PTC Inc. (PTC) Q2 2026 Earnings Report, Transcript and Summary

Good evening, ladies and gentlemen. Thank you for standing by, and welcome to PTC's 2026 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, 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.

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 2 things. First, that Windchill manages the authoritative product data their business runs on; and second, a clear road map 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, 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 it 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.

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 4 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 road map 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 give 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 Instructions] Your first question comes from the line of Saket Kalia with Barclays.

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 sort of 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?

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

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 AI need for AI modernization and getting their product data foundation ready. Also, we're seeing strength in our go-to-market execution, right? 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.

And Saket, I'll ask -- thanks for the question, and we've got still 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 could see around 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 next -- 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.

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

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, let's say, 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. So -- and 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?

Sure. Thanks for the question. I would say that one of the things we're really proud of that we're seeing is, as you probably know, we had a PTC/USER Summit last week in Las Vegas. And the feedback around the relevancy of what our customers need to actually create a product data foundation is at the highest level that users that have been with PTC for decades are saying is evident in our Windchill road map and our Creo road map, Codebeamer road map and down the line. And so the buildup of this modernization, as you asked the question around the product data foundation, i.e., 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 2 things. Number one is the AI thrust. I think those systems of records that we've had for so long that now we're advancing is used to be operational infrastructure. Now it is 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 2 things are happening. One is 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 is there's now an inevitability that's starting to occur around making sure customers are progressing towards consolidating their PLM estate onto Windchill. You're seeing that in the customer examples that we gave on the quarterly release here 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, and you've known this for a long time, our customers, one of the greatest things is they are complex customers. And the adoption of new technology since they began to now is still something that take a lot of effort, a lot of introspection and a lot of detailed analysis before they move mission-critical elements of their business on to new versions, new platforms and AI enable it. That's awesome for PTC because we're the trusted area where we provide the context for AI to work, and our customers are looking at us to guide them through that journey.

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

Maybe another big picture one. So I think if you go back over the years, the PLM segment would typically grow higher than the company average and higher than in CAD. And if I look at the recast ARR for the second quarter, that gap seems to be narrowing. And so with the new sort of portfolio mix in PLM and sort of all the product innovation coming and the macro perspective, maybe it would be helpful just to get a perspective of the relative growth rates you would expect of the 2 segments in the business going forward.

Yes. Great question. And Jen, you could add to this answer as well. But let me start. So I would characterize the ARR numbers you're looking at as backward-looking. And we've already been very articulate. The reason why 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 that we put in for Q3 and the step-up we have for Q4. You saw an indication of Jen's point of view around how the setup is configured for '27 and beyond. And what the metrics we look at, the reason why you feel the energy and the excitement from the team here is because we look at demand capture. We look at renewal rates. We look at pipeline growth. And in those areas, in those segments, particularly in PLM, we see really strong incentive by our customers to move on to this modern product data foundation led by Windchill, Codebeamer, Creo, et cetera. And so we see PLM growth in those forward-looking indicators as very positive. We've got continued pipeline growth. We've got to execute across it, but we feel good about that. On CAD, lastly, we are seeing great strength in Onshape, and we're seeing growth in Creo, but those markets grow at a different growth rate than PLM. And so you're going to start seeing those charts over the next number of quarters shift as ARR actually comes in deferred ARR actually flows into the P&L. Jen, anything to add?

I think you hit it.

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

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

Sure. Thanks for the question. So again, we're looking at in this stage of transformation, we look at demand capture, we look at renewal rates, we look at pipeline growth more materially than we do in backward-looking ARR. Obviously, all that needs to show up in ARR, and that's what we're completely focusing on as we inflect into Q3, Q4 and into next year. The verticals that we're seeing strength in is around electronics and high tech. I don't think that should be a surprise given the data center modernization that's occurring. Those customers are coming to us to build their infrastructure. They need a product data foundation to leverage everything that they need to do to accelerate product for their customers. And two, you saw an announcement this morning, which is indicative of many things that we've been seeing over the last number of quarters, which is in federal, aerospace and defense, PTC is leading the charge here. You saw the Army -- U.S. Army as an example, put the stamp of approval that Windchill is the standard for PLM systems, and that's the calling card to go to all the other agencies to ensure PTC is embedded broadly across not only the Army, but the other agencies. We're seeing that across the gamut and across geographies, too, around FA&D being a lead horse given the advancements that we have with our product solutions in that area. And so those are the 2 verticals we see strength in. Lastly, we did -- you noted BMW. We continue to play in the automotive sector different than some of our competitors where the predominance of our automotive thrust is around Codebeamer and Windchill and in some cases, Onshape now. And so we're starting to see that being a differentiated solution within automotive, where they're starting to needing to be competitive with our solutions as software-defined vehicles accelerate. So it's a really good area for us from that perspective.

