Image source: The Motley Fool.
PTC(NASDAQ: PTC)
Q3 2024 Earnings Call
Jul 31, 2024, 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 2024 third-quarter conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will open for questions.
I'd 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, Adam, and welcome to PTC's fiscal 2024 third-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.
Should you invest $1,000 in PTC right now?
Before you buy stock in PTC, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and PTC wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $635,614!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. TheStock Advisorservice has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of July 29, 2024
The forward-looking statements, including guidance provided during this call, are valid only as of today's date, July 31, 2024, 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. The 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
Thanks, Matt. In Q3, we again delivered solid constant-currency ARR growth, up 12% year over year, demonstrating that our portfolio of products is resonating with customers. Our Q3 free cash flow growth was also solid, rising 29% year over year. Kristian will take you through our quarterly results and forward-looking guidance in detail.
Before we get into more detail, I want to recognize Mike DiTullio, who will transition out of the president and chief operating officer roles at the end of the fiscal year and continue as an advisor to me into 2025. Mike's part in PTC's success has been profound over his tenure of more than 25 years. We certainly wouldn't be the company we are today without him. In addition, he's been a great partner to me as I've stepped into the CEO role.
We've been discussing his future plans, and we both agree that it's the right time to start this transition process. When we start fiscal '25, we'll no longer have the COO position within our leadership structure. At this stage of my CEO tenure, my approach is to be close to the business and be more directly involved with operations and execution, especially for our key priorities. Accordingly, I will be assuming many of Mike's responsibilities.
Additionally, I'd like to reiterate what I said on last quarter's call, which is that I'm turning over lots of stones and looking at everything in this company in order to usher in a new phase of focus and effectiveness across the entire company. To that end, while Mike's change was externally visible because we filed an 8-K, there are numerous other changes that we have already made and are making across many different areas of the organization. This is an ongoing process that we're doing with the intent of driving more effectiveness in the pursuit of our incredible growth potential. Let's move now to Slide 4, which highlights our product portfolio and strategy.
As a reminder, our five focus areas are, one, PLM, which is driven primarily by our Windchill product; two, ALM, which is driven by our Codebeamer product; three, SLM, which is primarily driven by ServiceMax; four, CAD, which is driven primarily by Creo; and five, our continued focus on SaaS. These are the areas where we can create the greatest customer value and are the areas where we are focusing our resources and attention. At the most basic level, our customers need to introduce new products at a faster pace and with higher quality. It is not unusual to hear from customers that they need to shorten their new product introduction timelines in half.
That's not possible without digital transformation across their workflows, which is exactly what our products enable. It's also worth highlighting that we are bringing our suite of software offerings together to help product companies improve their competitiveness. Given the unique breadth and openness of our portfolio, we can enable end-to-end Digital Thread initiatives, which leverage a connected flow of product data across design, manufacturing, service, and ultimately, reuse. Our Digital Thread enables product companies to break down silos, streamline workflows, and achieve interoperability across departments, functions, and systems with a single version of truth.
It also secures the quality, consistency, and traceability of product-related data, ensuring that the data is up-to-date, accessible, reliable, and actionable. With the digital thread, the right data is delivered to the right people at the right time and in the right context across the value chain. The demand drivers for our core offerings are strong, and our differentiated capabilities to drive Digital Thread initiatives are increasingly important to our customers. There is so much we can do to help our customers drive better business outcomes.
To unlock this potential, I have started to focus on our operations, taking a fresh look at ways to continue driving improvements. On last quarter's call, we discussed rebalancing some R&D resources away from creating new stand-alone IoT and augmented reality applications to instead support growth of our core products. That was just the first step. Putting in place an organizational design that enables us to scale more programmatically will set us up for continued success in the future.
We are now primarily turning our attention to optimizing our go-to-market and G&A activities. As I mentioned upfront, we've leaned out the go-to-market management structure, so there are less layers between me and our customers. At this point, we are moving forward without the chief operating officer and chief revenue officer roles, and I will be working directly with our head of sales and head of customer success. We are actively looking at every facet of our business to continue driving alignment and effectiveness across our entire company.
It is about focus on customer value and getting more effective with each dollar we spend to support them and capture that demand. The opportunities to achieve this are significant here at PTC. We are in the early innings of doing this work, and we expect the heavy lifting to continue in fiscal '25. I'd like to turn now to discuss three 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, Codebeamer ALM, and ServiceMax SLM products. Starting with PLM on Slide 5. This is Product Lifecycle Management, and Windchill is our flagship PLM product. PLM systems tend to be really sticky and are mission-critical for our customers.
This is software that historically had the function of helping CAD engineers keep track of their CAD files. Now, PLM is at the epicenter of digital transformation initiatives and product companies. As I explained last quarter, product companies are increasingly focused on compressing the time it takes to get new products to market. And at the same time, their products continue to get much more complex, both to design and produce.
