PTC (PTC) Q1 2025 Earnings Call Transcript todayheadline

PTC (PTC -0.69%)
Q1 2025 Earnings Call
Feb 05, 2025, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to PTC’s 2025 first 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.

Matthew Shimao — Senior Vice President, Investor Relations

Good afternoon. Thank you, Sarah, and welcome to PTC’s 2025 first quarter conference call. On the call today are: Neil Barua, chief executive officer; and Kristian Talvitie, 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, February 5th, 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 presented in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in today’s press release made available on our website.

With that, I’d like to turn the call over to PTC’s chief executive officer, Neil Barua.

Neil Barua — Chief Executive Officer

Thank you, Matt, and good afternoon, everyone. PTC started fiscal 2025 as anticipated with our first quarter results coming in slightly better than the guidance we provided which contemplated a difficult macro and our go-to-market changes. The consistency of our ARR and free cash flow underscores the strength of our diversified business model and our disciplined focus on execution. While we continue to see a sluggish selling environment in Q1, I am pleased with the intensity we have internally to ensure we exit fiscal 2025 with increased momentum.

This includes the focus we have on our go-to-market transformation, as well as many important purposeful product releases, augmented by the work we are doing in AI. I’ll share more on these key business initiatives during my comments today. For fiscal ’25, we’ve reiterated our ARR and free cash flow guidance ranges, and we think the guidance we provided for Q2 and the full year is appropriate. Kristian will take you through the details.

Turning to Slide 4. First off, I’d like to provide an update on the changes we announced last quarter to our go-to-market organization. We’ve made significant progress, reshaping our approach to be vertically oriented and the changes are energizing our team and customers. These efforts are designed to align us with our long-term growth opportunities and ensure we remain well-positioned to deliver value for our customers and shareholders.

As part of this transformation, we welcomed Rob Dahdah as our chief revenue officer in December. Rob’s reputation for excellence in enterprise software is already evident. His impact on the sales team and his focus on performance standards are in early stages and showing promise. Rob is also instilling greater alignment across our sales, customer success and marketing teams, setting the stage for sustained growth over time.

In addition to Rob, we’ve added key leadership roles in growth marketing, technical enablement, sales enablement and customer success. These hires bring fresh perspectives and high standards and their mandate is to raise the bar across our organization. Our vertical approach and organizational changes will take time to bear fruit, and we expect to be hitting our stride as we exit the year. To be clear, these efforts are critical to delivering sustainable, low double-digit ARR growth.

I’m encouraged by what I’m seeing so far. There is a step change in focus and speed, and we will not take our foot off the pedal. Let’s move now to Slide 5, which highlights our product portfolio and strategy. Our customers need to introduce new products at a faster pace and with higher quality even as product complexity increases.

That’s not possible without digital transformation across their workflows, which is what our products enable. We’re focusing our resources and attention on the five core areas of our portfolio that we believe can create the greatest customer value. As a reminder, these five focus areas are PLM, which is driven primarily by our Windchill product; ALM, which is driven by our Codebeamer product; SLM, which is primarily driven by our ServiceMax product; CAD, which is driven primarily by our Creo products; and lastly, our continued focus on SaaS. Today, I’d like to highlight some exciting new advancements across these focus areas.

Starting with PLM with Windchill Navigate View Work instructions. We’re extending 3D digital work instructions from PLM to shop floor employees, enabling our customers to get more value from their product data. In ALM, we’re excited about the upcoming release of Codebeamer 3.0, which will further extend the scalability and capabilities of our market-leading ALM solution. In SLM, just this past quarter, we achieved FedRAMP certification for ServiceMax, a critical milestone that opens new opportunities in our FA&D vertical.

In CAD, Creo 12 leapfrogs the competition in composite structure design and adds thermal physics to our AI-driven generative design engine. Both of these are embedded modules within Creo and open up new use cases for highly innovative designs. And also, in SaaS, Onshape, the industry’s only cloud-native SaaS platform for CAD and PDM also continues to advance, delivering significant new releases at a remarkable place, 17 over the past year, including cloud-native CAM and advanced servicing tools. We are also further differentiating our core offerings with AI, and we’re encouraged by the opportunity this presents.

So let’s get into this area. We believe the industries we serve over time will be fundamentally transformed by AI, and PTC is in a great position to be a leader on this front. The promise of AI is based on access to data and putting it to use. PTC solutions are used to create, manage and share the product data that is at the heart of our customers’ businesses.

This could be design data in Creo, requirements data in Codebeamer, bills of material data in Windchill or service history data in ServiceMax. We are advantaged in that we have decades of experience with how our customers use this data in their everyday operations and the impact that it has on workflows, speed of development, product quality and employee productivity. Our understanding of how this data store, access and use in our products has been our blueprint for applying AI. It’s our secret sauce.

Throughout 2024, I said PTC is taking a practical and value-based approach to AI for our customers. We’ve been hard at work on this front and have identified the most prominent applications and use cases for AI across our portfolio in concert with customer feedback. Our offerings operate in assistant-like capacities allowing customers to interrogate the data in their systems to confirm information, accelerate workflows and automate tasks such as proactively notifying engineers of a design or requirements change. These AI offerings will also have specialized AI agents embedded in them.