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

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 maybe telling you or revealing when it comes to that incremental investment beyond the core, what I guess you're calling the new intelligent layer and both how and when this becomes incremental for PTC. So maybe you can speak to like commercial strategy and pricing? And then how do you make sure that incremental piece is something that ultimately you can capture versus maybe some other solution provider or start-up or the labs themselves?

Sure. Joe, let me start with like what we're hearing from customers, how they're working their way in terms of using our AI capabilities that we're releasing first, and then Jen could add some of the commercial strategies we have broadly around that capture. I want to go back and make sure I make a pointed reminder, which is the AI road map and conversations we have with every single customer is relating to we want to go POC and test out these new AI releases. In some cases, I'll talk about scaling it up operationally. But in most cases, testing it out in smaller groups, POC-ing it. But it ultimately always comes back to before we -- or in parallel as we're doing this, we have to have our data structured so that as context for AI. And again, I want to repeat, the modernization of their product data foundation is, first and foremost, the thrust of what AI is accelerating in terms of our demand capture. I think that's hopefully clear. Two is when they do actually interface with our AI releases, as an example, I'll give the ServiceMax AI example, which was our first AI release with multiple agents now working in the field technician service area. One of the larger industrial companies in the world implemented that solution in a small POC. And it was driven by business and IT leaders, and it actually didn't capture the scaled attention that the great product would necessitate. That conversation moved then to, let's go talk to the workforce, this mission-critical field technicians, service technicians and show them the solution. Upon showing them the solution and then adopting it, that became very clear that there's a high ROI and that there's an adoption that actually will happen versus the ivory tower deciding what the actual mission-critical employees need to do. That is now, Joe, moved into a 7-figure just AI SKU on top of the ServiceMax SKU, AI expansion just here in North America, and we're already talking about the global piece, which is a lot larger than the North American piece. The reason I give you that example is that is going to be the nature of our industry and our end market where our customers are now playing around with these great releases. They will test it out. And only if there's a high ROI, there's a real conviction on adoption, will they then scale it. And that's leading for them to come back to us because we are the authoritative governed product context for AI to work really properly. And that's our real value, and we're going to have to continue to make sure we execute now across that strategy as we also go into this intelligence layer. Jen, do you want to add the commercial piece?

Sure. So I would say just echoing what Neil said around just how we expect to see this show up, right? It will take some time. Certainly, we'll see some monetization in '27, but not overly material. And as it relates to monetizing this, as you all know, we are largely seat-based right now, right? And that's really how customers are asking to purchase at this point. However, we have multiple ways of meeting the customer where they are in terms of if we -- if they want to bring their own agents, et cetera, so we'll be able to meet them there. But largely, it's early days for us in terms of different hybrid models, but we're ready for them.

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

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

I'll start with the longer duration. This was just based off of -- we had some key renewals that came through that had wanted to extend their contracts with us over the duration, and we see that ultimately as a very good thing for PTC. As you heard me say last quarter, we saw a similar trend, and we flowed that through the overperformance through the guidance for the year.

Yes. And on the first part of your question, look, as a reminder, about 16 months ago, we brought in a new CRO and made major surgery on transforming the go-to-market organization to be a vertical-focused go-to-market engine, and we changed a number of things, as we indicated on multiple earnings calls. Rob and I mentioned -- who's out, by the way, in Europe, closing customer deals. We mentioned that it's going to take 18 to 24 months from when we started to actually start seeing the turning of the momentum. We're, call it, 15, 16 months into it. And that go-to-market machine is starting to work well based on the demand capture we've seen, based on the renewal rates, based on the pipeline generation, based on the feedback we're getting from customers around our messaging, around the vertical expertise that we're bringing to bear. I'll say that we are continuing to improve it. We're never done. But right now, we're really focused on executing across this intelligent product life cycle vision, layering on top our AI strategy because we've got a go-to-market machine that's starting to hum, and we're going to keep making it better, but that's where we are in terms of the journey of the transformation.