The complexity becomes untenable, quality and time to market gets impacted. Sooner or later, it becomes very clear 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. And when a product company gets really serious about optimizing and automating their design and manufacturing processes, we tend to see large PLM expansion projects and step function increases in ARR as customers expand their Windchill deployments in terms of both seats and functionality.
A good example of this is our Q3 win as a supplier to the automotive industry that specializes in cabling and wiring harness solutions. Given the rise of software-defined vehicles and the importance of electronic wiring systems, the role of this company in the automotive supply chain has grown. It's interesting that this company already appreciated the value of leveraging their PLM system beyond engineering to drive better business outcomes. They are using Windchill within R&D, but they're currently using homegrown tools to drive collaboration across their engineering, supply chain, manufacturing, and quality assurance teams.
Over time, maintaining their homegrown system became unsustainable from both the complexity and cost standpoint. They found it compelling that extending Windchill beyond engineering is easy to implement and provides quick time to value, and they decide to standardize on their Windchill system as their backbone for enterprisewide collaboration around their product data. Turning to Slide 6. The second customer example for today is a medical equipment customer that has been using our Creo CAD and Windchill PLM products for years now.
What's interesting is that this customer wants to unlock value by going with the Digital Thread approach I highlighted a few minutes ago. Our Codebeamer ALM product helped to complete their Digital Thread vision. After being a Codebeamer customer for about a year testing out the product, they decided they were all-in and ready to move forward with their digital thread initiative. And in Q3, they signed a deal with us that will expand their ARR by 190%.
As a reminder, ALM or Application Lifecycle Management helps engineers keep track of product requirements and test to ensure that all requirements are met. This traceability is very important in safety-critical and regulated industries, including the automotive and medical equipment markets, and has been growing in importance across other industries because of the trend toward software-driven products of all types. Products now contain more embedded software than ever. And for many products, there's been an explosion in the number of unique software configurations that need to be developed and updated over time.
Codebeamer is a next-gen platform that enables industrial companies to manage this increasing level of complexity. Codebeamer is differentiated from legacy ALM offerings in two key ways. First, Codebeamer has industry-leading traceability capabilities, and second, Codebeamer also helps with time to market by supporting agile development processes. Consider, for example, what happens when a company has a product in the field that fails.
Regulators immediately want to understand which version of the software that product had and might even demand that more stringent new requirements be placed on new products the company makes. Codebeamer is becoming the solution of choice to deal with this new reality. Codebeamer is a big part of completing the Digital Thread vision for this customer because software plays such a critical role in their new product innovations. Before having Codebeamer, they faced challenges managing their high volume of software requirements, which led to unnecessary delays in getting new products to market as well as exposure to risk.
As a medical equipment company, software innovation and regulatory traceability are front and center for this customer, and the value Codebeamer brought to them gave them the confidence to rely on PTC in a more holistic way. They are expanding their Windchill and Codebeamer deployments and will use Windchill as the foundation for their digital thread. The digital thread is becoming increasingly strategic to customers across many industries, as product companies see the potential to improve their competitiveness by managing the complete life cycle of their products in a more integrated manner. What is most important to thread together can be different for different customers, but having visibility to a more complete picture and being able to gain actionable insights through a Digital Thread of product data is becoming table stakes as the competitive environment continues to intensify across many industries.
Turning to our third customer example for today, which is a ServiceMax SLM win on Slide 7. SLM is Service Lifecycle Management and one of our main products here is ServiceMax. The industry leader in field service management for high-value, long-lifecycle products. In Q3, we landed a new PTC customer because of ServiceMax.
This customer engineers, manufactures, and services, industrial and electrical power systems around the world, and they like that ServiceMax has become part of PTC. The drivers behind this win were similar in many ways to the elevated company win we highlighted on last quarter's call. The point is that many product companies are not only focused on managing complexity and accelerating time to market, they are also looking for new sources of top-line and bottom-line growth. In this example, the customer had a CEO-led initiative to better leverage their installed base to grow aftermarket revenue in a repeatable and cost-effective manner.
Because of organizational silos, the customer currently has fragmented service business operation, which impacts their field service productivity and customer service. They struggle to compete with smaller, local vendors for aftermarket contracts to service their own products. The customer made the strategic decision that it was time to transform their service operations and they selected ServiceMax. The ServiceMax system will be their software foundation and single source of truth for their aftermarket services and customer service initiatives.
Before going out into the field, the ServiceMax application will help their service technicians understand everything they need to know about the specific product that needs servicing so that they can bring the right parts with them. The ServiceMax application will also schedule and route the field technicians efficiently and guide the field technicians through complex procedures. As typical of ServiceMax deals, the selection process was very thorough and ServiceMax came on top based on product capabilities that are aligned with the priorities of the customer to drive more proactive customer service, improved visibility into their installed base of products, drive higher aftermarket attach rates and improve field technician utilization. Lastly, we also remain encouraged by our other focus areas that I didn't provide examples for this quarter, which are CAD and SaaS.
