PTC gave a comprehensive presentation of its financial status, goals and milestones at its user conference earlier this month. The headlines from the event focused on the announcement that revenue would come in at the low end of the company’s guidance for the June quarter and that PTC was seeing "some softness in services and a ‘hangover’ in maintenance" even as it expected a sequential improvement in license revenue. But there was a lot more to cover:
PTC has added an impressive number of seats to its maintenance stream over the last 5 years, most of them WIndchill and acquired products. This change in mix has caused the average revenue per seat to drop from around $800/seat in FY2004 to $560/seat in FY2008. The implications are staggering: maintenance is PTC’s largest revenue stream; the changing mix puts increased pressure on seat volume in the non-MCAD products directly affects its go-to-market approach.
The company divides its sales opportunity into four quadrants: Desktop (MCAD) and Enterprise (Windchill) product sets each divided into large enterprises and small/medium businesses. Growth in Desktop/SMB revenue has far outpaced Desktop/large enterprise but still accounts for only slightly more than a third of total Desktop sales in FY2008. In fact, PTC reports that MCAD sales to its large enterprise customer have stagnated at around 2% annual growth from FY2004 to FY2008. Clearly, the greatest potential for PTC in MCAD is the SMB, and it is working hard with its channel to get the word out to prospects.
But this begs the question: why is PTC finding it so hard to sell MCAD into the large enterprises? Overall MCAD growth over the same time period has been a few percentage points higher (we can argue about company size and definitions sometime), meaning that PTC has been losing ground here. To address this, PTC has begin an aggressive strategy to gain share: seeking to displace its competitors (presumably on functionality and deal-making) and to target strategic accounts that it feels will create a "domino effect" in supply chains and competitive circles.
The Enterprise (Windchill) business tells a different story. Enterprise revenue has grown exponentially in the SMB segment but is still tiny — $39 million in FY 2008. Annual growth among large enterprise customers, on the other hand, was 20%/year from 2004 to 2008, with 2008 revenue $367 million. PTC obviously knows how to sell a the high end; translating it to MCAD success is the challenge.
To this end, PTC has created a three-pronged sales strategy. Large enterprises will be served by a direct sales force that concentrates on 60 or so strategic named accounts; an geographically organized direct sales team serving an additional 1900 accounts; and an indirect channel serving all other customers — or about 90% of accounts. This is a radical departure for PTC, which saw 89% of revenue come from direct sources in fiscal 2004; by fiscal 2014, it expects to have 40% of revenue from it strategic direct team, 20% from geographic direct and 40% from the channel.
Of course, as all PLM vendors try to bring down sales costs by transitioning smaller transactions to a reseller channel, one has to ask: where are all these channel partners coming from? The work I’ve recently done on channel economics shows that many VARs are struggling and may not make it to an eventual economic recovery, so rather than there being more VARs than OEMs need, we’re heading for serious competition for a smaller number of good resellers.
Last point: someone asked me recently why PTC has disclosed so much and whether it mean that PTC is for sale. Maybe, maybe not — recall rumors to that effect shot down by the company last year. But investors seem to need convincing that PTC is on the right track to profitable growth and these disclosures may help make that case.