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

Huge congrats on the quarter. And I apologize in advance for anything that's been discussed or anything that is -- really, I'm jumping back and forth between a few prints tonight. The one question that I just wanted to ask you guys was looking at the guidance for ARR for the rest of the year, reiterated but sort of implies net new ARR has to grow in the back half. Can you just give us one level deeper of what you're watching or what you're looking at that is giving you confidence around the growth that you are pointing us to for the second half of the year?

Jen, why don't you do that? But please ask as many questions and repeat them as possible. We love talking about what's happening at PTC right now. But Jen, go ahead.

Sure. So first of all, as we think about the second half of the year guidance, we do feel incrementally better and more confident about things. And I'll leave you with kind of 2 points. The first is, as we look at the overall range for the rest of the year, we are increasingly more confident that we've derisked that lower end of the range. So that's the first thing I'll say. The second thing is if you look at what we have to do for the second half of the year versus what we did last -- second half of last year, it's about $127 million of net new ARR in the second half of this year, which is about $7 million more than we did last year for the second half, right? And if you think about the fact that we've already said, we built durable ARR as deferred ARR into Q4, really, it's about the step-up is much more around the deferred ARR that we already have banked and the team really having to perform in line with what they did last year. And so I would say we're increasingly more confident of where we sit for the Q4 step-up.

That was super helpful. Can I just clarify one thing you said? Am I supposed to read into your response as ex deferred ARR in the back half that the actual net new ARR is flat year-over-year? Is that what you're trying to say?

Approximately.

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

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

So I would start by just saying the focus this year was just to continue to build long-term durable contracts with our customers to increase the deferred ARR. That's not a onetime thing. That's how we're working with our sales teams and our customers, right? So you can continue to expect that trend to continue. I would go back to the fact that when we think about next year, right, we wouldn't -- even if we saw no better, more performance than we saw this year, you'd start to see that growth year-over-year. And so I think we're not going to guide to any specifics around net new ARR trends, but I think that's the best way to think about it right now.

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

Maybe if I can start with Neil, please. I've noticed that you've been calling out a displacement win for a few quarters in a row now. I just wanted to understand, is it a product of what you and Rob has been put in place for the past few quarters? Or is it also the fact that your investments and product releases around AI is helping with your competitive edge? And second part of that question is also, am I right in saying that many of the displacement wins that you've called out are primarily in the Windchill product? Or is it more broad-based across the product portfolio, please?

Yes. Great question. Thanks for asking it. I think what's happening and what we're seeing, and you saw another one, Hamilton Medical that we released about Codebeamer yesterday, a customer win, which another displacement, that's an ALM Codebeamer. We're seeing that in droves right now. And part of the thrust to why we're starting to see it, I'll start with CAD first and then move my way down here. One is like we got an incredible capability in Onshape. Onshape, by the way, from a vertical perspective, is kicking butt in the robotics and automation space as well as in the physical AI space. Hence, the reason why Jensen himself actually talked about Onshape and PTC in his keynote, as I'm sure you guys all followed. That's actually just a much better solution than anything that's out there in terms of what Onshape does from a cloud-native CAD tool. On Windchill, as you mentioned, displacements are coming because, again, our focus 2 years ago was to solidify the core functionalities of this company that's made PTC great. And the teams have been hard at work for 2 years doing that. And so the feedback is, if I'm going to go modernize my PLM environment, why not choose the best product out there that actually is investing into it and not talking about 50 other things that they're going to acquire in the next 2 months. Like they're focused on the thing that we need. So we're seeing displacements happen because consolidating PLM systems onto the best one, which is Windchill is paramount. By the way, I'll give a shout-out to Arena, our cloud-native PLM solution is also kicking butt because we invested into it, added AI functionality faster than any other competitor, and we're starting to see traction there. So that's coming from like the AI angle plus also just the work that we put into Windchill. Codebeamer we've talked about, that's just off to the races. We have matured the product. We're creating scalability. It's second to none in the industry for companies that need to have complexity at scale of the requirements, which is becoming increasingly important, and we're just making Codebeamer better. And then lastly, on ServiceMax, like we have a best-in-class solution that has forward-looking AI that beyond anything we've seen before. And so that's also gaining traction in the space. So put it all together with a newly energized go-to-market transformation that we put in and a team and a messaging and a coordination across marketing, sales, et cetera, you got the recipe for why like you feel the mojo coming back in PTC. And we've got continued focus, and we're not going to take our eye off the ball, but it's the result of all the work we put in for the last 2 years starting to now show up.