We have been reinvesting in our business, consistently growing our annual R&D investment footprint to provide greater value to our customers. In Q3, we made incremental progress in each of our five focus areas toward executing in a scalable fashion and focusing our investments on the product advancements that customers care the most about. As I emphasized earlier, you should expect to see a continued focus on aligning all our resources across all operational functions in this company behind our five focus areas. This is foundational work, and we will be disciplined about seeing it through.
It will take time and progress may not be linear, but we will leave no stone unturned, as I said, as we focus on scaling our business and further improving the consistency of our execution. With that, I'll hand the call over to Kristian to take you through our Q3 financial results and future guidance.
Kristian P. Talvitie -- Executive Vice President, Chief Financial Officer
Thank you, Neil, and hello, everyone. Starting off with Slide 9. PTC, again, delivered solid financial results in terms of both ARR and free cash flow in a continued challenging selling environment. As you know, we believe ARR and free cash flow are the most important metrics to assess the performance of our business.
To help investors understand our business performance, excluding the impact of foreign exchange volatility, we provide ARR guidance and disclose our ARR results on a constant currency basis. At the end of Q3, our constant-currency ARR was $2.125 billion, up 12% year over year and within our guidance range. Our free cash flow results were also solid, up 29% year over year, while at the same time, continuing to invest in our key focus areas. However, we came in a bit below our guidance of approximately $220 million due to timing.
We have a high degree of confidence in our cash flow guidance and targets due to the predictability of our cash collections and the disciplined resource allocation structure we have in place. With the timing issues resolved, we continue to expect free cash flow of $725 million in fiscal '24 and continue to be confident that our business model positions us to deliver solid, predictable results. Turning to Slide 10. Let's look at our ARR growth in more detail.
Starting with our product groups. In Q3, we delivered 10% constant-currency ARR growth in CAD and 13% growth in PLM. Despite the overall demand environment, which has been sluggish for a couple of years now, our top line has shown good resilience. Our solid ARR growth is supported by our unique portfolio with a solid footprint in high-growth segments of the market and the digital transformation journeys of our customers.
These underlying strengths are further supported by our subscription model, our low churn rate, and the propensity for our customer base to prioritize their own R&D investments through challenging times. Moving to our ARR by region. Our constant currency organic ARR growth was solid across the Americas, Europe, and APAC, with growth in the low- to mid-double digits. Across all regions, our year-over-year organic constant-currency growth rates in Q3 were similar to the growth rates we saw in Q2.
Moving to Slide 11. First of all, given the consistency and predictability of our free cash flow, we aim to maintain a low cash balance. As you know, 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. Given the strategic acquisitions, namely ServiceMax and Codebeamer that we've done over the past couple of years and the debt we took on to fund them, we paused our share repurchase program.
As we said before, we intend to use substantially all of our free cash flow to pay down our debt in fiscal '24. And as we've been saying, we'll revisit the prioritization of debt pay-down and share repurchases when we get to fiscal '25. We were 2.2 times levered at the end of Q3. During the quarter, we paid down our debt by $195 million and ended Q3 with cash and cash equivalents of $248 million and gross debt of $1.8 billion.
We continue to expect that we'll end fiscal '24 with gross debt of approximately $1.7 billion. Lastly, we expect fully diluted shares of approximately $121 million in fiscal '24, up by approximately 1.5 million shares year over year. With that, I'll take you through our guidance on Slide 12. Reflecting our year-to-date performance and our outlook for Q4, we're updating our fiscal '24 constant-currency ARR guidance, lowering the high end of the range by $20 million, and now expect to end the year with constant-currency ARR growth of 11% to 12%.
It's worth noting we're updating our revenue guidance accordingly, reducing the high end by $20 million. We're reiterating our free cash flow guidance of approximately $725 million in fiscal '24, given our year-to-date performance and Q4 outlook. For Q4, we're guiding for free cash flow of approximately $83 million and constant-currency ARR of $2.2 billion to $2.22 billion, which corresponds to year-over-year growth of 11% to 12%. We believe we've set our guidance appropriately.
I'll get a little more into ARR guidance details on the next slide. But before I do, I'd also like to reiterate my favorite reminder. To help you with your models, we're providing revenue and EPS guidance. But ASC 606 makes revenue and EPS difficult to predict for PTC since we primarily sell on-premise subscriptions.
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 '22 call that you may want to refer to if you are new to PTC. 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. 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. Moving to Slide 13. Here's an illustrative constant-currency ARR model for Q4.
You can see our results over the past 11 quarters and the column on the far right illustrates what is needed to get to the midpoint of our constant-currency ARR guidance. The illustrative model indicates that to hit the midpoint of our Q4 guidance range, we need $85 million of sequential net new ARR growth. This is approximately $10 million more than we added in Q4 of the previous two fiscal years. And this year, we expect to benefit from Codebeamer cross-selling ServiceMax with an aligned and enabled sales force and approximately $5 million more in deferred ARR than we had in Q4 of fiscal '23.
