Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to PTC's 2025 Second Quarter Conference Call. [Operator Instructions] I would now like to turn the call over to Matt Shimao, PTC's Head of Investor Relations. Please go ahead.

Good afternoon. Thank you, 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.

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…

Thanks, Neil and hello, everyone. Starting off with Slide 6. As you know, we believe ARR and free cash flow are the most important metrics to assess the performance of our business. To help investors understand our business performance, excluding the impact of FX volatility, we provide ARR guidance and disclose our ARR results on a constant currency basis. At the end of Q2, our constant currency ARR using our fiscal '25 planned FX rates was $2.326 billion, up 10% year-over-year. In Q2, our free cash flow was up 13% year-over-year as we continued to invest in our key focus areas. Note that the $279 million of free cash flow we generated also absorbed $3 million of outflows related to our go-to-market realignment. Turning to Slide 7, let's look at our constant currency ARR growth in more detail. Looking at our product groups, our ARR growth was 8% in CAD driven primarily by Creo and 11% in PLM driven by Windchill, Codebeamer and IoT. On a year-over-year basis, constant currency ARR grew by 9% in the Americas, 11% in Europe and 10% in Asia Pacific. Moving to Slide 8. We ended Q2 with cash and cash equivalents of $235 million. At the end of Q2, gross debt was $1.393 billion and we were 1.5x levered. We continued to diligently pay down our debt in Q2 with our gross debt balance decreasing by $155 million. And as expected, we retired $500 million of senior notes that were due in February with the draw on our revolver and cash on hand. In addition, we continued the disciplined and consistent execution of our $2 billion share repurchase program. And in Q2, we used $75 million of cash to repurchase 463,000 shares of our common stock. Given the consistency and predictability of our free…

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 Instructions] Our first question comes from the line of Daniel Jester with BMO Capital Markets.

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.

Yes, thanks for the question. This is Neil. Let me start and then Kristian can add on how we did this. So as we saw -- let me start with the framework of the 10% to 9%. Again, to reiterate, we feel and see a strong pipeline as we've been entering into the second half. We continue to see that. As of the early April time frame, when we all got hit with a lot of news and impact that's really centered around our customer base around trade policy and macro conditions, we've been in conversations with customers that are indicating things like I was on with the exec team of a large medical device company that says, "We're moving down the path with all of you on the PLM expansion that we need to do. But when we get to sign the contract in Q4, we might, if this continued environment persists, need to make it a smaller chunk first and do a bigger chunk later when there's more clarity." So we're in these conversations. Again, it's not broad-based but it's enough for us to say we look at the pipeline, we've assessed the end markets, the geographies and said, "You know what, the 10% is a stretch. Let's bring that top end down to 9% based on what we're seeing." Now on the low-end side, we took it to 7%. We did 2 things with the assessment of the 7% in our understanding of how to portray that to all of you. Number one is we did a bottoms-up view. And you'll hear hopefully from Rob in Q&A as well, where the pipeline quality and the velocity of it is incrementally getting better. We've been doing that for multiple years. But this quarter, we really went into what…

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

Maybe for Rob on the go to market. I'd love to talk a little bit more about -- just on the steps that have been taken, the confidence that you have, the internal indicators you're looking at to see that the go-to-market changes are indeed working and of course, Neil, chime in as well.

Thanks for the question. Top line is I'm really pleased with all the work that's been done and that we put into play here just over the last 90 days, for sure. When you think about what we started, we took -- we pivoted the full-standing field organization to a vertical approach. And that required a lot of movement and I'm proud to say the team really came through well. We did it with low churn, customer churn. We retained all of our top talent and a highly tenured sales organization, very low drama and we delivered on the quarter. So I think, overall, we feel really good about the foundation that's been -- that was planned for, frankly and then delivered and executed on in the last quarter. It really sets us up well for our future growth trajectory that allows for just more conversations with our customers, more outcomes-focused discussions and hopefully, a greater trajectory which we're seeing a little bit here early on the pipe. So overall, very pleased.

