Remember how PTC shocked everyone at the beginning of the month when they announced that the first calendar quarter/second fiscal quarter of 2015 was OK, but they were rejigging the business to better meet new goals? Yes? Well, last night PTC gave much more detail about the past and future. And both are pretty good — though, like everyone else on this side of the pond, foreign currency weighed things down.
The big picture is that total revenue for the quarter was $314 million, more or less in line with Wall Street’s consensus of $315 million and towards the high end of PTC’s own guidance of $305 million to $320 million. It gets a bit dicey forecasting, though, as PTC thinks June quarter revenue will be between $307 million and $312 million, versus a consensus of $327 million. PTC also lowered its guidance for the year from $1.32 billion to $1.35 million to around $1.29 billion; Wall Street had expected around $1.33 billion. In each case, PTC lowered its forecast because it sees further depreciation in foreign currencies, a slightly higher mix of subscription bookings (which will lower immediate revenue), the continued planned decrease in services revenue and a more cautious outlook here in the US. Did investor care? Not so much, as the share price is up 4% or so as I write this.
PTC CEO Jim Heppelmann told investors that “[F]Q2 results demonstrated solid execution across the business despite the very tough currency environment and somewhat uncertain macro economic conditions”. He went on to say that he thinks this is the “new normal” and that PTC’s recent corporate realignment is, in part, a way of mitigating these outside stressors while enabling PTC to take advantage of new opportunities. He said that PTC is accelerating IoT-related R&D for core CAD and extended PLM (ePLM) solutions because that will differentiate PTC’s offerings — more details to come at the LiveWorx event next week and at PTC Live Global in June.
The headline for those not bothered by Wall Street are that PTC’s business is increasingly complex, mixing license models, delivery mechanisms and product sets/types, all overlaid on a bunch of different end-industries and geos. What we wind up with is that the strengthening US dollar caused a negative impact on reported revenue, as did the continued push to move services revenue to partners. More customers opted for subscriptions, which pushes revenue out into future periods; that’s good long-term but also lowers immediate revenue. All added together, that means revenue was down 4% to $314 million.
- By revenue category, License and Subscription revenue was $86 million, down 3% year/year as reported but up 6% in constant currencies (cc). What’s interesting here is that PTC says that subscription bookings were 14% of total license and subscription solutions bookings in the quarter, up from 4% a year ago. Some of this is due to IoT growth (where everything is subscription) but still: it means that core product customers are increasingly going for subs. Given that subs require different customer buying and approval processes, that’s a pretty quick ramp-up. If these had been more traditional perpetual buys, PTC figures that FQ2 software revenue would have been up 10%. That, in turn, would have led total revenue to be up 5% (both cc measures).
- Maintenance revenue (now known as Support) was $169 million, up 1% and up 9% in cc
- Adding those together, total software revenue was $255 million, flat as reported and up 8% in cc
- Revenue from Services was $59 million in FQ2, down 20% (down 12% in cc) as the transition to partners continues. Mr. Heppelmann said that service partner bookings were stronger than anticipated in the first half of the year, so everyone is pleased with the progress.
- By business line, revenue from CAD-ish products and services was $131 million, down 5% as reported but up 4% in cc. CAD software revenue was $126 million, down 4% (up 5% cc). CAD support revenue was up 6% cc; CAD L&SS revenue was up 2% cc, “driven by a midsingle digit cc growth in new seats, modules, and upgrades of Creo, offset by a decline in legacy CAD products”.
- ePLM revenue was $132 million, down 10% as reported (down 2% in cc) as a couple of large deals slipped out of the quarter. ePLM software revenue was $92 million, down 4% (up 4% cc); ePLM support revenue was up 14% cc even as ePLM L&SS revenue was down 11% cc, as “double digit YoY CC growth in cloud services [was] offset by a decline in PLM license revenue against a tough comparison relative to large deals.”
- Revenue from IoT was $9.4 million, up from $0.5 million a year ago. (The percentage growth is a staggering but meaningless 1886%; some of this is organic, but the Axeda acquisition in August is also in here.) PTC says it added 62 new IoT customers during the quarter — I’m looking forward to hearing what they and PTC have to say at next week’s LiveWorx conference.
- SLM revenue was $42 million, down 4% as reported and flat in cc. SLM software revenue was $28 million, up 4%.
- By geo, revenue from the Americas was $132 million, down 2% as reported and down 1% cc. Revenue from Europe was $110 million, down 14% as reported and flat in cc. Revenue from Japan was $39 million, up 32% as reported and up 52% in cc, driven by a CAD and PLM megadeal. Finally, revenue from the rest of the Pacific Rim was $33 million, down 10% as reported and down 8% in cc.
- The company recorded 13 deals with over $1 million in license and subscription solutions revenue, down from 17 a year ago. This included one mega deal (over $5 million), down from 3 a year ago. That one deal was in Japan, which boosted year/year growth; the other two were in Europe and the Americas, and the lack of replacement deals there in FQ2 made for tough comparables in those geos.
- One other thing: PTC has apparently run afoul of regulations around how it does business in China and is working through the investigation and likely fines or penalties with the US Securities and Exchange Commission and Department of Justice. PTC says that any settlement “could be material to our results of operations for the fiscal period in which the liability is recorded. Further, any settlement or other resolution of this matter could have collateral effects on our business in China, the United States and elsewhere”.
OK. That’s a boatload of data. What does it all mean??
I’ve got 4 main takeaways: Cross-selling IoT, SLM or some other buzzword to CAD or PLM customers isn’t easy. Different departments, new purchasing gatekeepers, an unknown name in a new landscape. Too, a lot of prospects are just starting out with their internal process to identify services opportunities, so they’re not sure what problems they’re solving or what technologies they might find useful. I think PTC bet big on SLM and it hasn’t panned out as well as expected. Yet. They’re starting to make progress with accounts like Lockheed Martin, a Windchill customer that “made a sizable SLM purchase” in FQ2. The integration they’ve hinted at between sensor data and CAD, for example, to analyze actual use patterns, or between CAD, PLM and SLM to deliver as-built configuration images to the field, can only accelerate this trend.
PTC’s CAD people may not be subscribers. But it’s hard to say — the company has only offered CAD subscriptions for 2 quarters, so we still have a lot of users whose maintenance contracts haven’t come up for renewal. CAD software revenue grew 5% in cc in the quarter and (from inferences, not direct statements on the earnings call), most of that was from traditional buyers. How can PTC sweeten the offer? Autodesk uses suites and content only available to subscribers to get people to move; it’ll be interesting to see what levers PTC can pull.
The lack of growth in PLM is really troubling. In FQ2, ePLM license revenue was $33 million, down 19%. Total ePLM software revenue (including maintenance) was $92 million, the lowest since March 2013. Worse, over the past 8 quarters, license and subscription solutions revenue has averaged out to no growth, with all of the reported ePLM business line’s growth coming from maintenance (aka Support). Looking forward, PTC said that ePLM L&SS bookings decreased 16% in cc, meaning that future-period revenue doesn’t get a big jumpstart from subscriptions. Perhaps some of this is the big-dollar-upfront to smaller-dollar-subscription transition, but we don’t really know.
But all of this could become insignificant if PTC does the technology integration it’s talking about. If real usage data can be incorporated in design, products will become much better, reflecting as-used as opposed to as-designed. But as with SLM, it comes down to how ready enterprises are to embrace new ways of doing things. With SLM, there’s the obvious economic incentive of a manufacturer growing its services revenue; it’s unclear how PTC can make that a similar case for an IoT/CAD/PLM marriage. We’ll learn more over the next couple of months.