These agents will map to specific domain workflows and data sources within engineering, manufacturing and service and they’ll intelligently interact behind the scenes, connecting information across their specialty domains to serve out the best information or complete a task. I’m pleased to share that the first of these offerings will launch next week with ServiceMax. The ServiceMax AI offering includes several agents that assist with scheduling, service delivery and workforce enablement. This offering was in beta mode for much of 2024 with top ServiceMax customers, and now it’s ready for everyone.

These AI agents have access to all the data stored in a ServiceMax instance and technicians can interact with them through natural language. Using the latest GenAI technology, the agents can answer questions about a specific job or asset, automate manual documentation and scheduling tasks and review proactive recommendations for predictive maintenance. The main goal here is greater efficiency for technicians, doing more in less time. As part of this launch, we’re introducing a new ServiceMax AI SKU, which will be the entry point for AI-powered features.

This will be a per user per month subscription charge, which is what ServiceMax customers are used to. Our ServiceMax road map for fiscal ’25 includes other AI-powered features and capabilities based on large language models that can be accessed by the same ServiceMax AI SKU. We believe that more ways of accessing AI-powered features will lead to more adoption and happier customers. This will allow us to learn faster and continue to improve the offerings and pricing models.

In addition, we have been testing a beta version of generative AI features in Codebeamer with Volkswagen Group and Microsoft, which we demonstrated at Microsoft’s Ignite event in November to much fanfare. Based on customer feedback, I’m excited around the real potential for AI here because of Codebeamer importance to software-defined product strategies for so many of our customers. These customers store their hardware and software requirements data in Codebeamer, critical for the overall product development process and for meeting regulatory and safety requirements. These new AI features will help engineering teams improve the quality of the requirements, remove duplicate requirements and compare new requirements against existing quality standards.

We’re also hard at work on incremental AI functionality within Windchill, Creo, Onshape, Arena, Servigistics and other products, and you can expect previews at upcoming events such as HMI and the Paris Air Show. Ultimately, the value they’ll provide the goal of our AI offerings is to draw new customers, encourage upgrades with existing customers and become even more critical to day-to-day workflows. Turning now to some customer examples from Q1 that highlight our core offerings. Moving to Slide 6.

We’ve previously talked about our opportunity to cross-sell Codebeamer ALM to our base of Windchill customers. As products of all types become increasingly software driven. The two products, Windchill and Codebeamer in a customer environment, working together is highly differentiated in our space, an area we are investing in. Today’s first customer story highlights this theme.

This medtech customer has been leveraging Windchill to help drive their business since 2017, deploying it broadly beyond core engineering as a platform to enable enterprisewide collaboration to accelerate time to market. Software-defined products are a focus area for this customer as software has become a key driver of their product differentiation. In fact, their main products are software upgradable and they are able to charge their customers for software upgrades that add value to existing products. At the same time, the opportunity for software-driven product growth comes with new challenges associated with managing the rapid expansion in the number of unique software configurations that need to be developed and updated over time.

This customer needs help managing all of these software variants and releases and that is why they are now focused on modernizing their current fragmented ALM system and expanding their use of ALM. They decided to standardize on Codebeamer, displacing two legacy ALM vendors. Cross-selling was a key part of this deal. This customer is a happy user of Windchill and Codebeamer’s future road map aligns with their future plans.

Furthermore, the med tech vertical is similar to verticals, including automotive and federal, aerospace and defense in that there is an additional catalyst driving the adoption of Codebeamer, regulatory and safety compliance. With the rapid increase of software that is embedded in hardware components, companies are looking for tools to help ensure and automate their regulatory compliance processes. Traceability is required for safety-critical, highly regulated industries and Codebeamer is the most modern ALM product that enables this in an agile development environment. Beyond this specific customer example, 27 of the Top 30 public medical device manufacturers use PTC in some fashion, and we believe we are well-positioned to expand our footprint and grow our Codebeamer business in this vertical.

ALM represents a really interesting growth opportunity across multiple verticals in alignment with our PLM focus. As such, we have been increasing our investments in Codebeamer, working alongside Creo and Windchill to accelerate our leadership. Turning to our next customer story on Slide 7. This customer is in the federal, aerospace and defense vertical and is a good example of a well-established company that continues to invest in digital transformation to drive market leadership in a competitive high-growth environment.

This customer is seeing strong growth in demand and needs to increase production. In addition, their customers are asking for state-of-the-art products that are at the boundary of what is physically possible. We’re talking about designs where a small amount of wind resistance makes a very big difference. To tackle these challenges, this customer needs best-in-class tools and that’s why they chose Creo for design engineering and Windchill as their enterprise backbone for their product data.

Design excellence is in focus for this customer because this is an R&D-centric enterprise and it depends on improvements in design engineering to stay competitive. To further add to their capabilities, they will continue to invest in advanced Creo modules, including Creo Simulation Live, Composites and Generative Design. These modules will help this customer produce lighter weight products with higher quality at a faster pace using less materials. This customer is also continuing to expand its Windchill system as an enterprise platform to drive collaboration around real-time trusted product data.

