the offset, given this is a pretty tough environment your customers are going through?

Yes. I mean, for sure. I think if you look at 2009, we were really a CAD and PLM company. And those businesses combined – those markets combined were growing single digits, probably upper single digits at the time. We didn't have the growth engines we have now. And I spent a lot of time upfront to say, actually, this COVID crisis will probably create a substantial tailwind for our SaaS business, our IoT business and our AR business. Maybe not immediately, but definitely, some of it is happening immediately. Our AR pipeline is off the charts. So it's hard to know for sure how to compare this to 2009. I would say we definitely have a growth year portfolio and a more relevant portfolio in the context of this crisis than we had in the context of that crisis. And then as Kristian said, the high end of our guidance sort of assumes it's as bad as 2009, and the low end of our guidance assumes it's much worse than 2009.

Okay, great. That’s very helpful. Thank you.

Thank you. Our next question comes from Matt Hedberg of RBC Capital Markets. Your line is open.

Hi, Matt.

Hey guys, thanks for taking my questions. Really do appreciate a lot of the detail that you guys gave, that's super helpful. Jim, I'm wondering, your guidance outlines a variety of new booking scenario, which I think is helpful relative to ARR. Now given this is a clearly back-end loaded quarters, I'm wondering if you can comment on new booking trends you are seeing thus far in April? It sounds like renewals, and as Kristian said, remained strong this month. But wondering if you're seeing any signs of change in new bookings, maybe beyond what you saw in Q2?

Yes, I mean, as you said, we do have relatively back-end loaded quarters. And that said, we do track what we call the done number, which is what percent done are we versus this point in a typical quarter? And relative to the forecast, the done number is just fine. But it's early and it's not that meaningful when it's this early.

That's helpful. And then I like the done number, we got to use that more often. And then I guess, in terms of your global model, obviously you've got a very diversified model globally. And I think in your prepared remarks, you noted some new bookings weakness in Europe and Asia, in particular this past quarter. I'm wondering though if you can comment on, if you're seeing any signs of improvement or stabilization in some of these pockets internationally that are showing signs of reopening. I'm thinking like China, maybe pockets of Asia, anything of note there as if some of those economies start to open up a little bit?

Yes. I mean, in China in particular, even by the end of the last quarter, we saw hints of come back and definitely when we look at the forecast for this quarter, it's up quarter-over-quarter, it's up nicely. So I think we do see China coming back online and spending coming back into the system. The U.S. of course is two steps behind that, right. So last quarter, Europe was in a deeper funk than the U.S. and maybe by the end of the quarter we'll see Europe improving. I don't know. And part of the problem right now is none of us know, none of us know what's going to happen. So what we tried to do is give guidance with a lot of prudence as Kristian said. And then be transparent on the level of prudence we put in the guidance so that you can decide if it should be more or less based on your own deal of what's going to happen in the world.

Sounds good. Thanks a lot guys. Thanks for all the details.

Thank you.

Thanks Matt.

Thank you. Our next question comes from Adam Borg of Stifel. Your line is open.

Great. Thanks for taking the question, guys. And again, appreciate all the commentary as well. Just real quickly on ARR. So in the past, Kristian, you've talked about ramp deals in the back half of the year. Just curious, I want to confirm that those committed ramp deals that we've talked about, you haven't seen any impact to that or have some of those ramp deals been renegotiated and I have a follow-up?

No, we're not seeing, at this point, meaningful changes to the previously committed ramps. I mean, I think…

Well, I mean, the thing you have to understand is their contracts. And once you sign a contract, if somebody comes and said hypothetically, we'd like to renegotiate that, our reaction is, we wouldn't – there's a whole lot of contracts we have too that we'd like to renegotiate. We have a lease on a brand new headquarters. It's been empty for six weeks. I'd like to renegotiate that, but the vendor doesn't seem to want to renegotiate it with me. So I'm just saying these are contracts, that there isn't renegotiation unless there's something in it for us too and simply taking them down would just be a win loss and difficult to get us to sign up for that.

Perfect. I appreciate that. And just as a quick follow-up, I don't think I heard anything yet about the partnerships with Rockwell, ANSYS, we talked a little bit about Creo Simulation Live, but any color you can provide on how Rockwell – Creo Simulation Live and even the Microsoft partnership did in the quarter? Thanks again.

Yes. I passed on that simply to save time because I wanted to talk about the strategic perspectives, but all three main partnerships did okay in the quarter. Probably of them all, Microsoft was the strongest. But with Rockwell, we had some great wins. Rockwell had some great wins. Rockwell has taken us into some amazing new accounts and I'll let them speak about their accounts. And then with ANSYS, we also had some good sales. I don't think we probably were on plan with ANSYS, but in general, we weren't on plan with anything. So I think all three partnerships posted a decent quarter. None of them particularly notable in either direction, all of them suffered a little bit in the context of what happened to everybody late in the quarter.

Great. Thanks again.

Thanks Adam.

Thank you. Our next question comes from Jay Vleeschhouwer of Griffin Securities. Your line is open.

