PTC today gave more details on its financial performance in the March quarter (its fiscal Q2) and a glimpse into the year ahead. The high points: a positive spin on the revenue miss in FQ1, much more cautious outlook for the rest of the year (but the potential for significant positive surprises) and solid performance in Asia.

PTC is such an interesting company. A bunch of really smart people who shoot themselves in the foot every couple of years, either by getting too far ahead of their customers (remember “CAD is dead”?), alienating those who sign the checks while retaining intense loyalty among the user base, or moving too fast to make too many operational changes all at once. It really does sound as though the Q1 miss blindsided the company, with a wave of coincidentally timed events washing away what could otherwise have been an OK quarter. Enough editorializing, here’s what they said:

  • The Q1 miss was all in license revenue. As announced earlier, a mega deal in Europe failed to close because that company was going through a potential merger, placing everything on hold; and a number of smaller transactions in North America that also didn’t close. CEO Jim Heppelmann said again that the North American issues were due to poor forecasting, planning and execution and that analysis of the deals that missed showed no real pattern in terms of end user industry, economic factors or competition.
  • What did happen? Mr. Hepplemann said that the deals that didn’t close in North America were, for example, a defense deal that was “intercepted” by another defense program; several deals where a large upfront purchases were divided into a number of smaller phases; and a sizable expansion order that was “interrupted” by a scenario similar to what happened with the big Europe account. My interpretation: overzealous sales people thinking that deals would close earlier and larger than they really did.
  • How is PTC fixing this? The company has carefully “scrubbed” its large deal pipeline, presumably scaling back expectations on size and timing where appropriate. PTC has also changed its method for providing outlook to Wall Street and is no longer including mega deals in the totals it provides. This means that there’s a substantial potential for positive earnings surprises, since a $10 million deal could, as Mr. Heppelmann said in answer to another question, affect license revenue growth by 3%.
  • Could PTC have prevented the Q1 miss? Clearly, customers do what customers do, so a lot of this was outside PTC’s control. Yes, the forecasting methodology wasn’t optimal, and the company is putting in place a much more rigorous process for FQ3 and beyond. But Mr. Heppelmann believes that the changes that were made in the sales force prior to and during FQ2 (adding 75 new sales reps, redefining sales territories, moving some accounts from the VAR channel to the direct) position the company well for the future and needed to be done.

But there was lots of other news, too. Remember that PTC reorganized itself from 2 major product lines (CAD and PLM) sold through 2 channels (direct and indirect) into 5 buckets/segments: PLM, MCAD, ALM, SCM and SLM.

  • Total non-GAAP revenue for FQ2 was $302 million, up 12% year, including $23 million from MKS and 4CS. Excluding MKS and 4CS, total organic revenue growth was 4%.
  • Non-GAAP license revenue was $75 million, up 1% year/year as reported but down 10% on an organic basis. The missed deals caused European license revenue to decline 6% year/year and Americas license revenue to decline 4%. Japan and Pacific Rim license revenue, in contrast, were up 17% and 9%, respectively.
  • Non-GAAP maintenance revenue was $151 million, up 15% as reported and up 7% on an organic basis. Services revenue was $76 million, up 20% as reported and up 12% on an organic basis.
  • By geo, revenue from the Americas was $110 million, up 16% year/year but down 7% sequentially, driven by a 36% sequential decrease in license revenue. Performance was characterized as “solid” in MCAD and ALM, with “lower than expected” performance in PLM.
  • Revenue from Europe was $116 million, up 9% year/year but down 13% sequentially.
  • Revenue from Japan was $39 million, up 18% year/year and up 27% sequentially.
  • Revenue from the rest of the Pacific Rim was $37 million, up 3% year/year and flat sequentially.
  • Revenue from China was down 10% year/year. Mr. Heppelmann said that the “Q3, Q4 pipeline looks pretty good. We feel reasonably confident of our business in China, don’t see signs of any [economic] meltdown. We added resources, put in really good talent for the longterm and see China as a solid business opportunity.”
  • The company reported 25 large (>$1million) deals that contributed $56 million, essentially flat with last year. Nine of these wins were in North America; 11 were in Europe and 5 in Asia.
  • Using PTC’s former quadrant approach, direct sales of desktop products were down 11% (not surprising, since that’s were the bulk of the miss occurred). Indirect sales of desktop products actually were up 5%, while channel sales of the PLM products were up 54%, leading Mr. Heppelmann to conclude that the channel “did really well” in FQ2.
  • Total revenue from desktop products were $148 million, down 5%, even as maintenance revenue was up 4%.
  • Total revenue from PLM/enterprise products was $154 million, up 36%, including the acquired revenue from MKS and 4CS.

PTC’s guidance for FQ3 and F2012 ratchets back expectations with respect to mega deals, removing them completely from FQ3 but “assuming some contribution” from mega deals in the full-year targets. The “large European transaction that did not close in Q2” is not included in either total. For FQ3, PTC expects total revenue of $300 million to $315 million; for F12, it expects $1,265 million to $1,285 million, including about $90 million from MKS and 4CS. For the year, license revenue is expected to increase 5%l services, 14% and maintenance, 9%.

Mr. Heppelmann said on the earnings preannouncement conference call that PTC had hit a substantial pothole in FQ1. He was equally clear today: The changes in the sales organization “were right to make, and were done before this mess. The question is how to manage the pipeline and forecast. We need to transition to a “best in class” systematic approach, and we’re doing that starting now. We need to assess the impact of the new sales [people and territory changes]. If it settles into place and creates the productivity we anticipate it will, we will feel good about out long term targets.”

PTC bit the bullet early, carved an outline around the FQ2 miss that showed that the problem was of its own making (and not a competitive or economic issue) and outlined a plan to fix it. Can’t do better than that — at least until next earnings season, when we see if the plan worked. Investors like, and sent the share up 10% at 11:30 ET.

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