They have provided Windchill product data access to operational functions, including supply chain, quality, sales and service, usage has gone viral, driving productivity gains. These outcomes are leading to a large follow-on order for more seats, as well as further expansion to employees on the factory floor. Currently, approximately 70% of this customer’s employee base benefits from having access to product data in Windchill, and this customer’s Creo and Windchill ARR has grown significantly with more room to run. In closing, I remain immensely optimistic about where PTC is heading.

Our focused strategic initiatives are gaining traction, and we are driving purposeful innovations that are resonating with customers. Combine that with transformative go-to-market changes and to focus on accountability in everything we do, and you can understand why we are energized. Thank you for your support and interest in PTC. Kristian, over to you.

Kristian P. Talvitie — Executive Vice President, Chief Financial Officer

Thanks, Neil, and hello, everyone. Starting off with Slide 9. Our ARR and free cash flow results in Q1 were in line with our guidance. As you know, we believe ARR and free cash flow were 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 Q1 ’25, our constant-currency ARR using our fiscal ’25 plan FX rates was $2.277 billion, up 11% year over year. In Q1, we saw a continuation of the challenging selling environment we’ve been experiencing for a couple of years now, and this continues to impact close rates. Also consistent with our expectations from a quarter ago, our constant-currency ARR growth in Q1 was impacted by two factors, which we called out on our previous earnings call.

The first factor was the linearity of deferred ARR in fiscal ’25. And the second factor was a couple of contracts that resulted in churn in Q1, which are contracted to come back into ARR later this fiscal year. Moving on to cash flow. In Q1, our free cash flow was up 29% year over year as we continue to invest in our key focus areas at the same time.

Note that the $236 million of free cash flow we generated in Q1 absorbed $11 million of outflows related to our go-to-market realignment, which is in line with our expectations. Turning to Slide 10. Let’s look at our constant-currency ARR growth in more detail. Looking at our product groups, our constant-currency ARR year-over-year growth was 9% in CAD, driven primarily by Creo and 11% in PLM, primarily driven by Windchill, Codebeamer, IoT and ServiceMax.

On a year-over-year basis, constant-currency ARR grew by 9% in the Americas and 12% in both Europe and Asia Pacific. Our ARR growth is based on our unique product portfolio, which aligns with the digital transformation needs of our customers. Despite the overall selling environment, our top line has shown good resilience, supported by our subscription model, low churn rate and the propensity for our customer base to prioritize their R&D investments through challenging times. Turning to Slide 11.

We ended Q1 with cash and cash equivalents of $196 million. At the end of Q1, gross debt was $1.548 billion, and we were 1.7 times levered. We continue to diligently pay down our debt, and we started to buy back shares under our $2 billion share repurchase program. During Q1, we paid down our debt by $205 million and used $75 million of cash to repurchase 383,000 shares of our common stock.

As you all know, we have a $500 million bond that’s coming due in February, which we intend to retire upon expiration with cash on hand and by drawing on our revolving credit facility. Given the consistency and predictability of the business, we aim to maintain a low cash balance. As such, assuming we have excess cash, we expect to return it to shareholders. The authorization we now have in place gives us a lot of flexibility in how we do that.

In line with what we’ve said previously, we currently intend to buy back approximately $300 million of our common stock in fiscal ’25, with another approximately $75 million of repurchases expected in Q2. Our long-term goal, assuming our debt-to-EBITDA ratio is below three times remains to return approximately 50% of our free cash flow to shareholders via share repurchases while also taking into consideration the interest rate environment and strategic opportunities. Finally, our fully diluted share count in fiscal ’24 was 121 million, and we currently expect fully diluted shares to be approximately flat in fiscal ’25. With that, I’ll take you through our guidance on Slide 12.

All of the ARR amounts on this slide are based on our fiscal ’25 plan rates as of September 30th, 2024. For constant-currency ARR, given our differentiated product portfolio, the resilience of our subscription business model, the actions we’ve taken over time to align our investments with market opportunities and allowing that our go-to-market changes are expected to take time to have their intended effect, we expect growth of approximately 9% to 10% for fiscal ’25 and approximately 9.5% for Q2 of fiscal ’25. I’ll get into more detail on constant-currency ARR on the next two slides. On cash flow, we’re guiding to free cash flow of $835 million to $850 million in fiscal ’25, which absorbs the approximately $20 million of cash outflows for severance and consulting fees related to our go-to-market realignment we’ve discussed previously.

We’re not calling out a restructuring charge, so all of this will flow through the sales and marketing and cost of revenue lines on our P&L. As we’ve said previously, this is not a cost-cutting exercise. We’re reinvesting in our go-to-market organization with a focus on the areas we believe deliver the greatest value to our customers. In fiscal ’25, we expect largely similar invoicing seasonality compared to the previous four years.