That's really helpful. Sounds super exciting. Maybe if I could ask a second question for Jen. On the new share buyback authorization, $2 billion across 2 years. That's probably the vast majority of the free cash flow that you generate over the next 2 years as well. Is this -- are you guys just being opportunistic with the share buyback programs given the valuation multiples today? Or is it a fundamental change in your capital allocation approach from the previous CFO? If I remember correctly, I think the plan was to allocate 50% of free cash flow for share buyback, which the $2 billion for next year will be significantly higher than that level.

Sure. So let me just start by saying when we think -- when Neil and I think about our capital allocation philosophy, it really hinges on 3 pillars: organic investment back into the business, inorganic via M&A and share buybacks. And we look at each one of those to understand what was the right return on investment in capital. And this year, especially right now, where the stock price is, we believe in the long-term durability of this company. And so share buybacks have been in our eyes, a very good use of capital. Without guiding to the future, the authorization allows us continued flexibility in FY '27 to ensure that if that makes sense, we can continue to pursue it.

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

Neil, you talked about some pretty large wins in sort of the technology space. And obviously, there's an explosion of code being generated, but also the physical equipment that needs to go into data centers to support that. So can you just help us understand like how are you benefiting? What are some of the increased levels of complexity that are driving demand for PTC products? And is that something you're seeing as you're approaching these renewals with some of these large standing customers that are probably growing much faster than they've ever grown before?

Yes. Thanks for the question, Tyler. So it's a great question, and I'm glad you asked it around the customer environments when you get an electronics and high-tech company that's in the middle of all the data center build-out, they are being pressured to deliver as quickly as possible products out into that data center with the highest amount of quality, right? And that thrust is like very aggressive right now. What all those companies are doing, many of which are now our customers, many of them are the ones that we're displacing into, they're looking at where is the bottleneck, right? And when they look at the bottleneck, the engineering bottleneck of when someone is designing something that's to be used in a data center to when it gets manufactured, that like center of what PTC is so great at. They look at that environment that they have, and it's very fragmented, Tyler. There's multiple different PLM systems in many cases. There's manual processes in many cases. They have not standardized on any real tool. There's multiple, I think, because it's been an afterthought for many companies. So when they're thinking about how do I accelerate it and every single conversation, even with these companies are saying, well, I want to supercharge my engineering workflows with AI, it's coming back to it's impossible to do that because you don't have a structured data foundation to apply this to, let alone actually have speed within your normal processes without AI. And so that like tailwind and urgency is causing this point that we're making around modernizing the product data foundation. We're seeing that across the board across Codebeamer. I mentioned this like a couple of quarters ago, and we continue to see it where Excel or an antiquated system that's been around for 15 years just doesn't do enough to give context to an AI to accelerate requirements or test case management. Same thing on PLM, same thing on why Onshape is growing like weeds right now. Same thing with what we're actually seeing in displacement for Creo because of the best-in-class nature and the embeddedness of AI into it. So Tyler, that's the theme of those data center infrastructure builds. The data center picks and shovels that these companies that you guys are all valuing high, well, the picks and shovels underneath them is PTC.

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

Can you hear me?

Yes, Siti.

This is Sameer calling in. So the question I had was around the specific data that only Creo and your products are able to use and not a third-party agent. How do you create that data moat? What -- and then in the end, who owns the data? And the follow-up to that or a similar thing is, do you work with SIs or third-party IT services providers to enable the IT infrastructure modernization that is needed to enable AI use at the customers? So it's a little bit of a repeat of what has happened earlier, but just wanted to get a better feel.

Sameer, let me start with the second point. For sure, like a lot of these large-scale transformations to modernize the product data foundation, one of the things Rob and CK talked about is we're incorporating greater SIs into our ecosystem. And in many cases, they are the lead with us to help modernize the change processes, implement these solutions across customers. In some cases, by the way, PTC does it with our own solutions and our people as well. So it's a mix. But in predominance, we're using partners to do that on the product data modernization piece. On the first question around Creo, this is highly relevant in terms of the incredible capabilities we have and the unfair advantage we have to deliver AI to a 3D model. And the unfair advantage is actually the folks that actually own the CAD systems. PTC is one of them. There's only a few others in the world that do it. We're embedding AI into our CAD systems in Creo. We've already done it with Onshape. And the advantage we have is we understand the construct and the context of everything happening to design a 3D part, how it fits for a product, the manufacturing constraints, the materials, the geometry, the mathematics to actually bring the creativity of an engineer to life that actually becomes a product, that happens on a CAD system that we have full proprietary understanding of how that actually comes to be. And that is the advantage we have of training our AI onto that data set is a huge advantage versus any third party. By the way, we applaud every third party that tries to give a user interface to this. Our point of view is we're providing the user interface with our AI solution that is going to be materially advantaged than any other third party as we continue to develop AI across our Creo and Onshape solutions.

