PTC: refreshing candor, good results
At the end of the March earnings call, we were left with a couple of questions about PTC. First, can the company improve its sales methodology — forecasting through closing — so that the missed opportunities that bedeviled last quarter don’t continue? Second, big deals often make up a significant portion of revenue — can PTC wean itself from this unpredictable revenue stream? And, finally, how are customers responding to the idea that PTC now sells 5 distinct products, often to different audiences within each customer account?
PTC started to answer these questions with the June quarter earnings release. That mega deal still hasn’t closed and PTC isn’t counting on it any time soon. It’s working to put its sales management into salesforce.com for better visibility and planning, and ramping up sales effectiveness training. CEO Jim Heppelmann says that customers are responding to the broader offering, and that SLM revenue was “strong” while ALM (aka MKS) revenue “met expectations”. [I think we start getting more detail on how the new products are doing, from a revenue perspective, at the start of fiscal 2013. -- Ed.]
- PTC reported GAAP revenue of $311 million for the September quarter, up 7% over last year, at the high end of earlier guidance.
- Non-GAAP revenue was $311 million, up 6% as reported and up 10% on a constant currency basis. Non-GAAP revenue included $20.5 million contributions from MKS and 4CS. Excluding MKS and 4CS, total non-GAAP organic revenue growth was 2% (or 5% in constant currencies).
- Total license revenue was $84 million — also at the upper end of guidance. The reported total is up 3% over a year ago, is up 7% on a constant currency basis, is down 3% on an organic basis but is up 1% on a constant currency organic basis. Ploughing through that bumpy ride, it appears that almost all license growth is attributable to MKS and 4CS — but, as CEO Jim Heppelmann pointed out, Creo 2.0 is just now hitting the streets so should start adding incremental revenue this quarter.
- PTC reports that license revenue growth was primarily due to “strong” performance in Japan and the Pacific Rim, with year-over-year growth of 44% and 53%, respectively, and one “mega” deal (license revenue over $5 million).
- Direct revenue was up 6% to $227 million, while channel partners did slightly better, growing revenue at almost 10% to $52 million.
- Non-GAAP maintenance revenue was up 7% (up 11% in constant currencies) to $153 million, in line with guidance. The number of active Creo maintenance seats fell slightly to 185,100; in total, PTC supports 1,566,600 active maintenance seats.
- Services revenue of $75 million (up 9% and up 13% in constant currencies), was also in line with expectations. Excluding MKS and 4CS, maintenance revenue was up 3% while services revenue was up 6%.
- The company reports that it closed 34 large deals (over $1 million) in the quarter, up from 25 in the March quarter and up from 30 a year ago. Of the 34 deals, 11 were in the Americas, 11 in Europe and 12 in Asia. In the June 2012 quarter, these large deals amounted to $75 million, 25% of total revenue — higher than the average of about 21% of total revenue. That’s worrisome since large deals are harder to predict and harder to close. Mr. Heppelmann did indicate on the earnings call that he’s trying to get the company to look at large deals as “gravy” while building a pipeline of solid, mid-sized deals each quarter.
- By type of product, Desktop/MCAD revenue was down 4% to $148 million while license revenue was down 2% to $42 million — both due to the tough comparable a year ago.
- Enterprise/PLM revenue was up 16% to $160 million. License revenue was up 12% to $42 million.
- From a geographic perspective, total revenue from the Americas was $113 million, up 7% even as license revenue was down 27% year over year, due “primarily to a lower than normal level of new large deals in the quarter”. But it’s not all bad: sequentially, license revenue was up 1%.
- Revenue from Europe was $120 million, flat as reported but up 9% on a constant currency basis. License revenue was down 3% year over year, but up 6% on a constant currency basis.
- Performance in Asia was characterized on the earnings call as atypically strong. Revenue from Japan $35 million in Q3, up 15% as reported and up 13% on a constant currency basis. Revenue from the rest of the Pacific Rim was $44 million, up 18% (21% on a constant currency basis). As noted above, performance in Asia was aided by license revenue growth of 44% in Japan and up 53% in the rest of the Pacific Rim.
PTC also updated its guidance for the September quarter, its fiscal fourth. It now anticipates revenue of $320 million to $335 million, including license revenue of between $100 million and $115 million. That brings FY2012 to total revenue of $1,252 million to $1,267 million. This is a slight downward tweak and narrowing of the guidance, and reflects currency changes rather than any product or market effects.
Why did I mention the guidance so often in the financial details? Because PTC needs to prove to investors is that its guidance is meaningful and is based on a sound reckoning of deal size and timing (which deals in its pipeline are likely to close within a given period). The issues identified in the March earnings seemed to center on inflated expectations and ambitious dates. Coming in at the top end of guidance indicates that PTC is conservative in its forecasts, but pretty much on target. That predictability and the fact that PTC blew by its forecasts for earnings per share led investors to bid up the share price by as much as 17% today — impressive.
CEO Jim Heppelmann was remarkably candid on the earnings call, labeling various areas of the business “unimpressive” or “lackluster” and describing how the management team intends to address each shortcoming. High on his list is to improve sales productivity — as one analyst on the call pointed out, PTC now has 26% more sales people than a year ago, yet revenue isn’t up a commensurate amount. Part of the problem is the reps have a much broader portfolio of products to sell, and need to learn how to make a pitch that combines PLM and CAD — and, where appropriate, the newer Application Lifecycle Management (ALM), Services Lifecycle Management (SLM) and Supply Chain Management (SCM) offerings. Too, they need to figure out how to get to those buyers within their traditional clients. These are all things PTC can fix, tough they do take time. [See my post on PTC's recent user conference, where I try to explain how it all fits together.]
Mr. Heppelmann’s candor is refreshing — too often, CEOs insist on finding the bright, shiny pearls rather than just admitting the obvious: that not all is perfection. While I like the diversification strategy into adjacent areas like SLM and ALM, I am really interested to see if CAD license revenue picks up. It was only a year ago that PTC was pleasantly surprised (and sounded a bit overwhelmed) by the growth of that part of the business. Back then, Mr. Heppelmann said of CAD license growth, “if we can get [all parts of the business] firing together, this is a different company”. So true.
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