Based on this and our expected cash outflows, we expect approximately 60% of our free cash flow to be generated in the first half of the year and for fiscal Q4 to be our lowest cash flow generation quarter. For Q2 of fiscal ’25, we’re guiding for free cash flow of approximately $270 million, which absorbs approximately $4 million of the $20 million of total outflows related to our go-to-market realignment. Note that our cash flow guidance is not on a constant-currency basis. So FX fluctuations can have an impact in either direction.

Approximately 45% of our ARR is transacted in foreign currencies and approximately 35% of our non-GAAP cost of revenue and operating expenses are transacted in foreign currencies. So we have somewhat of a natural hedge. That said, significant FX moves can have an impact, and we’re seeing some of that pressure this year. We’ll see how FX rates move as we progress through the year.

But at this point, we still feel comfortable with our cash flow guidance for Q2 and for fiscal ’25. While changes in FX, interest rates and tax regulations can be difficult to predict, we have a high degree of confidence in our free cash flow forecasting process due to the predictability of our cash collections and the disciplined budgeting structure we have in place. Importantly, we’ve maintained consistent billing practices over time. We primarily bill our customers annually upfront one year at a time, regardless of contract term lengths.

So our free cash flow results over time are comparable. Furthermore, over the past five years, we’ve optimized our internal budgeting process. It starts with having a subscription business model that generates predictable cash inflows. Then we begin each fiscal year by funding our business for growth at the low end of our internal ARR forecast.

As the year progresses, we maintain or increase that level of funding based on the growth dynamics we’re seeing. By proceeding in this manner, we’re able to match our investments to the market environment in an agile way, while also delivering predictable free cash flow. That said, we would not do anything that impacts the long-term prospects of the business because of short-term FX movements. Over the medium term, we continue to expect our free cash flow to grow faster than our ARR with non-GAAP operating expenses expected to grow at roughly half the rate of ARR.

A basic tenet of our subscription business model and budgeting process is that there’s natural operating leverage that we benefit from as our ARR grows. To help you with your models, we’re providing revenue and EPS guidance. However, I’d like to reiterate my favorite reminder, ASC 606 makes revenue and EPS difficult to predict for PTC since we primarily sell on-premise subscription and the way revenue is recognized from these contracts can vary significantly based on variables that aren’t necessarily relevant to the performance of the business. I did a teach-in on this subject on our Q4 fiscal ’22 call that you may want to refer to if you’re new to PTC.

You can find the presentation on the investors section of our website. The summary is, we believe ARR and free cash flow rather than revenue and operating income are the best metrics to assess the performance of our business. Next, on Slide 13. Here’s an illustrative constant-currency ARR model for Q2.

This slide shows our sequential net new ARR over the past couple of years. And the column on the far right illustrates that we need $44 million of sequential net new ARR growth to hit 9.5% growth for Q2. Obviously, it’s impossible to predict any given quarter with that level of precision, and we’re being mindful of the macro environment and the go-to-market changes we’re making. As you know, based on our results over the past few years, our net new ARR can be somewhat volatile in any given quarter, given dynamics such as the timing of new bookings, the timing of renewals, the timing of deferred ARR starting, how much of our new bookings in any given quarter starts in the quarter, how much churn we expect in any given quarter, etc.

It’s not unusual to see quarterly volatility in our sequential net new ARR results. Importantly, we expect churn to remain low throughout fiscal ’25. Also, as we make incremental investment decisions over the course of a fiscal year, we continue to focus on our internal forecast for the full year net new ARR growth. Moving to Slide 14.

Here is a similar illustrative model for fiscal ’25. You can see our results over the past three years, and the column on the right illustrates that we need $214 million of net new ARR this year to hit the midpoint of our fiscal ’25 constant-currency ARR guidance range. This range, along with our Q1 results and Q2 guidance, obviously, indicates a back-half loaded year, which is supported by our pipeline and our internal forecast. Our pipeline continues to grow, and we have a significant stable of large opportunities in our Q3 and Q4.

At the midpoint of our range, we would be adding approximately $20 million less net new ARR in fiscal ’25, compared to 2024 at approximately $5 million less than in fiscal ’23 and ’22, Note that fiscal ’24 benefited approximately $10 million due to incremental deferred ARR in that year. Adjusting for that, our fiscal ’25 guidance midpoint indicates approximately flattish net new ARR growth compared to fiscal ’24, ’23, and ’22. I think this point highlights exactly why we’re evolving our go-to-market organization this year. We’re hard at work with this evolution, augmented with new product releases such as the ones that Neil outlined earlier, to ensure that we exit this year with momentum to drive net new ARR growth into fiscal ’26 and beyond.

In the meantime, our business model is resilient, and we continue to believe the right guidance range for fiscal ’25 constant-currency ARR growth is 9% to 10%. In conclusion, PTC has a strong product portfolio and strategy, a track record of operational discipline and clear value creation opportunities. We’re focused on what matters most for our customers, and we are aligning our operations so that we can scale our business in a consistent manner. With that, I’d like to turn the call over to the operator for today’s Q&A session.

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from the line of Jay Vleeschhouwer with Griffin Securities. Your line is open.