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

Neil, I wonder if we could just go back to Windchill+ for a minute. And can you just talk a little bit about how -- where the demand is coming from here, net new customers to PTC? And sort of what's happening on-prem -- with on-prem conversions? Are you seeing that continue? Or are they opening add-ons, new instances with Windchill+? Just trying to get a feel for how that's performing.

Sure. Thanks for the question. I was remiss in not mentioning that modernizing a product data foundation also, in many cases, includes how do you go into the SaaS version of our solutions, which is why you're seeing and we're seeing the traction of Windchill+ in the marketplace. We've released several press releases and a number of customer anecdotes. The reality is that product is really moving at pace right now. And so that is part of the modernization where it's just a more simplified, cleaner tech stack by which someone can run their PLM off of and consolidate other legacy systems onto. So that's an area we mentioned a couple of years ago, we're investing into. We want to make sure it's right. We want to make sure we get customer references. We're starting to see that momentum starting to build, and we have many more years to do that. To answer your question, that is predominantly on net new. And it's a very good thing that we have an artillery to go win displacements because it's such an advanced solution versus anything else in the marketplace, plus it modernizes their tech stack by which AI could actually create greater scalability. So that's like kicking butt, we're like super jazzed about, and we're thinking ways creatively to continue to accelerate that momentum. On your point around on-prem, I wouldn't go as far as saying like the dam is broken because many of our customers like really first want to modernize their data foundation by expanding their on-prem solutions and taking out the other third-party solutions that might not have the scalability of Windchill or manual processes and put it in what we call enterprise PLM. So we like that. And by the way, over time, they will convert to SaaS, but we will take that all day long to make sure that we capture all the seats that are available in that environment, #3 point -- third point. The last thing I'll say is there's going to be many customers, particularly in some spaces where you need to have air gap system where they'll never move to SaaS, and we're perfectly fine with that as well as we think about it. Lastly, you didn't ask the question, but I have to add to it. Our AI releases are both for on-prem as well as our SaaS solutions.

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

Neil, just following up on Blair's question on Windchill+. Obviously, you mentioned that product several times on the call today. Is that one of the key drivers behind the strength of your -- that you're seeing on deferred ARR deals and your focus on deferred ARR deals in your go-to-market? And also, I think you kind of hinted on it, but I just want to make sure, is the need to adopt AI and need to modernize the product data to support those AI initiatives? Is that kind of what's driving some of this momentum around Windchill+ as well?

Sure. That deferred ARR buildup is actually coming from multiple different product SKUs. It's coming from Codebeamer ALM strength, displacements, expansion that we're seeing there, where, again, I want to reiterate, Onshape is creating huge displacement opportunities off of -- I won't name the competitor, but we're taking share there in an aggressive fashion at scale right now. And then Windchill, to your point, is clearly the nerve center of the product data foundation, and that is a huge element of modernization that we're seeing in the buildup of deferred ARR. And so we see that happening across those major categories. I'll give another shout-out around our born-in-the-cloud PLM solution is also seeing a renaissance of making sure expansions occur. So that deferred ARR is starting to click. And when I mentioned the area of SLM where previously, as I've mentioned on multiple calls, that ServiceMax was weighing the momentum of the rest of the portfolio, we went through a rough period for the last 18 months, and we're optimistic that the big digestion of the negative churn is behind us, we're more in a normalized environment with a strong pipeline, and we're getting that back in the gym and back to form like the rest of the portfolio, we're enthused by what we're seeing so far and still the work and our heads are down to execute around that.

Okay. Great. If I could just squeeze in one more. So you kind of gave us some use cases and some small POC examples of our AI products. Can you just kind of expand on what type of AI products that you have available today on GA? And just talk about what are your plans around AI products going forward?

