Earnings season begins today for the engineering software space (although AVEVA did hint at its results two weeks ago), with PTC announcing March quarter revenue slightly below expectations at $240.6 million, but still up 7% from last year. The company also adjusted guidance, forecasting a flat September quarter and a fiscal year that will meet prior guidance at $1.015 billion.
According to prepared remarks, PTC saw “signs of improvement in customer spending [in FQ2]. We are currently seeing the most strength in large, Windchill-led engagements, with PLM license revenue up year-over-year in all regions and up sequentially in all regions except North America (which had a particularly strong quarter in FQ1). We also saw modest sequential license revenue growth in the Indirect (SMB) space, which indicates that while overall spend is still subdued, these customers are also beginning to invest for growth again as well. While perhaps not quite the time to do a victory lap just yet, we view this as an encouraging sign.”
A quick reminder: PTC divides the universe into four quadrants. Direct and indirect sales channels target desktop (Pro/E, Mathcad and some CoCreate and Arbortext) and enterprise (aka PLM: Windchill, ProductView, ProductPoint, InSight and the remainder of Arbortext and CoCreate). PTC reports license, services and maintenance revenue for each.
Lots of interesting details:
• Total revenue in FQ2 was $241 million, up 7% from last year but below guidance because of currency fluctuations in the Euro and a decline in services revenue. Absent the Euro decline, FQ2 revenue would have been $3.1 million higher. For the year to date, revenue was up 7% and is almost comparable to the first 6 months of 2008.
• FQ2 license revenue was up 54% over a weak FQ2 a year ago, to $64.7 million. License sales were up 137% from last year in the enterprise/direct quadrant to $26 million to be the largest license revenue quadrant for PTC. Overall, PLM license revenue was up 106% from last year. Desktop license revenue was up 20% in the direct space (to $19.7 million) and up 35% in indirect (to $15.1 million); in total, MCADish license revenue was up 26% from last year.
• Maintenance was flat year/year in FQ2 at $122.8 million, with slight gains in PLM not offsetting declines in CAD. This is not surprising, as PTC continues to deal with the after-effects of soft license sales in F2009. PTC now reports having 1.16 million seats under maintenance, up 16% from last year due to a 23% increase in Windchill seats under maintenance. CAD and “other” seat counts continue to fall; ProE was down 8%.
• FQ2 services revenue was $53.1 million, down 12% from last year. PTC believes this will pick up, saying that bookings are up as “the strength of license revenue over the past 3 quarters [leads us to] expect the services business to return to growth over the coming quarters.” Training revenue was down 18% while consulting was down 12% year/year. Per VP Barry Cohen, services revenue from North America was “pretty strong; weaker in Europe and Asia where license revenue was lower in F2009” but should pick up in early F2011.
• During FQ2, PTC reports closing 18 large deals (more than $1 million in total revenue), double the number closed a year ago and up from 10 in the first quarter of F2010. This upturn leads the company to forecast closing about 60 large deals in the full year, a pipeline that CEO DIck Harrison characterizes as being twice the size of last year’s.
• The average large-deal size fell from $5.0 million in FQ1 to $2.2 million in FQ2, a more typical level for PTC.
• Looking at total revenue from the four quadrants, Enterprise (PLM) direct revenue was up 15% to $95 million and now represents 39% of total FQ2 revenue. Desktop direct revenue was down 1% from a year ago to $76 million, and represents 31% of total. The channel businesses were up 5% to $71 million and make up the remaining 30% of PTC’s revenue in FQ2. Clearly, PTC’s channel is still struggling. PTC reports having 112 channel business development managers who support 420 channel partners.
• PTC continues to execute on its domino strategy and reports winning two new accounts FQ2, bringing this total to 13 against a target of 15 by the end of FY10. The two FQ2 wins were not named, but are characterized by PTC as “a large global retailer and the other a large player in the industrial space.”
• PTC saw continued signs of recovery in the CAD and SMB businesses; both had flattish revenues on a sequential basis, but both businesses have sequential license revenue growth.
• By region, revenue from the Americas returned to a more typical 35% of revenue; Europe to 39% and Asia, 26%. FQ2 sales in the Americas were $84 million, up 6% year/year, but down 22% sequentially due to a strong FQ1. License revenue in the Americas was down 57%. Revenue from Europe was $94 million up 4% as reported (down 4% on a constant currency basis) compared with last year, but down 6% sequentially. Revenue from Japan was $30 million in FQ2, down 3% (4% on a constant currency basis) compared with last year, but up 28% sequentially driven by license revenue growth of 259%. Finally, Pacific Rim revenue was $33 million in FQ2, up 31% as reported (27% on a constant currency basis) year/year and up 16% sequentially. Revenue from China was up 46% year/year.
• Jay Vleeschhouwer (Ticonderoga Securities) asks such good questions! He wanted to know if the PLM business really is profitable, given that 41% of PLM revenue in FQ2 came from low-profit services versus high-profit license and maintenance. CEO Dick Harrison believes the PLM business is profitable, and that the company sees the lower-profit services as essential in establishing relationships with large accounts that will drive license sales.
• The company doesn’t release product-specific data, but said that Arbortext revenue was up nicely in FQ2 and has returned to growth after a “reinvigoration” of the product. MathCAD revenue appears to be stalled, as the company said it was “in a bad product cycle position”, on the brink of the MathCAD Prime release that’s stalling sales of the traditional product.
• COO Jim Heppelman says that the company’s focus on 20% sustainable earnings growth requires organic revenue growth — but acquisitions can complement this strategy, especially as technology tuck-ins that allow the company to enter to new markets.
• The call was pretty calm, with very little competitor-bashing. CEO Dick Harrison was asked about which products Windchill was displacing: “It’s pretty even across DS and Siemens but MatrixOne is more vulnerable. Displacements are probably 60% DS, 30% Siemens, 10% other (SAP, Oracle). Most successful displacing MatrixOne, which is the basis for DS’s V6 — customers are saying ‘we’re done, not going to V6’.“
PTC guided to FQ3 revenue of $235 million to $245 million, assuming $1.36 per Euro. The FQ3 guidance puts license revenue at $65 million, a 30% year-over-year increase, while maintenance and services revenue are expected remain flat year-over-year.
For the full year, PTC still sees total revenue for about $1.015 billion, with license revenue growing at 35% to 40%, up from the previous goal of 30% growth. Since the total stays the same, but one component is growing faster than planned, a reasonable question is: “What will grow more slowly?” Unfortunately, the answer isn’t that simple. Start with $1.015 billion (the old forecast). Subtract the $14 million PTC believes revenue will be affected by the falling Euro, and we get to $1.001 billion. Add back 2.5% of license growth ($10 million) and we’re still $4 million short.
Bottom line: PTC is going to have to scramble to meet its $1.015 billion target, given the negative impact it believes currency will continue to have as the year moves along. Given FQ2, is certainly seems doable.