PTC’s 2013 — what a difference a Q makes!

Sometimes you can hear glee over the phone wire, can’t you? At roughly the same time that Dassault Systèmes announced that it missed its September quarter objectives, PTC’s CEO Jim Heppelmann was telling Wall Street that total revenue for the quarter was up 6% to $345 million, handily beating analyst consensus, and that the CAD business was up for the first time since early 2012, with CAD license revenue growth of 13% year/year (y/y). Acquisitions helped boost total revenue, as Servigistics, Enigma and NetIDEAS contributed $27 million on a non-GAAP basis to the quarter. For fiscal 2014, PTC reported record annual revenue of $1.29 billion (but, unfortunately, no CAD increase; see below). Mr. Heppelmann told investors that the fiscal fourth quarter started with a strong sales pipeline but also with concerns that customers were turning cautious and slowing their purchasing decisions. To the contrary, PTC saw modest improvement as the quarter progressed, and “ended strong. We were able to surpass the high end of our revenue guidance on license and total revenue … that extra revenue allowed us to deliver substantially more earnings than our guidance had suggested. So with those strong fourth quarter results, the FY ’13 year ended well, particularly when measured in terms of earnings performance.” The details for FQ4:

• License revenue was $105 million, up 5% y/y and up a staggering amount from the roughly $80 million reported in FQ3 and FQ2. Acquisitions contributed $8 million. Overall, license activity was “strong in Europe, the Pacific Rim, and Japan” but “soft” in the US. License sales in Japan were up 27% y/y, slower than in FQ3 because of a large deal recorded in FQ3; sales in the Pacific Rim reversed the Q3 y/y decline of 30%, and were up 31%, while Europe reversed the FQ3 decline of 31% to be up 37% in FQ4. Excluding acquisitions, license revenue was down 3% y/y.
• Support (aka maintenance) revenue was $167 million, up 8% y/y. Unlike the other revenue categories, organic revenue was up 2% y/y. Acquisitions contributed $9.2 million.
• PTC reports having 246k CAD seats, 1,592K Windchill seats and 94K SLM seats under maintenance at the end of FQ4. That’s up a whopping 13% y/y — the expanded focus on global support is clearly having the intended effect of getting people onto maintenance and engaging with the company.
• Service revenue was up 5% to $72 million, including $10 million from acquisitions. On an organic basis, services revenue was down 10%. Some of this decline is planned, as PTC shifts services work to partners, but the smaller deal sizes over the last year mean smaller Windchill implementations and less services work.
• Speaking of partners, PTC reports “considerable success with our partner ecosystem, which had 71% year-over-year bookings growth for FY’13”.
• By solution type, CAD revenue was up 2% y/y in FQ4 to $149 million. License revenue was $48 million (up 13%), support revenue was $96 million (down 1% y/y). License revenue growth in Europe, Japan, and the Pacific Rim were partly offset by lower license revenue in the Americas. Channel revenue (40% of the CAD total) was up 2% y/y.
• Mr. Heppelmann said that roughly 40% of the CAD base is now on Creo 2.0, and that over 60% of customers who migrated from Wildfire to Creo added capability; most often: direct modeling.
• Extended PLM (=PLM + SCM + ALM) revenue was $150 million, down 8% y/y. PTC doesn’t break the category down any further but said that “ongoing macroeconomic challenges led to year over year revenue declines in PLM, ALM, and SCM” — so I’m inferring that revenue was down across all three lines. The company said it saw a double-digit y/y decline in the Americas, cc growth in Japan, Europe and the Pacific Rim. Extended PLM license revenue was $44 million, down 20% y/y, while support revenue was $56 million, up 6%. Services revenue was down 10% to $50 million.
• SLM revenue was $47 million, up 161% y/y including $8 million of license revenue from acquisitions. On an organic basis, license revenue was up 49%. SLM total license revenue was $13 million; services, $17 million and support, $16 million.
• By region, revenue from the Americas was $143 million, up 2% as reported but down 13% when excluding acquisitions. Organic license revenue was down 33%, support was up 4% but services was down 10%. A very mixed bag, but PTC sees signs of an economic recovery beginning in the region in 2014.
• Revenue from Europe was $126 million, up 13% as reported (up 8% in cc) with organic revenue up 10%. License revenue was up 37% y/y while organic license revenue was up 28%. PTC reports that a recovery “may be underway in Europe” and expects performance to improve in FY14.
• Revenue from the Pacific Rim was $47 million, up 14% as reported (up 11% in cc) with organic revenue up 10%. License revenue was up 31% y/y while organic license revenue was up 31%.
• Finally, revenue from Japan was $29 million, down 7% as reported but up 15% in cc. Organic revenue was up 17% as reported. License revenue was up 27% as reported and up 58% in cc; on an organic basis, license revenue was up 17% as reported.
• PTC no longer breaks out direct and indirect revenue, but Mr. Heppelmann said during the earnings call that indirect revenue remains at around 25% of total, but that this could change as SLM is sold mostly via direct — so, as SLM grows, the proportions could change. Mr. Heppelmann did mention the recent addition to PTC of Kerry Grimes (most recently with Siemens PLM) but gave no targets for the indirect channel.
• The company reports signing no mega (>$5 million) but 45 large deals (>$1 million recognized in the quarter) totaling $83 million in revenue. For the first time in a while, the mix skewed towards software, contributing $47 million in license revenue. While the number of deals in FQ4 was 50% higher than in FQ3 (45 vs 32), the average deal size was $1.8 million, the lowest level in a couple of years.