We think our guidance range for Q4 and the full year balance both risk and opportunity. And looking out a little further ahead to our fiscal '25, and here, keep in mind that we're still in the middle of our detailed planning process. But I would not be surprised if our official fiscal '25 guidance, when we give it next quarter was in the low double-digit ARR growth range, consistent with our medium-term targets and in line with our performance over the past couple of years, again, balancing both risk and opportunity. I also anticipate our free cash flow guidance would be somewhere within the $825 million to $875 million range we previously communicated.
Additionally, as we think about capital allocation, I think you will see us resume share repurchases in fiscal '25 in and around the $300 million level as we balance debt paydown with returning capital to shareholders. Obviously, we'll provide our official guidance on next quarter's call, but we just wanted to provide some directional thinking that we feel pretty comfortable with given the recurring nature of our business model and the budgeting process we have in place. In conclusion, PTC has a strong portfolio, solid strategy, and a great team of people with deep expertise and strong customer relationships. We're focused on disciplined and consistent execution to ensure we deliver on the value-creation opportunities we have ahead of us.
With that, I'd like to turn the call over to the operator to begin the Q&A session.
Questions & Answers:
Operator
Thank you. [Operator instructions] In the interest of time, please limit yourself to one question only. If you have an additional question, please return to the queue. And with that, our first question comes from the line of Siti Panigrahi with Mizuho.
Your line is open.
Siti Panigrahi -- Analyst
Thank you. Thanks for taking my question. Neil, I want to ask about the demand environment. How has that changed over the past quarter? Has it gotten worse or still the same? And when you look at the environment turning around, what do you need to see on the macro data, or which leading indicator you would look at before you start feeling more confident about things turning around?
Neil Barua -- Chief Executive Officer
Sure. On the first question, in Q3, we saw very small puts and takes across all geographic regions and verticals. Absolutely, no discernible change in any trend there. As we've been saying very consistently, the demand environment in Q3 was consistent with what we've seen over the past couple of years.
Good thing, by the way, is our pipeline going to Q4 is strong. In terms of what I'm looking for, what Kristian and I are looking for in terms of areas where we would feel the environment is getting better is how we think about close rates, and consistently for the past few years, close rates have been difficult and challenged. Once those close rates on a growing pipeline become better is my indication of when the environment is better for PTC in terms of securing the deals in a more accelerated manner. But I absolutely feel good about the demand, in fact, our sequential growth and pipeline is increasing and so we're focusing on closing deals and how they actually attribute to in-quarter ARR.
Siti Panigrahi -- Analyst
Great. Thank you.
Operator
Our next question comes from the line of Tyler Radke with Citi. Your line is open.
Tyler Radke -- Citi -- Analyst
Yeah. Thank you very much for taking the question. You know, I guess on the demand environment, understandably, it's choppy out there. We heard from Microsoft yesterday talking about EMEA weakness.
But could you just talk about the trends that you saw play out throughout the quarter? And I know that you're making some go-to-market tweaks as well with taking on more of the customer work, Neil, but how much of this do you think is execution versus macro? And what are you assuming on the environment here in Q4? Thank you.
Neil Barua -- Chief Executive Officer
Yeah. First of all, I'm actually pleased with the performance that we delivered in Q3. In terms of over the course of the quarter, again, very small puts and takes of any change in trend across geos and verticals. I think we've been focusing and executing quite well in this challenging environment.
And again, to be clear, no real change in terms of what we're seeing in terms of customer behavior. And again, maybe different than others on other calls, but I've been very consistent around the environment has been challenged. Even post Q2, we mentioned its challenged, and it remains as such because of this point around close rates. And going into Q4, the way in which we're thinking about this is, and I'll take the piece around guidance.
The update to the high end of our guidance takes into account how the deals we landed in Q3 will show up in Q4 ARR. It also factors in the close rates we expect in Q4 based on the further maturation of deals in our pipeline, in our view, how those will impact Q4 in-quarter ARR. So, that guidance range, we feel, is appropriate, balancing up the risk and opportunity from what we see from now to the end of the quarter.
Operator
Our next question comes from the line of Joe Vruwink with Baird. Your line is open.
Joe Vruwink -- Robert W. Baird and Company -- Analyst
Great. Thanks for taking my question. Neil, maybe you can expand a bit on what you've observed at PTC and also maybe feedback from customers where ultimately operating a flatter org structure and taking on the roles and responsibilities you outlined at the start, where that makes the most sense and you see an opportunity to actually move results forward.
Neil Barua -- Chief Executive Officer
Sure. A consistent theme from my prior calls around where are we putting wood behind which arrows. And that is driven by our belief around where we could drive the most customer value and where we have the highest right to win. And so, that's how we set forward the five priorities of the company that I've been consistently talking about for the last couple of quarters.