Jay Vleeschhouwer — Analyst

Thank you. Good evening. Neil, your various comments on new products or product extensions are quite interesting to me. And one thing, I’d like to ask about, is your comments about the AI products, specifically.

Maybe you could talk about how you’re organizing and investing in those. Is this a segment or product-specific development effort? Is it a central AI group that is managing all of these developments. So there’s some commonality within the company for your AI proliferation. And then, just to finish up on the product side, you alluded to some expansion into manufacturing process.

This is something that two of your larger competitors, Dassault and Siemens have clearly been investing in and seeing new business in. Is this an incrementally important use case or application area for you?

Neil Barua — Chief Executive Officer

Yes, thanks for the question, Jay. On that, I’ll take the second piece. In fact, we had contingent of a number of people, partners, as well as employees today here at the Seaport this week working through the manufacturing process category and value that we’ve got. The way we’re approaching it is we believe extending PLM Windchill data to the manufacturing floor is where our value resides.

And we see that working in conjunction with the MES systems of the world that are deeper into that workflow, we will provide the PLM data to those systems and to ERPs is our approach on the manufacturing side. On the other piece on the AI, as you know, as we’ve talked about, with ServiceMax, we were letting 2024 be able for our teams to self-introduce and innovate and experiment with AI technologies over the course of 2024. You saw the ServiceMax team really doing a nice job. Onshape by the way, has also done a really nice job with that, thinking through all different technologies and approaches for working with customers on betas by which now, as I talked about, ServiceMax GAing on February 10th here, new ServiceMax AI piece, and that was done within the ServiceMax team.

But what we’ve seen with Codebeamer now and the interest that we got out of the Ignite conference and the work we’re doing with Volkswagen and Microsoft for the Codebeamer launch and subsequently, what we’re doing with Windchill and Creo, we are now in the process and have already started an alignment of a group that is actually centered in on making sure there’s alignment across all our AI innovations that are happening in our product segment. So we’re evolving it. As I said, it was always going to be an approach that’s valuable and practical and to make sure there’s value for customers and over time can accrete to PTC. And I think, we’re at the stage where we were crawling last year, we started walking and it’s time to move into the jog to run pace based on the customer feedback we are getting around this.

And this space is evolving very quickly and will be very nimble toward things that are changing around that manner. But we’re energized, as you could tell, around the addition of AI capabilities into what is already great products for the company.

Jay Vleeschhouwer — Analyst

Thank you, Neil. Thank you, Kristian.

Neil Barua — Chief Executive Officer

Thanks, Jay.

Operator

The next question comes from Jason Celino with KeyBanc Capital Markets. Your line is open.

Jason Celino — Analyst

Hey, thanks for taking my question. Actually, kind of building off of Jay’s — one of Jay’s partners. Two of your competitors, your European ones seem to be really battling it out on the PLM side. Ironically, one seems to be taking share from the other.

Where does PTC fall in all this? I mean, have you seen any changes to the competitive environment? Any changes to your win rates? Are you involved in some of these? Or are you happy to just be watching on the sidelines? Thanks.

Neil Barua — Chief Executive Officer

So we are fully in the arena, no being on the sidelines here, Jason, as you know. And I think what I would say is, given we’re three players in this really remarkable industry where all boats are lifting because of these digital transformation needs. I’m glad to see all of us kind of rising to the occasion here. And as I said, very optimistic around how this will translate over the next number of years in front of us for all three of us competitors.

That being said, strategically, our focus from a PTC perspective, is that the nerve center is our Windchill and Codebeamer product capabilities. And we have amazing CAD tools like Creo, obviously, and Onshape, and we have really great aftermarket capabilities in our SLM suite. Our approach, which is differentiated versus the two that you mentioned is how do you really think about as a customer, the utilization of Windchill in coordination with your CAD systems, whether it be Creo or others. And how does software kind of get embedded into what’s happening within product development cycles.

And that’s our approach. And the competitors, as you heard, this past week, they’re battling it out in the manufacturing side, which Jay talked about. We’re not there. We are not going there.

We’re actually just showing our PLM data to the manufacturing floor. So let our two competitors play out the manufacturing side. We’re really focused on where does the product data actually need real-time understanding and democratization of that moving through the enterprise and our Windchill, Codebeamer in conjunction, strategic intent is very differentiated versus our other two competitors, and we feel good about how we’re positioned there.

Jason Celino — Analyst

Perfect. Thank you.

Operator

The next question comes from Ken Wong of Oppenheimer & Company. Your line is open.

Kenneth Wong — Analyst

Thank you for taking my question. Kristian, I just wanted to ask about the trajectory of NRR. When I look at kind of Q2 being a little subseasonal and then I maybe meld that with Neil’s comments that you guys won’t hit your go-to-market stride until Q4. Is it fair to assume that we should be looking at kind of slightly subseasonal net new ARR until you hit that fourth quarter?

Kristian P. Talvitie — Executive Vice President, Chief Financial Officer

Yeah. I think, we are not providing specific Q3, Q4 guidance at this point. But as we said in the prepared comments, we do have a maybe even slightly more than usual back half-loaded year, of course, back half loaded year is pretty typical for PTC, and we’re kind of around the edges there.