Thanks. Good evening. Jim, your comments on product strategy were quite interesting, including the reference to the forthcoming Atlas release. My question there before my follow-up for Kristian is could you put all of those comments and your strategic outlook in the context of the close with lifecycle management strategy that we've talked about that you've talked about. What are perhaps some of the metrics or milestones that you would think about to validate that the strategy is viable, that it is having an impact in the marketplace and maybe throw in some Onshape roadmap comments into that. And then secondly, for Kristian, your cost containment efforts were certainly quite apparent from the very large reduction in your open positions over the last few months down over 60% since the end of 2019 for all open positions. In that number, there was an especially large decline in sales openings, which I suppose is understandable given the bookings outlook. But is there some longer term implication in there in terms of how you were thinking about your sales structure. Maybe driving to more of an inside sales structured in support of Onshape and SaaS, generally and you’re thinking perhaps about any kind of further R&D or even product line consolidations, maybe end of lifeing anything or anything along those lines.

Yes. So Jay, I'll take the first one. To share with people some terminology so rather than say Vuforia will be based on Onshape, which sounds funny. Let's say Onshape is based on Atlas and Vuforia will also be based on Atlas. And we will bring other technologies onto the Atlas platform. And this Atlas platform will evolve over time and at some point it actually will look materially different than what we acquired from Onshape because we've taken it in other directions as well. For example, Vuforia needs a computer vision engine in the platform and Onshape didn't, but that's okay. No Atlas will have a computer vision engine for anything that needs it and then AI engine for IoT and so forth. But to get to the gist of your question today, we have a closed loop life cycle management story with significant properties being subscription but on-premise, in particular Creo. And Windchill has a lot of on-premise, but we also do sell that as SaaS. And so what we'd like to do is somewhere down the road, have a complete 100% SaaS based closed-loop life cycle management suite that passes that 15-second test. You click on a link, and within 15 seconds, you're in any part of the suites doing anything that we can do. We are not there today, but and the industry is far from there by the way. And so I think that what PTC has is a lead and now we see an exogenous factor as Kristian said, that's a wake up call that this industry have to move to SaaS pronto and pronto won't be quick, but it's going to be a lot quicker than I might have thought it was three months ago. And so PTC is going to press our advantage is as hard as we can and try to be the company that brings this industry to SaaS. And it's going to require a lot of work from us in the coming quarters and even years. But I think it could represent a significant share shift. Because of the industry goes to SaaS and we're far ahead of everybody pulling the industry there, we might definitely benefit from that. We're seeing it happen in education. That's why I started up that story is as you know, to imagine taking five points or 10 points of educational market share in two months. I couldn't have dreamed to that. But I can now in the context of this crisis.

And Jay then to answer the second through seventh questions…

At least that.

That you sneakily wrapped all into one. Let me just try to sum it up this way. To a certain degree, PTC was fortunate with the timing of the reorganization that we did in the first half, which was actually pre-global pandemic and therefore unrelated. It was really more around reorganizing around the growth businesses. And, now as this struck, we had actually taken out more costs than perhaps originally anticipated. But that now puts us in a position where as we start looking at the back half much of that cost control, we can really just think about it as how, and when we want to release the spicket. We all want to get back to a stage where we're all hiring and growth is happening. So we want to be mindful of that and we're watching carefully what's going on in the market. But in the meantime, it's more like a slow drip on when and where we're hiring and we're trying to be pretty thoughtful about where we're adding capacity right now to take most advantage of the situation.

Yeah. Maybe I can add two tidbits to that that might be helpful. One is when we did this restructuring, we set out to do a reduction in force, but then we said, what we've moved to this new headquarters and that might be causing some pressures associated with the commute and so forth to some people. And they might leave anyway if it's a problem. So why don't we have a voluntary program and by the way, an early retirement program. And so we serve those two programs up with really only but an estimate of what might happen. And we had fairly good adoption of the voluntary and early retirement programs. So we ended up taking out more people than we probably would have taken out by a reduction in force. We said, okay, that's fine. We'll hire them back. But guess what? We're not going to hire them back. So you might say, it's almost like we've done a reduction in force by going below the headcount we intended to be at and then electing not to go back up. So that's a little bit why our cost structure has come down so much. And then, we definitely are still hiring. I can tell you what we're hiring developers for sure in our AR business, in our SaaS business and we're making selective hires here and there and also doing portfolio work within the portfolio. So for example, based on the demand we've seen for Onshape, we've shifted a fair amount of inside sellers into selling Onshape just did that recently. So don't yet have results. But we're responding to what we see as interesting demands in the market. We also did something else we turned our premier channel resellers, loose – or we're just doing that now, turning them loose with the right to sell Onshape. We hadn't intended to do that. But we said, hey, wait a minute. If the industry suddenly wants SaaS-based CAD and we alone have it, let's not miss this opportunity. Let's put capacity on it. So thinking that is just within the headcount and within the ecosystem, we're also doing some portfolio management to move resources to where the demand is the strongest.

Thank you.

Thank you, Jay.

Thank you. Our next question comes from Sterling Auty of JPMorgan. Your line is open.