We did some repositioning of product and R&D capabilities in IoT ARR back to core products to reinforce those priorities to deliver a better outcome of those priorities over the next number of years. The same is happening now across all these other functions, in particular, now the focus is around the go-to-market function by which it's not around efficiency, it is around, are we using every person we have in this company effectively toward those five priorities? And so, we're working through making sure whoever is targeting PLM expansion capabilities is adequately enabled, is adequately incented, is structured in our go-to-market model by which they can be successful that delivers value to the customer and returns to the company. And so, that's what we're working through. And the other stones that we're kind of working through is because we've set these priorities very clearly, we're all really energized by these priorities because we're seeing, to your question, a lot of customer demand and pull from it, we're looking at anything we're spending money in that is -- can be better utilized using that same dollar on things that could accelerate those priorities, whether it'd be greater R&D capabilities, which we've been doing it, whether it'd be making sure we position the rest of the organization to serve those customers toward those five priorities.
So, that's how we're looking at it currently. And again, much work to do, early innings, and heavy lifting will continue into 2025.
Operator
Thank you. Our next question comes from the line of Stephen Tusa with JPMorgan. Your line is open.
Stephen Tusa -- Analyst
Hey, guys, good evening. So, obviously, a lot of different crosscurrents here in the macro, whether it's the kind of budget questions around AI and things like that. Obviously, your key competitor had quite a significant mix. They talked about geopolitics a bit, I guess, you guys aren't seeing that.
Can you just remind us of maybe how you differ from Dassault and maybe what makes your model a bit more resilient perhaps? And are you seeing kind of geopolitical issues? Or when you talk about the macro, is it something just a bit more, I guess, financially or business related to customers being a bit more cautious on budgets like we've been hearing for the last year and a half, two years?
Neil Barua -- Chief Executive Officer
Sure. Good question. Look, from a PTC standpoint, again, I just want to keep reiterating this. We did not see any discernible change in trend, among geographies and verticals.
Whatever our competitor mentioned, we didn't really see that same dynamic happen in that vertical at PTC. I'm not sure what we're doing different than them in particular, but we didn't see that dynamic play out here. Partly, we've been very consistent around making sure everyone is clear and the way we're actually operating is within a challenging sales environment. And we've been seeing that and not getting ahead of our skis thinking it's going to change but being -- operating under that environment.
And I think that discipline with a great product portfolio, I think, is differentiated across the industry, with a movement toward building the business toward these five priorities that is more consistent to create the execution. Kristian called is why I believe we're continuing to deliver the types of results we are and why Kristian and I are looking at Q4 and making sure with this growing pipeline, we continue to make sure we deliver on the commitments that we're making and drive customer value.
Stephen Tusa -- Analyst
And then I guess just to follow up -- great answer, first of all, but just the follow-up, looking to next year, obviously, you guys have pretty high confidence in, I guess, giving us a framework for next year in this environment. What would it -- what kind of environment are we talking about to kind of get below to the double-digit range in ARR? And then secondarily, how close are you guys to having the playbook ready to respond on the cash side, like you said, you would be able to in that environment. I don't think we're going to like that type of scenario, but it seems like your model is very defensive from this perspective, it would take a lot to kind of drive it to that point. Just curious what the mindset is around defending the cash at this stage.
Neil Barua -- Chief Executive Officer
Do you want to start, Kristian?
Kristian P. Talvitie -- Executive Vice President, Chief Financial Officer
Yeah, sure. I mean, here, again, I don't think we really want to get into the nitty-gritty details of the guidance for next year. As I said, we're still working through detailed planning process. That said, I think that we've seen our, we'll call it, budgeting process play out here this year.
As we've articulated, we started the year with a range of expected outcomes on the top line. We started the year with a spend run rate. And as we progressed through the year, as we get more comfortable, we released more incremental funding into the system. So, that's how we try to gauge it, and we would continue to try to do that, and we're frankly doing it right now, already in preparation for next year and that's how we're thinking about it.
So, we're really talking about modulating incremental expense into next year and hopefully not putting ourselves in a situation where we've where we've got to actually pare back expense. I think we feel pretty comfortable about it.
Stephen Tusa -- Analyst
Great. Thanks for the detail.
Operator
As a reminder, please limit yourself to one question only, and if you have an additional question, please return to the queue. Our next question comes from the line of Adam Borg with Stifel. Your line is open.
Adam Borg -- Stifel Financial Corp. -- Analyst
Awesome. And thanks so much for taking the question. Neil, maybe for you. It's great to hear the continued kind of turning over all the stones as you take a fresh look at the entire organization.
How do we think about -- especially so as we think about go-to-market and potential changes there, how do we think about the potential risk of disruptions from those changes in the near term? And how is that contemplated in guidance? Thanks so much.
