Neil Barua
Chief Executive Officer and Director at PTC
Thanks, Matt. I'm proud of what the PTC team accomplished during our second fiscal quarter. We again delivered solid results, which Kristian will take you through in detail. This quarter continues to demonstrate that PTC is on the right track and that our portfolio of products is resonating with customers. Before going into more detail about our strategy and discussing some proof points from the quarter, I'd like to address our mid-term targets, which we have updated today.
To be clear, we are not changing our cash flow guidance. What we have updated is our mid-term ARR growth targets. We are now targeting constant currency ARR growth in the low double digits over the mid-term, which is consistent with the performance we have delivered over the past five years through varying macroeconomic conditions. In addition, we feel very good about our ability to hit our cash flow targets even while we appropriately reinvest into the business for product development.
This is because we have a disciplined process to manage our internal spending based on the level of ARR growth we are seeing. This year, as an example, our internal spend framework assumed 10% to 12% ARR growth. In addition to adding incremental investment to drive multiyear growth, we are also proactively managing our existing spend. We are able to do this effectively by leveraging the skill sets of our global R&D teams where we could shift the focus of these resources towards the product areas that create the greatest customer value.
In addition, we have confidence in generating increasing operating leverage from our go-to-market and G& A teams. The investments we make are aligned to the market environment and our five focus areas to ensure appropriate resource allocation towards the areas that create the greatest customer value. As an example, we are currently in the process of rebalancing resources primarily in R&;D, away from creating new stand-alone IoT and AR applications to instead support PLM, ALM and SLM growth.
While these are not huge movements of people and there will not be a restructuring charge associated with this, it is an example of how we plan to put a greater focus on driving our priorities more effectively. As a reminder, our five focus areas include: number one, PLM, which has driven primarily by our Windchill product; number two, ALM, which is driven by our Codebeamer product; number three, SLM, which is primarily driven by ServiceMax; number four, CAD, which is driven primarily by Creo; and lastly, number five, our continued focus on SaaS. I'd like to turn now to discuss two of our focus areas to illustrate the significant value we bring to customers.
This quarter, I'll touch on what we have been seeing with customers of our Windchill PLM and ServiceMax SLM products. Starting with PLM. This is product life cycle management, and Windchill is our flagship PLM product. PLM systems tend to be highly configured, really sticky and our mission-critical system of record for our customers. This is software that historically had the function of helping CAD engineers keep track of their CAD files. Part of the reason PTC's growth has been so solid over the last few years is because PLM systems have grown in importance at product companies.
Today's products are more complex, typically with embedded electronics and software and even the mechanical components are now more complex. To drive revenue growth, product companies have become increasingly focused on producing more variants of their products. Mixing certain hardware configurations with other software configurations, while at the same time, compressing the time it takes to get new products to market.
That's a tall order. Simply put, product companies that offer multiple configurations of their products face a diversity and scale challenge. And sooner or later, it becomes clear to these companies that having an advanced PLM system is a strategic necessity. In general, manufacturing companies have a long way to go in terms of their digital transformation journeys. When a product company gets really serious about optimizing and automating their workflows, we tend to see large PLM expansion projects. This creates a step function increase in ARR as customers expand their Windchill deployments in terms of both seats and functionality. This is what we saw in a leading medical equipment company with over $5 billion of annual revenue and 20,000 employees, getting new products to market faster is a top business priority for them.
As a first step, they standardize on Windchill within R&;D across all their business divisions and harmonize their engineering practices related to product changes and configuration management. By doing this, they established a solid engineering foundation that ensures the traceability work performed and updates made for both productivity gains and also to remain compliant with regulations.
Before standardizing on Windchill, this customer did not have an authoritative source of truth for their product data. So whenever they ran into conflicting product data in their system, they lost a lot of time figuring out why that happened and what to do about it. While the first step for this customer was expanding Windchill within R&;D, they also want to accelerate their new product introduction time lines. To do this, they needed to drive earlier collaboration around new products, across other operational functions outside of R& D.
To accomplish this goal, they decided to leverage their Windchill system as a backbone for enterprise-wide collaboration around product data, and they expanded their Windchill deployment to teams, including manufacturing, supply chain, quality, regulatory, compliance and marketing. For example, providing the supply chain team with relevant product data earlier in the process enables any issues around component availability or component pricing to be identified earlier resulting in less need for products to be redesigned or reworked later.
Turning to the second customer example for today, which is about cross-selling service mix, SLM into our base. First, a reminder that SLM is service lifecycle management, and our main product here is ServiceMax, which we acquired a little over a year ago. ServiceMax is the industry leader in field service management for high-value long lifecycle products. Our customers are not only facing complexity challenges, competitive pressures have also increased. Globalization has forced companies to be more efficient if they want to remain competitive.
They are looking for new steady sources of top line growth and margin expansion. In order to drive scalable service revenue expanding their focus with digital tools on their services operations is key. The example I want to highlight here is one of the largest elevator companies in the world with billions in annual revenue. After struggling with disparate disconnected systems that got in the way of providing good service to their customers, they decided to embark on a complete service transformation to improve both the growth and profitability of their services business.
In the future, when their service technicians go into the field to service an elevator, they will know, using the ServiceMax application about the specific elevator so they bring the right parts to the work site. They will know the service history and have service instructions for that specific elevator. And of course, they'll be scheduled and routed efficiently to the job site. Furthermore, the elevator business is highly regulated and the ServiceMax application will ease the regulatory compliance burden by having traceable records of the work performed during service calls.
This is how ServiceMax helps our customers. We've been focused on cross-selling ServiceMax into our strong base of customers where we have established customer trust. As of the start of fiscal '24, we aligned the PTC sales team with the ServiceMax sales thresholds to go to market together. And this collaboration played a big role in getting this deal across the finish line. We also remain encouraged by our other focus areas that I didn't provide examples for this quarter, which are Codebeamer ALM, CAD and SaaS. In each of our five focus areas, we made incremental progress during Q2 towards executing in a scalable fashion and focusing our investments on the product advancements that customers care the most about.
As many of you know, during my transition period before taking over as CEO, I spent time listening to employees, digging into our product strategy, speaking with customers and partners to understand their needs and how we address them. As a result of the time I spend on this, I feel good about our product portfolio and strategy, which guides our five focus areas. You should expect to see a continued emphasis on focusing our resources in the areas that create the greatest customer value and where we have a right to win. I've also started to focus on our operations. I begin to examine where we excel and have room for improvement.
As you know, PTC has been on a multiyear journey to improve efficiencies. But my early observations are that PTC will benefit from a fresh look at innovative ways to continue to drive operational improvements. I'm turning over lots of stones, and we'll look at everything to usher in a new phase of focus and effectiveness across the entire company.
With that, I'll hand the call over to Kristian to take you through our Q2 financial results.