Kenneth Wong — Analyst

OK. Got it. All right. Thank you.

Operator

The next question comes from Siti Panigrahi with Mizuho. Your line is open.

Siti Panigrahi — Analyst

Hi. Thanks for taking my question. Neil, on your comments about exiting fiscal ’25 with momentum and maybe grow in ’26, help us understand the progress you have made on the go-to-market alignment side given Rob joined recently as CRO. And also, on the macro side also, we recently saw manufacturing PMI bouncing back 50 — above 50% after two years.

Wondering what other metrics that you look at to feel comfortable on the macro side.

Neil Barua — Chief Executive Officer

Thanks for the question, Siti. I’ll take the first one, and thanks for it. I want to just level set again on reinforcing the two main reasons for why we’re making in the process of all these go-to-market changes. First is to make us more effective at serving our customers.

And the second is to make sure as we scale, we sustain our low double-digit ARR growth target over the medium term, right? So that’s what we are like centered in on from all the changes that are being made. And in terms of the changes in Q1, we’re showing early promise and I’m seeing the teams being motivated, customers reacting to this as well. But like three dynamics are the things we’ve already undertaken and are now well underway in executing. First is in Q1, as we talked about, we verticalized our go-to-market approach.

Top verticals are industrial products, FA&D, automotive, med tech and electronics and high tech. So we did that and all the heavy lifting to make sure the messaging, the account transition, the plans to go execute as we’re starting to do here in Q2 has been put in place. If you watch LinkedIn, you’ll see the marketing messages very tailored around industry verticals. So point number one.

Two is we brought Rob in, our new CRO in early December, Rob’s acclimated real well so far. He’s infusing a ton of discipline and depth into, as an example, our weekly pipeline management processes. He’s working through the overall go-to-market operating rhythm, which should — he’s targeted to make sure we are getting a more consistent and predictable way to grow the business. He’s also — this is really great as Rob’s working with CK, our chief marketing officer, to make sure they’re combined in their efforts to execute across this vertical strategy.

And lastly, just to give you the scope of the change that we are making, we’ve also levered up our overall go-to-market team by adding key leadership roles in growth marketing, enablement that I mentioned on sales and technical customer success. We’ve exited a number of people that we talked about in Q1. We removed layers. We’re starting to add quota-carrying salespeople over the course of this year.

And we’ve elevated really great veteran PTCers to prominent roles as well. All — the reason I give you that backdrop, Siti, and the team here is because that work and the execution now of all the foundation laying that we did in Q1 will now allow for the next few quarters for us to start working that flywheel to get us running at the pace that I believe is the potential of this company. And so far, we feel good about it, but work is ahead of us, and we’re feeling compelled around the opportunity around it. On your second question around macro, yes, of course, we look at the PMI.

Of course, we wake up like it’s Christmas morning where we see a PMI take over 50%. But that being said, what we look at is the pipeline, which Kristian talked about, we feel really good about the back half pipeline, the size of the deals, the quality of the deals. And I’m even more energized by the fact that now that we’re putting a greater discipline around the go-to-market changes, how we could add even greater pipeline opportunities. And the summary of when the macro gets better, when I’ll stop saying it’s a sluggish sales environment, is when we could predictably have higher close rates on an already really good pipeline.

That’s what we are looking at. We’ll, obviously, watch every metric out there from a macro perspective. But internally, that’s the laser focus we continue to look at when we see the macro changing to our favor.

Siti Panigrahi — Analyst

We appreciate that great color and all the LinkedIn posts.

Operator

The next question comes from Tyler Radke with Citi. Your line is open.

Unknown speaker — Citi — Analyst

Hi. Thanks. This is Peter on the line for Tyler. In your presentation, there’s an example of a medtech Windchill customer expanding their seats from 10% to 15% to over 50%.

Just curious how much of an opportunity is there still left like within the existing PLM customer base to see seat count expansion, like outside of that core engineering team and like dive deeper into other departments, whether that’s like quality, supply chain and manufacturing.

Neil Barua — Chief Executive Officer

Yeah. There’s a reason why I start every call since I started last February around PLM and the opportunity there. The expansion of PLM in every call we’ve been talking about examples of customers that are now seeing the value of PLM being enterprise driven, not just a CAD depository — a repository tool, a PDM-like tool. It is now becoming enterprise PLM.

And we have a significant opportunity across our already existing base of customers that are still at early or mid stages of expanding PLM to all the seats, like this example the customer did. So that is the reason why we’re pushing on all cylinders to get enterprise PLM known and integrated with what they could also do with Codebeamer, it is a very critical value prop to our customers. So this is the area that we feel very energized and it gets even better when we create the vertical approach to how automotive companies are using Windchill to expand their utilization of product data moving faster than the enterprise. How does federal aerospace company think about that.

And we are really advanced in that, and we’re just needing to prove it out to more customers to expand. That is a clear priority of the business.

Operator

The next question comes from Steve Tusa of J.P. Morgan. Your line is open.

