PTC reports solid Q3, worries about Q4

PTC announced fiscal third quarter results on July 28 that were strong in retrospect but not so hot on futures. FQ3 results were above the revised guidance issued last month: Total revenue was up 7% over last year revenue at $243 million, led by license revenue growth of 37%. Maintenance revenue was flat, services revenue was down slightly, both due to the low level of license sales in fiscal 2009. PTC expects maintenance and services revenue to be flat in the fourth quarter while license growth backs off to 20%, resulting in total revenue of $255 million to $265 million — up just 6% over last FQ4. That brings total revenue for fiscal 2010 to just about $1 billion, or growth of 5%.

The details — remember that PTC looks at the world in four quadrants: Desktop (CAD) and Enterprise (PLM), each sold via direct sales and indirect sales:

• PLM license revenue growth has been spectacular but is slowing: In FQ1, FQ2 and FQ3, it grew 143%, 107% and 63% y/y with FQ3 coming in at $37 million. Growth was strongest in FQ3 in the Enterprise (large company segment), with PLM license revenue up 74%. The slowing growth rate is worrisome for two reasons: PTC is relying on Enterprise PLM for future growth, and the “release” of pent up demand coupled with the length of pilot engagements should be strengthening growth. We’ll see what management says during its earnings call.

• CAD/Desktop license revenue actually grew in FQ3, up 1% to $17 million in the Enterprise and up 35% to $14 million in the SMB market. With the new release of Mathcad coming during the period, it will be interesting to see if management comments on this growth — is it Pro/E or not?

• Total PLM revenue was $115 million, up 20% over a year ago; total Desktop revenue was $71 million, down 6% because of a decline in maintenance and services revenue. The PLM business is on track, according to PTC, to be “close to a $500 million business” for fiscal 2010.

• PTC achieved its “Domino” goal for the year by signing two more accounts, bringing the total to 15 — one in auto and the other in life sciences. What’s interesting about this is the broad distribution: Of the 15, PTC characterizes four as “industrial” and one in electronics/high-tech, two in aero/defense, three in auto, two in life sciences and three in retail, footwear and apparel. Clearly, PTC is playing to its strength in the manufacturing machinery market, but its reach is extending. If its domino theory holds (meaning that winning a major account does lead to follow-on sales from that account’s value chain), PTC is spreading through many markets in a very orderly fashion.

• Looking at the business by channel, direct continues to dominate. Total direct sales were $174 million, up 8% over last year and up 2% over the March quarter. Total indirect revenue was $70 million, down 2% from FQ2 but up 6% from last year as license revenue, especially in Desktop, showed solid y/y growth. That’s good news, since it may mean a bottoming out in the SMB sector and more optimism about future prospects.

• PTC closed 14 large deals in FQ3, up from a year ago but down from FQ2. It’s hard to see any trends in this, since large deals are, by definition, lumpy and close with no real predictability — but it’s a solid sign of recovery that there are this many.

PTC will hold its earnings conference call this morning, and I’ll update this (and add geo color) after the call.