Parametric Technology Corp. (PTC) reported fiscal third quarter revenue of $292 million, nicely ahead of earlier guidance of revenue between $275 million and $285 million and up 20% from a year ago. Some of the upside came from MKS, which contributed $6 million in the month since the deal closed. Currency fluctuations negatively impacted revenue by $0.5 million, so it’s fair to say that PTC’s core business performed ahead of expectations in the quarter.

In prepared remarks, CEO Jim Heppelmann said, “With the launch of Windchill 10.0 this spring and Creo 1.0 in June, we have had an exciting year from a product portfolio perspective. In addition, the acquisition of MKS adds important breadth and depth to our already robust product portfolio, and further extends PTC’s long-term growth opportunity. Given the market momentum we are experiencing and the extent of our technology leadership position, we remain confident in our ability to achieve our longer- term goal of 20% non-GAAP EPS CAGR through 2014. Based on the market momentum we are seeing, the strength of our pipeline and investment to increase sales capacity, we continue to be excited about our FY’12 growth opportunity.”

PTC currently divides its financial reporting world into quadrants, with the top tier being Direct sales, the bottom, Indirect; the left is Desktop (CAD) and the right is Enterprise (PLM), leaving us with Direct/Desktop, Indirect/Desktop and so on. In its FQ3 prepared remarks PTC spelled out that Desktop revenue includes Creo Elements/Pro, Mathcad and some of Creo Elements/Direct and Arbortext; while Enterprise includes revenue from Windchill, Creo Elements/View, a portion of Arbortext and (MKS) Integrity. The company notes that there are differences in these definitions when compared to prior periods — apparently, as an account “changes between the Direct and Indirect classification, [PTC] reclassify their historical revenue to align to the current period classification. The reclassifications of prior quarter and annual Direct and Indirect and Desktop and Enterprise revenue were not more than 2% for any single quarterly or annual reporting period.” I can readily understand how an account might start out indirect and wind up direct, but notice that they didn’t explain why some products moved between Enterprise and Desktop …

On to the highlights (as always, GAAP except where specifically mentioned):

• Total revenue was $292 million, up 20% from $243 million a year ago.
• Total license revenue was $81 million, up 21%. Excluding MKS, license revenue was $79 million, up 18% year over year and an improvement over the 15% growth reported in FQ2. Desktop license revenue was up 41% year over year while Enterprise license growth was only 3%, reflecting, the company said. “the very strong enterprise license performance we had in Q3’10.”
• Services revenue in FQ3 was $69 million, up 27% from last year, and the fourth quarter of year/year services revenue growth. Training, which typically represents about 15% of total services revenue, was up 41%, due to “a handful of large deals”. Revenue from the consulting business, which primarily supports Windchill implementations, was up 25% year over year.
• Maintenance revenue was $143 million, up 17% year over year. Excluding MKS, maintenance revenue was up 15%. PTC reports that there were 1.4 million active maintenance seats of its software in FQ3, with the total of Windchill seats surpassing 1 million. [The Creo and “Other” totals are a bit squishy, as Creo Elements/Direct seats were moved from Other to Creo while MKS Integrity seats were added to Other in FQ3. Hmm.]

• By channel, FQ3 Direct revenue was up 23% over last year to $214 million. Direct Desktop revenue was up 27% to $89 million while Direct Enterprise revenue was up 21% to $124 million.
• The company reported 27 large deals totaling $61 million in FQ3 up from 14 deals worth $39 million last year and 24 in FQ2. Of the 27 deals in FQ3, 15 were in North America, 8 in Europe and 4 in Asia. I don’t remember PTC doing this before, but it’s an important addition to the reporting: Of the $61 million in license and service revenue, approximately $14 million (23%) was Desktop-related, up from approximately $2 million (5%) a year ago Clearly, PTC’s large deals involve a stronger CAD component than just a year ago likely due to a combination of improved economy (more jobs = more licenses) and interest in Creo.
• Indirect revenue was up 13% over last year to $79 million, but up only 3% sequentially. PTC says that its SMB customers are “more heavily impacted by macroeconomic factors” that may be stalling growth but points out that total indirect revenue is up year-over-year for the 6th quarter in a row.