Stephen Tusa — Analyst

Hey, thanks. I wish I got as excited as you guys do about the macro data like Christmas morning with the ISM or the PMI. On the macro front, how are you seeing the focus on AI impact decisions and budgets more specifically than just what normally happens at this time of the year on budgets?

Neil Barua — Chief Executive Officer

Within our space and I talked to this last — I think last quarter or the quarter before, Steve, most of our customers still need to make sure that they have a structured data set by which you could apply AI tool. So like as for the prior question, when you don’t have enterprise PLM and a number of your engineers and supply chain folks, procurement folks still use antiquated systems or spreadsheets for data flows around product data, it’s very hard to apply generative AI. So we call it get your digital house in order. We really feel, Steve, this is why Kristian and I talked about the robust pipeline we see in the second half of the year, that is inspired by the fact that people need to get going on getting PLM systems across their enterprise, get Codebeamer deployed, make sure they have 2D models move to 3D and model-based definition across their CAD drawings.

And what’s really interesting is when we add the AI concept of Codebeamer as an example, that we are really going to be stoking the flames with to make sure people understand the real value here at HMI, it then creates a necessity for the customer to deploy Codebeamer on their underlying requirements management capabilities so that they actually can get the benefit of a generative AI tool like Codebeamer AI that we’re launching. So Steve, I actually think it’s a good benefit from us because it’s creating our customer base to get their digital house in order. And now, with our additional AI offerings, which we have a secret sauce to give to them in concert with them, I think we are in a good spot.

Stephen Tusa — Analyst

Great. Thanks for the color.

Operator

The next question comes from Joshua Tilton with Wolfe Research. Your line is open.

Arsenije Matovic — Analyst

Hi. This is Arsenije on for Josh Tilton. I just had a question really on the net ARR performance. Look, it was within the range of guidance, but even after adjusting for the timing impact and deferred ARR, it looked like it was below year over year, irrespective of the environment, not really changing, still mixed.

I guess, what occurred, is there some underperformance in the channel versus expectations? Or is it just kind of exactly within what you were expecting even on the channel front and expected still better visibility with growth recovery in the back half? Thanks.

Neil Barua — Chief Executive Officer

Let me start and then, Kristian. This quarter, we guided toward the number and we came in thereabouts. Even from an internal expectation, we saw this. We took into account, the pipeline, the sluggish sales environment, obviously, all the changes we’re making in go-to-market and we structured the guidance as such.

So we are past Q1, it was as expected from our perspective. What we’re really focused in on is let’s get the machinery working, as I mentioned, on the go-to-market side. Let’s get these product releases out, message and customers really buying into it, by which when Rob and CK get the go-to-market transformation really humming that I mentioned in the tail end of this year, second half of this year, we have a real rhythm to close out already a robust pipeline and keep adding to it by which we can now really see a sustainable path for low double-digits ARR growth as we go into next year, which has been our medium and long-term targets. Kristian, anything to add?

Kristian P. Talvitie — Executive Vice President, Chief Financial Officer

Yeah. Just reiterating what you said, we came in pretty close to the — our internal targets. Channel, actually, had a strong quarter this quarter. So all in all, I think it was largely as expected.

Arsenije Matovic — Analyst

Got it. Thank you.

Kristian P. Talvitie — Executive Vice President, Chief Financial Officer

Thank you.

Operator

The next question comes from Nay Soe Naing of Berenberg. Your line is open.

Nay Soe Naing — Berenberg — Analyst

Hey, guys, thanks for fitting me in. I’ve got two questions, if I may. The first one is on the go-to-market changes. It sounded like you made quite a lot of good progress in Q1.

I just want to get a sense of whether that was ahead of what you scheduled or is it pretty — everything is pretty much on track? And then, a secondary question to that is that, Neil, I think if I remember correctly, you said last quarter that you weren’t expecting any major disruption to sales from these go-to-market changes. Now that it’s been a quarter, can we get an update on that front, please?

Neil Barua — Chief Executive Officer

Sure. In terms of where we are in the transformation versus where we thought. I’m pleased with where we’re at. Obviously, I would have liked Rob to join a month earlier when I did, some of the folks that moved out of the company come in, we had a month gap before he joined back in December, but he’s hit the ground running in December, and the team didn’t wait for him to get here, and he was really well acquainted with the plan.

So in all, in general, I would say, a very specific project plan that we’ve had for this transformation, I feel good that we accomplished a lot of the foundation laying in Q1. Now we’ve had our kickoffs in January to get — now that the account transitions are done, comp plans are out, we’ve really — if you’re watching LinkedIn again, we’ve really had a good time kind of launching all this in the January time frame. And as I mentioned, the reason for why we’re talking about the next few quarters is now the framework, the operational discipline Rob’s bringing to bear, the vertical approach, we believe that that just will take some time to catch rhythm. It could happen faster, but my experience would say it takes a few quarters to really get the machinery moving here.