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

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?

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.

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.

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

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 discussion going on with your customer in terms of AI adopts and you guys introduced some of those AI products, both in Windchill and even ServiceMax and other areas as well. So how are the discussion going in terms of them adopting AI in this kind of environment?

Yes, it's a great question and it's -- if you were watching us in Hannover Messe when we announced Windchill AI, showed the world Codebeamer AI and obviously, as we talked about ServiceMax AI alongside the Onshape AI Advisor, we've got a full stable of launches and proof points that we're putting on to the marketplace. So a lot of great innovation the team's doing. A lot of great customer reception. It was standing room only in terms of the things that our customers were seeing, prospects were seeing around our AI capabilities. I think the major thing that we're learning through this process is that, as we mentioned a few quarters ago, this product data foundation that our core systems allow our customers to achieve with PLM, CAD, ALM, SLM, having that is absolutely critical for getting the best use of generative AI. So those 2 factors, a great generative AI product innovation that we're now showing to our customers, getting feedback from our customers, relating back to how do you really supercharge that, well, put together a great PLM system across your enterprise or ALM system across your enterprise, the 2 is the differentiator for PTC. And it's highly valuable and we believe it's going to be an ultimate growth driver that results in ARR growth over the midterm and long term. I think in the near term, to summarize, customers are still interested. They're far more engaged this quarter than they were last quarter given our launches. But our view is it will take some time for the biggest bite sizes of generative AI to take hold. It will happen but it will happen more methodically over the course of the next 12 to 24 months.

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

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%?

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.

And just to add to this, we chose to give this guidance range different than some others out there that are still looking at the environment. We want to be proactive about it. And the way you look at -- if you think about the Q4 number to your question, the low end is $55 million in that new ARR. The high end is $85 million, right, at 9%. Last Q4, we did $84 million. In 2023, we did $76 million. And so when we look at that $20 million or so downside protection, we did that bottoms-up view. We know every customer and made assessments around what could push, what could get smaller bite sized. And then to your question on other crises, we looked at what happened in those other really dramatic crises which, quite frankly, I don't believe personally that, that will happen in this go-around. But if it does, what we saw was a 20% to 30% reduction in conversion rates when things really fell apart in the industry. So top-down, bottoms-up, we came to -- that $20 million risk is a good risk profile if things get materially worse in Q4 -- Q3, Q4.

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.

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

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.

Yes, I couldn't make sense of what our competitors said on that front. But in terms of our business, most importantly, we had a solid quarter in Q2. Like look at the customer appendix slides, some, by the way, disruptive moves that we did, competitive displacements that were made with real sizable accounts, right? So strong demand environment. I want to reiterate, we've entered Q3. We continue to see an extremely strong -- a good, strong, high-quality pipeline that we're continuing to build upon with Rob's hard work here. So we feel like the demand environment is solid. What we're portraying in this new guidance range is making sure these initial conversations of uncertainty in end markets that are most impacted by the trade policy, we're just being prudent and making sure we're ahead of it as they actually formulate themselves. If they do, this is the range that we see.

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

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?

Jay, let me start with the demand and call it, the seat size side of the equation and then Kristian or Rob can talk about the commercial optimization piece. The vertical approach that we undertook at the beginning of the year, the go-to-market transmission is all intended to ensure we're capturing more wallet share in the verticals that we're strong in and have a concise determined effort led by Rob to make sure that we execute better across that demand opportunity that is getting better on a monthly basis because deal transformation is getting more urgent. That is the premise of the work that we're putting, hard work that we're putting in. That's going to take a few quarters to really see the fruits of that labor but is to expand the utilization of Windchill, to expand the utilization of Creo, to cross sell ALM, to think about SLM being integrated in a vertical approach, by the way, supplemented by a solid generative AI technology layer that really leverages all that great system work that we've got. That's like still in the work and in the future. That being said, in Q2, you saw again examples of, I think if you looked at the bullets, CAD consolidation, right? So in many of these cases, we're going into a vertical approach and saying, "Can you consolidate your CAD?" We saw that happen in Q2. The methodical way that Rob, CK are making sure that this happens is the biggest impetus of why we did this go-to-market transformation and that's our North Star. Commercial optimization, do you guys want to -- Rob, do you want to start and then...