Yes. We've got 8 AI releases already done last year that we've been working on POCs and refining with our customers. We've got 14 more that we're releasing here in 2026 with one pretty awesome. You'll see it in PTC Next, an amazing AI native first product release that we're putting out there in Chicago in June. But the areas that we're actually seeing now going from POCs and migrating to operational scale, I mentioned some of the areas in ServiceMax that are going into more scaled conversations. That's first. Two is, Onshape AI is actually most of the information that Onshape AI is providing to end users are making and simplifying their processes is happening on AI versus all the other ways they were doing it before AI. So we're seeing really rapid adoption there on that born-in-the-cloud CAD solution. And then on our born-in-the-cloud PLM solution, we have an amazing supply chain AI intelligence layer that we're seeing that now being in an operational environment. So customers are seeing supply chain disruptions flow right into PLM, so that there is no need for multiple tools versus just using PTC's products. So that's what's in right now and the momentum and the tidal wave is building on incremental and exciting AI releases just in the next 6 months from now to the end of September. So stay tuned on that. We're getting really strong feedback from customers. We're working hand-in-hand with them to make it usable adoption rates, and that's why we're pretty pumped over here.

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

As you guys sort of talk more about AI, can you just talk about this tension about proprietary data and folks who want to make all sorts of agentic solutions, want data to be interoperable, you want to be able to feed into data graphs. How do you manage this tension at your customer level? And second thing, does that mean that maybe down the road, you have to beef up because PLM is at the heart of it, that you actually have to beef up your own proprietary capabilities either organically or through an acquisition?

So thanks for the question. So just moving backwards around how we're executing across our AI strategy. One is this intelligent product life cycle, build a modernized product data foundation. I think we've made that clear around customers need to put their data house in order. PTC enables them to do that. The intelligence layer that we talked about in the early part of the script is around building a layer of intelligence that actually executes what the agents within the products are actually doing. So Phase 2 is building embedded agents that I've talked about previously in the core systems of records in Onshape or ServiceMax or Windchill or Creo or Codebeamer those are creating productivity gains within that solution. But our vision is a lot more expansive than that, and we feel we have an unfair advantage to create this intelligence layer because we understand how the context of that data actually operates across an enterprise. What I mean by that is there is a view that we strongly have that agents will need to interact across these domains for greater outcomes to our customers. And we will create that intelligence layer. We are creating an intelligence layer by which that operates and those agents can communicate with each other. So we feel -- and our customers, to answer your question, are coming to us and saying, PTC, you're the trusted source, you understand the data best, you could train the agents the best, you provide this to us. So that's how we see it right now. However, we are very open, and we have a deep belief that there will be multiple agents across other systems of records outside of engineering that we will interact with, including ones that the customers build, including ones from other software providers or others. But within the engineering workflow and that stream of what happens to that data in the enterprise, we will have the most advanced, most efficient agents built bar none that know how to interact with each other. That's our vision of where we're taking the company.

So your goal is to build agents that dominate your own ecosystem rather than have agents that can sort of plug in your ecosystem and interact with other file formats?

Yes. We will have the best agents that understand how to interact with Windchill and be able to have the data and context of that Windchill productivity gains to make sure a manufacturing agent or an ERP agent or a service agent actually knows how to deal with that solution and create a better outcome for the customer. So that's how we're thinking about, build the best agents and the products that we have deep domain expertise in, let them interact with each other and create the interface by which they can interact with other agents that are built by others.

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

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

Yes. Thanks for the question. What we're seeing is a higher quality pipeline. Again, a factor of a go-to-market transformation is around making sure Rob and CK, our leaders of go-to-market, align the resources, the messaging, the -- all the things that we're doing for customers in a vertical way so that we build a higher-quality pipeline with larger amounts that are more strategic and that have higher velocity. And what I'll say is the high-quality pipeline has increased from last year to now as we think about the second half. The conversations are still -- by the way, we still have to go through approval process. We still live in an environment where there is a war going on and energy prices have escalated to levels no one's seen before in the long time. So all those strains, we still have to go through and get the approval. I think the added things that are happening is, one, we're internally better. We're a better organization than we were last year because of all the hard work that we've done. But two is, from a macro perspective, we're getting this thrust of AI is so prominent and customers after spending all the cycles thinking about AI within their infrastructure are realizing without a strong product data foundation that has context to it, AI just does not work well. And that's leading for us to have these engaged conversations, leading to us being energized by the demand capture. And we got our work here to execute across a high-quality, higher pipeline as we think about the second half of the year versus last year at this time.

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.

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

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