• By type of solution, Desktop revenue was $155 million, up 21% from last year, led by a 52% increase in license revenue — to $47 million — while maintenance was up 12% to $100 million. Desktop services revenue was up 38% to $11 million. PTC is “sensing a good market response to our Creo strategy in the first quarter of its commercial release.”
• Enterprise revenue totaled $139 million, up 20% from a year ago. Enterprise license revenue was $58 million, up 23%; services revenue was up 23% to $58 million and maintenance was up 34% to $43 million. Enterprise direct license revenue was flat year over year but was up over 50% from the $21 million reported in FQ2. [Note that MKS revenue is included in the Enterprise totals, so these are not true apples-to-apples comparisons.]

• By geography, revenue from the Americas was $105 million, up 27% from last year and up 11% sequentially. Direct sales again led, up 32% while indirect sales were up 8% over last year.
• Revenue from Europe was $121 million in FQ3, up 18% as reported and up 6% on a constant currency basis compared with last year. Direct revenue was up 21% while indirect was up 14%. Notably. FQ3 license revenue was up only 1% due to a large transaction last year that skews the comparison.
• Revenue from Japan was $30 million, up 18% (up 5% on a constant currency basis), with revenue up  25% and 8%  from direct and indirect channels. Sequentially, total revenue was down 8% and license revenue was down 31%, primarily due to seasonality and higher Desktop license revenue from large deals in FQ2. It’s interesting that no mention was made in the prepared remarks to slowdowns in the economy or selling environment in Japan — we’ll have to see if it comes up during the earnings call.
• Revenue from the Pacific Rim was $37 million in FQ3, up 11% (8% on a constant currency basis) with revenue up 6% and 26% from direct and indirect sources, respectively. Sequentially, revenue was up 2%.
• Revenue from China, which was not specified but which “represents a significant portion of [PTC’s] Pac Rim revenue”, increased 15% compared to FQ3’10.

• There were some other interesting tidbits, too. For example, after experiencing a significant slowdown in FQ2, the company reports that spending in Federal & Defense revenue in North America improved in FQ3 but no details were given.
• Remember in FQ2, when PTC said that it was having a hard time balancing sales activity between Enterprise and Desktop — to the detriment of Desktop? Well, it appears to be continuing. PTC said it will “ramp sales capacity in response to the broadening demand for PTC’s products.”
• The company also announced closing two new ‘domino’ accounts during FQ3, one in Retail & Consumer and the other in Electronics & High-Tech. Since 2009, PYV has won 27 domino accounts and is on target to hit 30 by the end of FY’11.

For the fiscal fourth quarter, PTC believes revenue will be between $320 million and $330 million on a non-GAAP basis and between $318 million and $328 million on a GAAP basis. These estimates include a $20 million non-GAAP revenue contribution from MKS.

Doing the math, this means the company has set its FY’11 targets to non-GAAP revenue of $1,150 million to $1,160 million and GAAP revenue of $1,147 million to $1,157 million including a non-GAAP revenue contribution of approximately $25 million from MKS. This guidance raises PTC’s non-GAAP revenue growth to 14% to 15%, up from the company’s previous guidance of 13% to 14% — even as license revenue growth drops to about 15%, at the lower-end of PTC’s previous guidance of 15% to 20%. The company said that somewhat slower license growth “is more than offset by stronger and more predictable services and maintenance revenue.”

PTC did not give guidance for fiscal 2012, but did say that MKS would contribute $75 million in non-GAAP revenue and be slightly accretive to non- GAAP EPS results  as “operating profitability is offset by interest payments on the debt and investments we are making in the business to capitalize on its long-term growth opportunity”.

Bottom line: FQ3 was a very good quarter for PTC. Revenue from services and maintenance exceeded expectations and the number of large deals was truly impressive, as was the proportion of revenue within these large deals that came from CAD. In all, this announcement sets a high bar for engineering software vendors who announce results over the next few weeks.

Will update if anything new and interesting comes out during the earnings call.

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