PTC Inc. (PTC) Q4 2025 Earnings Call Transcript

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Overview

PTC's earnings call highlights a revenue beat, record deferred ARR, and improved operational efficiency, all signaling strong financial performance. The divestiture of the IoT business aligns with strategic focus and is seen positively. Despite challenges in certain segments, the overall guidance is optimistic, with a focus on AI and product development. The Q&A reveals confidence in the Intelligent Product Lifecycle strategy, though some uncertainty remains around the Section 174 decision. With a $2 billion share repurchase plan and raised free cash flow guidance, the sentiment is positive, expecting a 2% to 8% stock price increase.

Key Financial Performance

Constant Currency ARR Growth 8.5% year-over-year. This growth reflects solid execution and benefits from go-to-market transformation.

Free Cash Flow Growth 16% year-over-year. This growth illustrates operating leverage as ARR grows and includes absorption of $20 million of outflows related to go-to-market realignment.

Revenue Beat Exceeded midpoint of guidance range by $140 million and high end by $110 million. This was driven by a mix of large multiyear renewals and contracts with longer-than-anticipated term lengths.

Deferred ARR Record deferred ARR under contract, providing strong visibility into fiscal '26 and beyond. This reflects multiyear ramps activating.

Operating Efficiency Percentage Expanded by 310 basis points to 45% in fiscal '25 compared to 42% in fiscal '24. This indicates improved operational efficiency.

ARR Attributable to Kepware and ThingWorx Approximately $160 million in fiscal '25, with constant currency ARR growth of negative 1%. This reflects challenges in these segments.

Free Cash Flow Attributable to Kepware and ThingWorx Approximately $70 million in fiscal '25. This is part of the overall free cash flow performance.

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Operating Highlights

Divestiture of Kepware and ThingWorx: PTC announced a definitive agreement for TPG to acquire its Kepware and ThingWorx businesses. This move is aimed at enhancing the value of these products through additional investment and operational focus from TPG.

AI and SaaS Enhancements: PTC is focusing on its Intelligent Product Lifecycle vision, emphasizing CAD, PLM, ALM, and SLM, with growing investments in SaaS and AI. New AI capabilities have been released in ServiceMax, Servigistics, Onshape, and Arena, with a strong roadmap for Creo AI.

New Product Versions: PTC plans to release new versions of Windchill, Windchill+, and Codebeamer in the near future.

Strategic Customer Wins: PTC secured its largest Codebeamer deal in the automotive sector, a major Onshape deal, and a competitive displacement win in the med-tech vertical, showcasing its growing market presence.

Deferred ARR Growth: PTC ended the year with record deferred ARR under contract, providing strong visibility into fiscal 2026 and beyond.

Go-to-Market Transformation: PTC's go-to-market transformation has shown early benefits, with improved execution on large strategic agreements and better alignment across sales, technical, and customer success teams.

Free Cash Flow Growth: PTC achieved 16% year-over-year growth in free cash flow, reaching $857 million in fiscal 2025.

Capital Allocation Strategy: PTC plans to return excess cash to shareholders, with $150 million to $250 million in share buybacks per quarter in fiscal 2026, starting with $200 million in Q1.

Focus on Core Vision: The divestiture of Kepware and ThingWorx allows PTC to concentrate on its Intelligent Product Lifecycle vision, leveraging AI and SaaS to transform product data management.

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Risk or Challenges

Divestiture of Kepware and ThingWorx: The divestiture of these businesses could lead to potential customer disruption and operational challenges during the transition period. Additionally, the company may face a reduction in ARR and free cash flow contributions from these businesses, which could impact financial performance in fiscal '26 and beyond.

Macroeconomic Environment: The guidance accounts for potential worsening in the macroeconomic environment, which could negatively impact ARR growth and customer demand.

Deal Structure Variability: Variability in deal structures, including ramp deals and longer-than-anticipated term lengths, could lead to fluctuations in revenue and ARR growth, creating challenges in financial predictability.

Transaction-Related Costs: The divestiture of Kepware and ThingWorx is expected to incur significant one-time cash outflows, including divestiture-related fees and taxes, which could impact free cash flow in fiscal '26.

Operational Execution Risks: The company is undergoing a go-to-market transformation and product roadmap execution, which, if not managed effectively, could impact customer relationships and financial performance.

Customer Churn and Renewal Seasonality: While churn is expected to remain low, any unexpected increase in churn or challenges in renewal seasonality could negatively impact ARR growth.

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Guidance & Outlook

Kepware and ThingWorx Divestiture: PTC has reached a definitive agreement for TPG to acquire its Kepware and ThingWorx businesses. This move is expected to enhance the value of these products through additional investment, expertise, and operational focus. PTC will maintain a close relationship with these businesses post-transaction to ensure a smooth transition.

Intelligent Product Lifecycle Vision: PTC is concentrating resources and investments in CAD, PLM, ALM, and SLM, with a growing emphasis on SaaS and AI. The company aims to help customers leverage product data and transform lifecycle stages.