Thanks. This is Jackson Ader on for Sterling tonight. Question from our side, maybe on the go-to-market motion. Jim, you explained how any of us can go to ptc.com couple of clicks. We're using Onshape. So I was just curious, the required legwork for maybe an Onshape net new logo relative to the on premise world. Can you just give us a flavor for just how much easier or less friction there is with, with an Onshape, onboarding relative to the on-premise?

Yes, well, again, there's no software and there's no data at the customer sites. So we skip all those phases of installation and so forth. And then as you might expect with a SaaS product, all the demonstrations and so forth are done digitally, virtually over the web. So definitely Onshape is set up for a digital go-to-market process and that's really what we're trying to leverage. Now that said, if you want to get in bigger deals, where there's more switching costs, more perceived risk in switching, no matter what you're switching to, you might have to call on people and have live conversations with them and so forth. So I think it's definitely more than just selling over the web, but it's not at all like pounding the pavement and making cold calls and stuff like that kind of the old fashioned direct sales way. So I think it's somewhere in the middle and that's why we're pulling more of our inside sales and more of our resellers into the game.

Okay, great. Thank you. And then the follow-up question on services. So you mentioned services were cut – but which services are still happening and which services where maybe cut the most, what types of services?

Well, let me just say, it's probably hard to categorize it by type, but let me do my best. So any services work that have to be performed onsite is a problem, because generally speaking, we're not allowed to go onsite, we're not allowed to travel there. And by the way, if we went onsite, probably the customer wouldn't be there anyway. So I would say as a characterization, onsite work is where the problem is. Good amount of our work is done offsite and really has been for years in part to take advantage of lower cost labor and so forth. So if you give us a project in Europe, we're probably going to do it in Romania, even if the actual project is in France or something like that. So that kind of work has gone full speed ahead, but it's really services work that requires onsite for example, if you're going to stand up IoT in a factory, somebody really has to go to the factory and assess all the physical assets that are there and determine how to connect to them. And it's hard to do that project without ever being in the factory. You maybe don't have to be in the factory all the time, but you at least have to go there to kick off the project. So I think it's those projects in the near-term, while we're in lockdown mode that require onsite work that are most challenged.

Makes sense. Thank you.

Thanks, Jackson.

Thank you. Our next question comes from Steve Koenig of Wedbush. Your line is open.

Hey, Steve.

Hi gentlemen. Hey. Thanks for taking my question. I'll just – I'll make it one question. So – and I apologize if this is repetitive with either scripted or QA remarks. I'm curious, I heard the remarks on your guidance and how you're thinking about it in comparison with 09, and that sounds sensible and it sounds pretty robust. I'm wondering though the composition of – particularly by vertical Jim, I'm curious on your view as you look out across your verticals kind of the relative, maybe resilience of the verticals and maybe one way to do it is to stack rank them if you want it to, but kind of any generalizations you can make regarding the financial crisis and the relative impact on your verticals versus this crisis and any relevant supply chain disruptions or other factors that affect those verticals.

Yes, well. Maybe I could start by saying where we have the highest concentrations would be, what I'm going to call generalized industrial. That would be everything from John Deere to machine tools and factories to Carrier air conditioning equipment. That's our biggest vertical at this point in time. Our second vertical is Aerospace and Defense, which by the way particularly on the defense side is where we're strong, is not really suffering that much, the U.S. government is not dialing back, they're leading in. The third thing would be Electronics and High-Tech, but that's not really consumer electronics, it's really more business-to-business type of electronics equipment. So those would be our three biggest exposures. And then if you get down to places like Automotive, you're talking single-digits which is good because automotive is a tough industry. If you get into commercial aviation, it's not that big, again, we're much bigger than defense. If you think about places like, there is been questions about airlines. Well airlines are less than 5%. I think airlines and retail together are less than 5% of our ARR. And by the way, the business we do with airlines is around spare parts management. And we don't so much – it's not about new sales, it's more about renewals. And as long as they own those airplanes, they're going to own spare parts for them, whether they're flying them or not. And I don't think any airline that's still in business is going to stop managing spare parts because they won't be able to get back into business. They'll never put those airplanes in the air again, if they give up on the spare parts. So it feels like the parts of this particular economy that I hit the worst really are not the places where PTC has the deepest exposure. And in particular, I'm probably referring to automotive here, which I think is probably one of the toughest places to be.

Got it. Great. Well, thanks, Jim. Thanks, Kat.

Thanks, Steve.

Thanks, Steve.

Thank you. I’d now like to turn the conference back over to Jim for any closing remarks.

Thank you, and thanks everybody for joining us today. So in addition to LiveWorx going virtual, a lot of investor are going virtual as well. We're going to be at a bunch of them in this quarter beginning with JP Morgan’s Global TMT Conference on May 14th. So, look out on our website for the other events as they get posted. So we do look forward to seeing you on the conference circuit, hopefully. And if not, hopefully you can join us at the LiveWorx event, information is up on the website for that as well. And lastly, thank you for your interest in PTC and have a great and safe evening. See you all later. Bye-bye.

Thank you.

Ladies and gentlemen, this does conclude today's conference. Thank you for participating, you may now disconnect.