For the year, total revenue was $1,293,541, up 3% even as license revenue declined 1% to $344.2 million. Support revenue was the only gainer, up 7% to $655 million. By product line, CAD revenue was $553 million, down 4% as license revenue dropped 5% to $150 million and services declined 21% (likely planned, offloaded to partners) to $24 million. Most worrisome is the decline in CAD maintenance revenue, down  2% to $378 million. For fiscal 2013, extended PLM revenue was $572 million, down 6% with licenses taking the hardest hit: down 12% to $250 million. SLM saved the year, with revenue of $172 million up 121% over fiscal 2012. We also learned that PTC paid less than $10 million for Enigma, which had “mid-single digit millions” in annual revenue and 50 employees, and “less than $20 million” for NetIDEAS, which also had “mid-single digit millions” in annual revenue and 20 employees in the US. It seems that NetIDEAS had around 80 customers, including “big ones like the US Navy”. Mr. Heppelmann used a question about NetIDEAS to discuss PTC’s potential cloud offering. He said, “Nobody today is kicking down our doors and saying ‘I need a product that’s fundamentally different than what you’re trying to sell me’. We’re trying to stay ahead of our customers, and are driving initiatives to think about how to bring some of this technology first, into a managed service environment with NetIDEAS; second, maybe into a peer cloud SaaS environment over time. That integration and enterprise fabric story, some amount of it will be done on premise, and then over time, the cloud SaaS model gives us a slightly different approach to sort of finish that project”. The differentiator to competitors is clear: we’re thinking about it, but no one is really asking for it yet. Finally, and I don’t know why this took so long, PTC will change its NASDAQ ticker symbol to “PTC” at the start of trading on December 3. Looking ahead, Mr. Heppelmann and CFO Jeff Glidden urged caution, as the macroeconomy is anything but clear. For FQ1 of 2014, the company expects non-GAAP revenue between $310 million and $320 million, below the analysts consensus of $325 million, with license revenue of $70 million to $80 million. For fiscal 2014, company guided to a non-GAAP revenue range of $1.325 billion to $1.340 billion, a bit higher than the analyst consensus of $1.29 billion. For the year (which will have Servigistics as “organic”), NetIDEAS and Enigma will contribute around $6 million to $9 million. PTC’s fiscal 2013 results are such a mixed bag of economic ups and downs, currencies, channels and big-but-not-mega deal factoids that it’s hard to draw a single big-picture conclusion. What is clear is that PTC’s product and vertical diversification strategy is a good thing, since it paves the way to new customers and to those who may not be buying PTC’s CAD products but might be good candidates for its PLM and SLM offerings. Those, in turn, open the door for other products. I have to say, though, that it’s nice to see life in the CAD business; let’s hope it continues.