Neil Barua -- Chief Executive Officer
Yeah. You know, one of the benefits of having been here now 18 months, maybe a little bit longer, is I've had the time to process, be part of the organization to think through and observe and part of a number of customer conversations, etc., have had a great transition process. Mike DiTullio, as I mentioned, and I feel confident that my thoughtfulness, our thoughtfulness around what to change from a position of strength, not a position of weakness is actually a very exciting thing for many people here at PTC to make sure we're enabling them to be as successful as they can across these five priorities. So, I actually believe that the work we're doing fundamentally is going to be a huge value to a lot of people here at PTC to unleash even greater work that they've been doing.
And so, to that end, these are going to be very intentional moves. I've done it a number of times in my career, and it's to drive more effectiveness. And I feel really good about our ability to manage through these changes.
Adam Borg -- Stifel Financial Corp. -- Analyst
That's awesome. And maybe just a quick housekeeping for Kristian. I know we lowered the top end of the ARR range by $20 million, and I apologize if I missed this. I think last quarter, it was lower due to some ARR contracts being renegotiated or more deferred ARR.
Is that what we're talking about here? Or is there something different? And I apologize if I missed this. Thanks again.
Kristian P. Talvitie -- Executive Vice President, Chief Financial Officer
Yeah. No, there were no other changes to the deferred ARR, like we talked about last quarter. This was simply reflecting, and this is I think what Neil was saying earlier, reflecting how our Q3 results came in and the composition of those deals, and how they roll into ARR in Q3 and Q4 and beyond. And the outlook to the best of our ability for Q4 as well, given the deals that are in play in the pipeline and expectations around what the composition of those deals is going to look like as they materialize into ARR.
Operator
Our next question comes from the line of Joshua Tilton with Wolfe Research. Your line is open.
Joshua Tilton -- Wolfe Research -- Analyst
Hey, guys. I actually want to follow up on that last question. I want to ask it a little differently. Kristian, I always appreciate your accounting teach-in, and one of the things you emphasize is the relationship between ARR and free cash flow.
And I guess if I look, free cash flow missed by $10 million in the quarter, and you're also lowering the midpoint of the full-year ARR number by $10 million as well, kind of implies that there was a $10 million deal or $10 million of ARR that should have landed this quarter and is no longer in the guidance. I guess, is that the right read. And if so, is that because the deal is going to close in later periods? Or is this just you guys being prudent? Any color there would be great.
Kristian P. Talvitie -- Executive Vice President, Chief Financial Officer
Yeah, sure. It's a great question, Josh. No. And that actually is not the case at all.
On free cash flow is actually simply timing. I mean, here, just being completely candid, we had a bunch of collections that were due in the last two days of the quarter, the last two days of the quarter happened to be a Saturday and Sunday. We were hopeful that we were going to get that cash in on Friday or before, but obviously, customers have a contractual right to actually pay it the following week. And so, that's what happened on the cash flow.
We were hopeful that we were going to get it on the week before. We've now got that cash. So, hence, there's no change to the cash flow forecast for the year. That's the timing issue.
Joshua Tilton -- Wolfe Research -- Analyst
Super helpful. And just to confirm, also more of a clarification, I think as heading into the second half, you guys still had $10 million more in deferred ARR in the balance this year versus last year. Is all $10 million of that remaining with some of that recognized this quarter? Can you just help us understand that?
Kristian P. Talvitie -- Executive Vice President, Chief Financial Officer
Yeah. It was about half of it in last quarter and half of it this quarter. Sorry, let me -- half of it -- I'll be more precise. Half of it in Q3 and about half of it in Q4.
Joshua Tilton -- Wolfe Research -- Analyst
Super helpful. Thank you, Kristian.
Operator
Our next question comes from the line of Saket Kalia with Barclays. Your line is open.
Saket Kalia -- Barclays -- Analyst
OK, great. Hey, Neil. Hey, Kristian. Thanks for taking my question here.
Neil, maybe for you. It feels like close rates is one of if not maybe the major reason here for just the revised ARR guide. And so, the question is, can we maybe talk about that metric anecdotally, of course, for ServiceMax and Codebeamer cross-sell? I mean, I know the team really enabled PTC sellers to go after those opportunities this year. How has that sort of trended? And how are you feeling about those businesses when you think about close rates?
Neil Barua -- Chief Executive Officer
Yeah. Let me make a piece of this clear around close rates. Our assumption going into Q4 about close rates and looking at a deal-by-deal maturation of the pipeline is no different than our view of close rates that have been evident for the most part in general for the last few years. The dynamic of what we're doing on Q4 right now in terms of guidance, how we think about it is we now know what happened in Q3.
We now know the composition, meaning how the deals that we closed in Q3 are going to actually go into ARR, whether they all came into Q3 or whether part of it goes into Q4 ARR or part of it goes into the next subsequent years. So, now, we have that data point. We have now made the assessment around all the deals that are maturing in the pipeline and the close rates is consistent with what we've seen in prior quarters and years. So, it's a continued challenge on the close rate, not worse, not better.