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.

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

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?

Yes. So great question. Really glad you asked it. The -- I'd start with the first part of your question around the conversations we're having. They are idiosyncratic based on where the customer is and the level of the transformation and the competitive positioning that they're under, right? So as an example, I can't make a broad brush statement that says we're having conversations with automotive OEMs that are all pulling guidance and they are all now telling us they're going to stop buying from any of the software vendors because they're in paralysis mode. In some cases, we actually announced something this morning, Schaeffler, one of the largest industrial parts manufacturers that actually is very centered around the automotive market, they just did a massive strategic partnership deal, multiyear deal that's going to transform them to our SaaS framework. And you might question, well, why would they sign something like that in this type of environment? Well, because they have now understood that they've got to be even more nimble in this environment. And so they've moved forward with that. In other cases, there could be automotive OEMs or parts manufacturers which, again, this is the pipeline work we've done where they're earlier on in their diligence of how much they want to transform and they're doing a lot of work about why Windchill could help them. And they're coming to us and saying, "This sounds great. We're down the path of selecting someone. It's going to take another 4 weeks to select it." But at the end of the 4 weeks, if this tariff issue does not get resolved or is still unclear the way it currently is to them, we might have to pull back and this might push into Q1 of next year or I might…

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

Guys, can you hear me?

We can hear you.

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?

So let me start with the last question first. The situation that has started for all of us particularly and most importantly, the end markets that PTC serves has been dramatic since April 4. This is -- you guys are watching it. Guidance is being pulled from a lot of our end market customers. That means they don't know what they're going to do or what they see in even the subsequent quarter. That then relates to conversation that says what are the things we absolutely need to do and what are the things that are nice to do. And in some cases, working with PTC, signing on the dotted line to expand their technology with PTC is a must-have to be competitive even in this tough environment, hence, where we sit in our 7% to 9% range. But in other scenarios, it really could mean a delay or extending out the time period they decide or making a smaller decision. So I wouldn't say they're scary. We've been in other crises. I've done this multiple times and this team is experienced enough to do it as well. This has been very impactful to our end market customers from their ability to decide clearly, how to think about their business and where to invest for the future. Hopefully, that gets taken care of and there's more certainty as the weeks progress and trade deals are announced and people know how to navigate with discipline around the guide rails that they run their business. On how you should think about it, look, we want to be really transparent with all of you. It's a 7% to 9% range. I think we did a lot of justice, hopefully on this call, around the ways in which 7% on the lowest end can look like, the ways we're looking at that. We also mentioned that 9% coming into this quarter, we had pipeline that's really strong on our original guide. We also have mentioned this go-to-market transformation is starting to hit stride. It's going to take multiple quarters to show it but that's on track. We also said the strategic priorities of the company have been working well. You saw that in Q2 in terms of how customers are buying. And so we're working really hard to make sure we capture as much demand as possible off of that pipeline, hence, our range and how we see it.

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

This is Pierre [ph] 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.

Yes, this is not product related. We have -- all of our products, fortunately, are mission-critical products that the world uses and we all rely upon these companies to produce things out there. And so our products are the underpinning of the great products that are out there in the world. So that's -- it's not a product-specific issue. This is just how do customers think about investment decisions in light of uncertainty around the guardrails that they need to understand to run their businesses, right, what the supply chain looks like, what their input costs look like, et cetera, et cetera, where manufacturing resides which is all things that they are now needing to contemplate in light of what happened at the beginning of April. So that's like from that standpoint. And then two, I think that covers probably both questions there.

I will turn the call back over to Neil Barua for closing remarks. Please stay on the line.

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.

Thank you.

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