PTC reports an Optima Q1

(Sorry. The Optima is a model of Kia automobile. Bad pun, I know, but hard to resist.) PTC is usually the first PLM company to report results and is therefore seen as a bit of the canary in a coal mine (send in the canary; if it dies, there’s not enough oxygen for humans. It is an old form of “early warning.”). The analogy may not work this time, since a number of unique factors played into PTC’s FQ1. First, the company announced at the end of October 2010 that it was changing its branding, packaging and positioning to focus on its next-generation Creo product set. We’ll see with these results if that announcement stalled purchasers who are waiting to see what Creo really is, before signing on the dotted line. Second, PTC had a very strong quarter a year ago, which makes comparable tough this year. Those were predictable; PTC added a third element with some confusing accounting and a very big strategic win. CEO Jim Heppelmann said FQ1 was a good quarter on many fronts: across geographies, direct and indirect channels and all product lines. He singled out automotive as the biggest vertical within manufacturing but noted that it has been underrepresented within PTC’s customer portfolio. He said that PTC has begun to take share over the last 6 quarters or so, with Volvo Truck, Continental, Cummins, Harley Davidson and others. In FQ1, PTC finally penetrated the passenger auto subsegment, moving beyond CAD in powertrain. Indeed, Mr. Heppelmann said he was “very leased to announced a tremendous win at Hyundai Kia Motor Company (HKMC), the 5th largest auto company in the world and the fastest growing — it is likely to be the 4th largest next year”. Mr. Heppelmann said that HKMC began benchmarking 2 years ago, looking at PTC, DS and Siemens for its next-generation platform. PTC won the account and is now in a phase 1 deployment. As part of the deal, HKMS required PTC to commit to a number of enhancements that Mr. Heppelmann characterized as typical when entering a new market. The way Mr. Heppelmann explained it, accounting treatment requires “front loading” of these costs in the period when the contract is signed, meaning that these expenditures must be accounted for before they actually happened. This led to a decrease in EPS of $0.03 to $0.04 in FQ1 and a reported EPS of $0.11, at the low end of the company’s guidance and below the $0.15 reported a year ago — this likely explains why PTC’s shares were down early today on Wall Street. But Mr. Heppelmann pointed out that the year’s EPS guidance is unchanged. But there’s a lot more than accounting in PTC’s Q1 announcement. The FQ1 results: • PTC reported total revenue of $266.6 million, a bit ahead of guidance and up 3% from the $258 million reported for 1FQ10. • My supposition that the Creo announcement could have chilled demand for PTC’s CAD products is not borne out by the FQ1 results: Desktop (aka “CAD and related”) product license revenue was up 54% to $24 million among large accounts and up 16% to $17 million among SMB customers. “And related” covers a lot of ground, but realistically, ProE/Creo is by far the majority of that revenue category. In total, Desktop license revenue went up 36% to $41 million. Desktop maintenance revenue held steady at $94.5 million while service was up 1% to $10.5 million. • On the not-so-rosy side, Enterprise (PLM) revenue was down 2% to $120.6 million, including a 30% decrease in license revenue from large/direct accounts. The company says that this is due to the strong quarter a year ago, and offers the fact that, excluding $20 million in large deals from its 1Q10 results, total PLM revenue was up 17% in Q1’11. PLM license sales to SMB customers was up 63% to $6 million. Services revenue was up 8% while maintenance was up 13%. One of the analysts asked if the license revenue in 1FQ11 was affected by the contract accounting of the HKMC deal; the answer appeared to be no, since the license sales were minimal in this phase in FQ1 and about $5 million in services expense are related to the HKMC deal even though they were R&D costs. [I don’t claim to understand it; if you do, please send in a better explanationI — Ed.] • Adding it all up, total license revenue was $75.5 million, essentially flat with the $74.8 million reported last year. FQ1 maintenance revenue was $131 million, up 3%. The company says it has 1.2 million seats under maintenance, up about 0.5%. • Looking at regional performance, revenue from the Americas was $100 million, down 7% from last year. Indirect revenue was up 13% even as direct revenue was down 10% because of the exceptionally strong 1QF10 mentioned above. Revenue from Europe was $108 million, up 9%, driven by a 53% increase in license revenue. Indirect revenue in Europe was flat while direct revenue was up 14%. PTC breaks Asia into Japan and Pacific Rim. Revenue from Japan revenue was $25 million, up 8% due to a 14% growth in license sales. Revenue from the rest of Asia was $34 million, up 16%, led by strong growth in China. License revenue from the Pacific Rim was up 9%. • Direct sales, focused on large enterprise customers, were up 2% in FQ1 to $190 million. PTC reports closing 22 large deals (valued at over $1 million in license and services revenue) totaling $51 million. Nine of these deals were in North America, 11 in Europe, and 2 in Asia. Mr. Heppelmann said that about 1/3 of these large deals came from domino accounts won before the quarter. PTC reported signing 10 such large deals a year ago generating $50 million. The 1FQ11 results return PTC to a more typical level of about $2 million/deal. • PTC continues its focus on winning domino accounts that it believes will cause other companies in a particular industry to also adopt PTC solutions. The company reports closing 3 such deals in FQ1 (HKMC in automotive and 2 other unnamed companies in the industrial and retail verticals), on its way to its target of 11 wins in F2011. • Channel revenue was up 7% to $77 million, led by 26% license revenue growth. CFO Jeff Glidden says that this continues a healthy trend showing improving economics and positive partner and customer response to Creo. Mr. Heppelmann said that excitement about Creo is building because today’s products are forward compatible, meaning that an investment today has a path to Creo. He believes this gets PTC into sales situations where they might not otherwise have been included. PTC reports that it has around 420 channel partners and continues to build out an SI community; EVP Strategy Barry Cohen expects this ecosystem to ramp up more quickly in coming quarters. • One other interesting note: PTC’s headcount went up in FQ1, from 5317 to 5416. For FQ2, PTC initiated revenue guidance of $260 million to $270 million, which includes license revenue of growth of 20 to 25% over last year. For the full fiscal 2011, PTC sees total revenue up 10% to 12% to a total of $1,110 million to $1,130 million. The company anticipates license revenue growth of 20% to 25%, services revenue growth of 10% and maintenance revenue growth of approximately 5% for fiscal 2011. Confusing accounting aside (which one analyst said was typical but seemed to confuse others), PTC had a solid quarter. Q1 is always tough because PTC competes against other companies’ Q4 discounting and sales force incentives but PTC did a bit better than expected — and certainly created optimism about coming quarters with the HKMC announcement.