And we've made assumptions around how that ARR when it closes, actually comes into ARR. And that's the area where the precision is difficult for the company, given is it going to be a deal that ramps over time. Is it all going to come into one quarter? And looking at all those factors, we determined the guidance range that we put with the risk and opportunities balanced. In terms of Codebeamer and ServiceMax, Saket, what I will say anecdotally is, we are continuing to be pleased, excited about the buildup and momentum of Codebeamer and the interest and reception we're getting from the market, the reception that we're getting from customers that are testing out like the example that I gave to you that are thinking about broadening the expansion of the utilization across the company Codebeamer.
And on ServiceMax, the business is starting to work in terms of continued buildup of really good pipeline as well as close that happened for the last year to date through Q3 and quite a lot of very interesting deals that we're assuming will close in Q4 to allow for a really strong jump off into next year that we will make sure we continue. So, on both fronts, all systems go, and we're very pleased so far with the momentum we still have to close and continue that momentum to sustain over the next number of years.
Saket Kalia -- Barclays -- Analyst
Got it. That's really helpful. Thanks, guys.
Operator
Our next question comes from the line of Jason Celino with KeyBanc Capital Markets. Your line is open.
Jason Celino -- KeyBanc Capital Markets -- Analyst
Hey, thanks for fitting me in. How are you baking in -- well, let me rephrase. Your customers decision-making, whether it's close rates or pipeline or whether they want to expand, how are they baking in the U.S. election into that process? I mean, you serve some industries like automotive and aerospace and defense that are sensitive to that.
And then how are you baking that into the guidance framework, if at all? Thank you.
Neil Barua -- Chief Executive Officer
Yeah. Hey, Jason. It's the first time in my career where I've been spending so much time with executives that at customers and across the world, and they ask me who's going to win the election in the U.S. It's a consistent and quite a confusing time for everyone around what happens in the U.S.
That being said, I think, for the most part, customers are understanding that whoever gets put in the office, a lot of things don't dramatically change depending on the composition of what happens across all different constituents of the U.S. election. And so, part of what we're seeing and part of what we're continuing to assume and hearing most importantly from our customers is we got to get on with digital transformation, regardless of if this person's an office or that person's office because we are not becoming competitive if we can deliver products faster with better quality and a more sustainable cost structure, given all the things that are happening around the world. I will say that geopolitics, the environment, the uncertainty, wars have been consistent for the last number of years, which is why we continue to say we've not said that the environment is getting better.
We don't believe it's getting worse based on this, and we're going to navigate through this time period, and we've thought through that in the way in which we set the guidance here.
Jason Celino -- KeyBanc Capital Markets -- Analyst
Perfect. Thanks, Neil. Very helpful.
Operator
Our next question comes from the line of Matthew Hedberg with RBC Capital Markets. Your line is open.
Mike Richards -- RBC Capital Markets -- Analyst
Hey, guys. It's Mike Richards on for Matt. So, I appreciate the early look into 2025. So, maybe how should we be thinking about the drivers of that low double-digit growth and how that sort of evolves from this year as it pertains to the five focus areas and, even acknowledging that it's a decade-long journey for SaaS, maybe how that might contribute more to growth as we move forward? Thanks.
Neil Barua -- Chief Executive Officer
Yeah. Again, I mean, I think we'll get into providing more details when we give the official fiscal '25 guidance next quarter.
Operator
Our next question comes from the line of Jay Vleeschhouwer with Griffin Securities.
Jay Vleeschhouwer -- Analyst
Thank you. Good evening. Neil, Kristian, one of our observations about your largest market, historically, I mean, with the CAD market is that over the last year, the share shifting that we had seen in the prior few years which worked out to your benefit has somewhat abated. In other words, share seems much more stable of late in that market.
If it should turn out that the CAD market becomes increasingly competitive, how do you think about your competitive responses, perhaps on pricing or packaging or some other means? And again, if it were to become more competitive, how might that affect your broader cross-selling initiatives or ability to close cross-selling? And then secondarily, Neil, I like your comments on the internal stone turning. Could you elaborate on the R&D changes that you're making, particularly in terms of the common platform that you've been working on, namely Atlas, which we frankly have not heard a good deal about lately? Thank you.
Neil Barua -- Chief Executive Officer
Sure. You know, on the first part, on CAD, we have two awesome ways in which we're addressing the market. As you know, Jay, we've got Onshape, the industry's only cloud-native CAD application, and we got Creo, which is awesome, as you know. And so, those two together, we feel have competitiveness.
I'm not talking about Onshape. It's a great part of our business, building momentum. We feel very good about our competitive positioning. It's starting to scale.