AI Integration: PTC is embedding AI into its offerings, including ServiceMax, Servigistics, Onshape, and Arena, with a strong roadmap for Creo AI. New versions of Windchill, Windchill+, and Codebeamer are set to release soon.

Capital Allocation Strategy: PTC plans to return excess cash to shareholders in fiscal '26, with share buybacks between $150 million and $250 million per quarter, starting with $200 million in Q1. Investments in R&D and potential tuck-in acquisitions remain priorities.

Fiscal 2026 ARR Growth: PTC is guiding to ARR growth of 7% to 9% including Kepware and ThingWorx, and 7.5% to 9.5% excluding them. Growth is supported by a strong pipeline and deferred ARR.

Free Cash Flow: PTC expects to deliver $1 billion in free cash flow in fiscal '26, including contributions from Kepware and ThingWorx. Post-divestiture, free cash flow is projected at approximately $840 million, with a return to $1 billion in fiscal '27.

Net New ARR: Q1 fiscal '26 net new ARR is expected to be similar to last year, with momentum building throughout the year. The high end of the ARR range assumes minimal disruption from the divestiture and a steady macro environment.

AI and Product Data Foundations: PTC is enhancing its CAD, PLM, ALM, and SLM offerings to support AI-driven transformations. Customers are increasingly adopting PTC's portfolio to build structured product data foundations for AI applications.

Revenue and EPS Guidance: Revenue is expected to grow over 10% in the first half of fiscal '26, with mid-single-digit growth in Q3 and a decline in Q4 due to prior overperformance.

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Shareholder Return Plan

Share Buyback Program: In fiscal '26, with leverage below 1x, PTC expects to return excess cash to shareholders. The company plans to buy back between $150 million and $250 million worth of shares per quarter during fiscal '26, starting with $200 million in Q1.

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Key Q&A

Q:What was the context behind the decision to divest the IoT business, and are there any other IoT components to be shut off?

A:The decision to divest the IoT business (ThingWorx and Kepware) was driven by PTC's focus on its Intelligent Product Lifecycle vision, which aligns with its core priorities and customer needs. The divestiture allows PTC to concentrate resources on this vision. TPG's focus on factory floor operations makes it a better fit for these products. PTC feels confident about its current portfolio and its alignment with the Intelligent Product Lifecycle strategy.

Q:What is the impact of the Section 174 decision on the $1 billion free cash flow guidance?

A:The Section 174 decision provides a tailwind included in the $1 billion free cash flow guidance. However, the final decision on how to handle the Section 174 implications will be made later in the fiscal year. The guidance also accounts for incremental CapEx related to transitioning a major R&D facility into a new office.

Q:How would you characterize the push versus pull in deal structures this quarter?

A:PTC closed the majority of large transactions in the pipeline for Q4, with some deals structured as ramp deals. These are committed and contracted, not tentative. The focus was on capturing customer demand and ensuring deferred ARR for future periods, even if there were anomalies in quarterly ARR.

Q:Does the Kepware sale alter PTC's view on the TAM for the Intelligent Product Lifecycle?

A:PTC feels more confident about the addressable market for the Intelligent Product Lifecycle than two years ago. The strategy focuses on building a product data foundation with CAD, ALM, PLM, and SLM capabilities, enhanced by AI. Customers are responding positively to this strategy.

Q:How does PTC view its net new ARR growth guidance for the next fiscal year?

A:PTC's guidance for net new ARR growth is disciplined, considering factors like strong committed deferred ARR, ongoing go-to-market transformation, and potential disruptions from the Kepware divestiture. The guidance range reflects both cautious and optimistic scenarios based on macroeconomic conditions and execution.

Q:Are there any significant go-to-market changes planned for Q1, and how is the verticalized sales force performing?

A:The verticalized sales force has been foundational for growth, and the focus now is on consistent execution and scaling. PTC held its first global kickoff in eight years, including partners, to align messaging and strategy. The emphasis is on elevating messaging, engaging with C-level executives, and integrating AI into industry-specific talk tracks.

Q:What additional improvements in road map execution are planned, and how does it tie into multi-solution sales?

A:PTC is focusing on improving UI/UX for products like Windchill to enhance user adoption and product data utilization. AI is being embedded into core products like Codebeamer, Windchill, Arena, ServiceMax, and Onshape to deliver unique customer value. The alignment of road map execution with customer needs and sales strategies is a priority.

Q:What is the outlook for PTC's growth following the IoT divestiture and capital allocation changes?

A:PTC is doubling down on its core CAD and PLM businesses, focusing on the Intelligent Product Lifecycle vision. The company aims to build a repeatable and sustainable growth model by aligning its strategy, resources, and messaging. The current year is critical for executing and making this growth durable.

Q:Review of Unclear Management Responses

A:Management avoided providing a direct answer to the specific impact of the Section 174 decision on free cash flow guidance, as the final decision on handling it will be made later in the fiscal year. Additionally, while discussing net new ARR growth guidance, management provided a broad range of scenarios without committing to a specific growth rate, citing macroeconomic uncertainties and potential disruptions.

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Earnings Word Cloud

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