In terms of disruption, what I’d say is, we made a lot of changes in Q1. And the different approach that Rob is taking and CK is taking around this vertical piece is changed. And when we thought about this, this is why we proactively came out to you last quarter and said, look, like in our guidance, we are going to have a framework by which there should be a level of impact from the go-to-market changes in addition to our estimation that the macro remains sluggish, and that’s why we came to that 9% to 10% ARR range that we reiterated again on the call today for the year.

Nay Soe Naing — Berenberg — Analyst

Got it. All makes sense. One quick question, if I could squeeze in, if that’s all right. The AI product launches are upcoming, all sounds very exciting.

But are they going to be limited to just Codebeamer and ServiceMax or will that be across your entire product portfolio?

Neil Barua — Chief Executive Officer

Great question. Stay tuned. The ServiceMax is first one out of the gate. Codebeamer is a big element that we’ve been working on that at Hannover Messe, we’ll be spending a lot more time on.

Obviously, as you know, we’ve been spending time working on this with Volkswagen, Microsoft. We are working through a Windchill applied AI element around parts reuse. Onshape has been doing a lot of work on this. So stay tuned on that, and we got a few more in the hopper, but we’re really focusing on the core areas right now and learning from a very innovative technologies that’s moving.

So we’re learning around that in conjunction with our customers. That’s really important here to show real value versus just a marketing message.

Nay Soe Naing — Berenberg — Analyst

Sounds good. Thank you. We look forward to it.

Operator

The next question comes from Saket Kalia of Barclays. Your line is open.

Saket Kalia — Analyst

Hey, guys, thanks for thanks for taking my question here and fitting me in as well. Kristian, maybe for you, and Neil, please feel free to chime in here, right? So I want to go back to kind of the five pillars that Neil, you talked about in your prepared comments, right? So clearly, there are a few higher growth parts of the business like an ALM or an SLM or a SaaS part of the business just because of their scale, right? I think there are — the strong competitive position drives solid growth in PLM and CAD, but it feels like those three segments have the potential to grow faster. Maybe the question is, where are those businesses in their evolution in terms of being more additive to growth? And then, maybe the other side of that coin, how much of a drag are some of the businesses that maybe aren’t those pillars anymore like in IoT, for example. There are a lot of moving parts in that question, but does that make sense?

Neil Barua — Chief Executive Officer

Yeah. Well, let me take the front end and then Kristian can add any color here. I just want to be clear. The PLM and the ability for us to expand seats like we mentioned in this customer example, there’s a lot of room for us to grow with the best-in-class PLM offering in the marketplace, bar none, in my opinion, and I think in our customer’s opinion.

When integrated with Codebeamer, our ALM suite, we believe that there is a real strong growth potential for those two boats to rise in a significant amount that really creates a differentiated value to the end customer. So I just want to be clear, PLM is part of a very strong growth driver of the business. And we just see many more potentials for that to increase in growth rate as we get this vertical approach, right, as we get the messaging around ePLM really structured in the marketplace. So I’m just not — and we are not just relying on ALM, SLM and SaaS to be the inflector of accretive growth.

PLM actually will pull its way and then some in our view, in terms of the approach that we’re taking. In terms of the drag, you mentioned some of them. As I indicated on Windchill Navigate View Work instructions, where we’re extending 3D digital work instructions beyond the shop floor, guess what, we are using ThingWorx technology to do that. And if you recall nine months ago, we took a number of resources from the stand-alone businesses and moved them to make sure the great technology of ThingWorx, actually, allowing customers to expand PLM and provide more value to different personas.

We’re doing the same on some of those other product sets that don’t really do as well versus our core growth rates to make sure we augment our core growth rates with better capabilities using some of those technologies. That’s how we’re thinking about it from a perspective of how we’re interfacing with our customers and organizing ourselves internally. Kristian?

Kristian P. Talvitie — Executive Vice President, Chief Financial Officer

No. All good.

Saket Kalia — Analyst

That’s super clear guys. Thank you very much.

Operator

This concludes the question-and-answer session. Please remain connected as I turn it to Neil for closing remarks.

Neil Barua — Chief Executive Officer

Thank you, everyone, for joining us and for your questions today. In February, Kristian will attend the Baird conference in Park City, Utah, and Matt will attend the Wolfe conference in New York. In March, I’ll be in San Francisco attending the Morgan Stanley conference together with Kristian and Matt. Also in March, Kristian and Matt will participate in two additional conferences, the LOOP conference, which will be virtual and the Stifel conference in New York.

Thanks again, and we look forward to engaging with you.

Operator

[Operator instructions]

Duration: 0 minutes

Call participants:

Matthew Shimao — Senior Vice President, Investor Relations

Neil Barua — Chief Executive Officer

Kristian P. Talvitie — Executive Vice President, Chief Financial Officer

Jay Vleeschhouwer — Analyst

Jason Celino — Analyst

Kenneth Wong — Analyst

Kristian Talvitie — Executive Vice President, Chief Financial Officer

Ken Wong — Analyst

Siti Panigrahi — Analyst

Unknown speaker — Citi — Analyst

Stephen Tusa — Analyst

Steve Tusa — Analyst

Arsenije Matovic — Analyst

Nay Soe Naing — Berenberg — Analyst

Saket Kalia — Analyst

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