I will talk about it when it has a meaningful impact at an aggregate level to the financials of the business. But strategically, we continue to make sure our chips are being placed to ensure that Onshape is successful against some of the other solutions that are out there from our competitors. And then you got Creo, which is a very strong tool. And our belief is the connection of Creo to Windchill and ultimately, Codebeamer, the three together is a very strong value proposition for many customers thinking about how they think about the Digital Thread.
So, Jay, I would say on the CAD business, we're ready, we're competing, we're in several different dynamics of deals that might cause share shifts, might not. As you know, it's not an easy business to do share shifts, but we believe we have a very comprehensive offering on both fronts industry-leading scale player in Creo and Onshape, which is starting to hit their stride here, and we're going to continue to focus in on it. On your point around turning over stones on R&D, what I'll say is, we're focusing in, particularly on go-to-market and G&A, we're making sure on R&D, we are focused in on making sure the team is aligned to deliver on the road map. Every single one of our customers, Jay, is saying, "We love your products.
We love where you're going in terms of building, feature functionality, scalability of those products. Just do it." And so, job No. 1 for the R&D team is keep doing that and do it with precision, energy because our customers need it. So, that's number one, including, by the way, the Atlas team because that is a fundamental layer by which we have the ability to offer our SaaS offerings.
And two, continue to build innovative offerings. We're continuing to build ways in which we could add generative AI into our products. We're continuing to do -- we just released an awesome integration of ServiceMax to Windchill on time with great quality on July 11 of this month. We have another release of a ServiceMax ability to now have ServiceMax able to be sold alongside Windchill in the federal space.
So, we're continuing to build some of these innovations, including with Codebeamer, Windchill and Creo and Onshape, to make sure we're at the best-in-class here. I'll pause there.
Jay Vleeschhouwer -- Analyst
Very good. Thank you both.
Operator
Our next question comes from the line of Clarke Jeffries with Piper Sandler. Your line is open.
Clarke Jeffries -- Piper Sandler -- Analyst
Hello. Thank you for taking the question. I wanted to ask Kristian, we're asking a lot of questions here about close rates and pipeline, but maybe going back to that framework that you've said around ARR and what you need to believe on a sequential ARR basis. I just wanted to maybe have the discussion on -- in relation to that $85 million for Q4, you called out the $5 million related to some of those existing contracts.
What is the percentage in that $85 million that's going to come from uplift or pricing drivers that are relatively in hand versus new sales or upsells that might be more sensitive to execution? Thank you.
Kristian P. Talvitie -- Executive Vice President, Chief Financial Officer
Yes, sure. So, I guess we could take a stab at it. And I think I would think about it in a few different buckets. There is some benefit from pricing.
As you know, we tend to be pretty customer-friendly on that front, but there's certainly some benefit from that. I would say, consistent with what's been in the past couple of years. Then I would probably start moving up the stack and thinking about the channel. The channel has been a pretty consistent pro forma, really for a number of years now, and we haven't really seen any meaningful changes in one direction or the other.
That would indicate a change in the trend there. So, that gives us some level of comfort. Then I would move up also more into our kind of base business and base transactions. And again, the kind of volumes that we've seen there have been pretty consistent.
And then lastly, you get to the large deals, and that's really where the volatility is in any given quarter. And of course, it's also those large deals where you see the other dynamics come into play, not only is it going to close in the quarter, but if it closes, how much of it's in quarter start? Is it a ramp deal? Is it all starting in the quarter, etc.? And that's the part that's on a quarter-by-quarter basis, difficult to predict with a high degree of certainty.
Clarke Jeffries -- Piper Sandler -- Analyst
Perfect. Thank you very much.
Operator
Thank you. I will now hand the call back over to Neil Barua for closing remarks.
Neil Barua -- Chief Executive Officer
Thank you, everyone, for joining us today. Here's what's ahead specific to investor conferences: August 20, Steve Dertien, our CTO, will join the Rosenblatt Virtual Tech Summit Conference; September 4, Kristian will be at the Citi Global Tech Conference in New York. On behalf of the team, thank you again, and we look forward to engaging with you.
Kristian P. Talvitie -- Executive Vice President, Chief Financial Officer
Thanks, everybody.
Operator
[Operator signoff]
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
Siti Panigrahi -- Analyst
Tyler Radke -- Citi -- Analyst
Joe Vruwink -- Robert W. Baird and Company -- Analyst
Stephen Tusa -- Analyst
Steve Tusa -- Analyst
Kristian Talvitie -- Executive Vice President, Chief Financial Officer
Adam Borg -- Stifel Financial Corp. -- Analyst
Joshua Tilton -- Wolfe Research -- Analyst
Saket Kalia -- Barclays -- Analyst
Jason Celino -- KeyBanc Capital Markets -- Analyst
Mike Richards -- RBC Capital Markets -- Analyst
Jay Vleeschhouwer -- Analyst
Clarke Jeffries -- Piper Sandler -- Analyst
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
The Motley Fool recommends PTC. The Motley Fool has a disclosure policy.
