PTC’s Q1 call blends caution, excitement

PTC kicked off earnings in style last night, providing more details on the barebones announcement made in December with the acquisition of ThingWorx. The Internet of Things (IoT) was a big topic on the investor call as PTC continues to educate its investors about the opportunity but, IoT aside, the commentary was cautiously optimistic, with variations on “still uncertain global economic recovery (particularly the global manufacturing economy)”. FQ1 was tough, said PTC CEO Jim Hepplemann, as some customers are cautious about releasing budgets while others are spending more readily. Mr. Heppelmann said that PTC saw a “weak close rate in FQ1 on a strong pipeline. It was worst in China where deals pushed out, but it’s mixed elsewhere … Q4 felt pretty easy compared to Q1, so conservative feels like the right place to be right now.” Investors are going to be happy. PTC reported total revenue of $325 million versus the consensus estimate of $318.2 million, with services revenue stronger than expected. CAD revenue was up 1%, led by 15% revenue growth in CAD license revenue (albeit on a weak quarter a year ago), while PLM returned to growth. The energy on the call was all IoT, both from investors and the company.  Mr. Heppelmann told investors that the response to PTC’s acquisition was unusually positive; he said that the Fortune 100 manufacturing executives he contacted about the deal all expressed real interest in learning more. He said that PTC plans to offer ThingWorks as a standalone platform as well as “rework[ing] everything to take advantage.” Paraphrasing, Mr. Heppelmann sees the opportunity in SLM as enormous because it moves services from reactive to a proactive, preventative mode. When it is time to intervene, a services partner would go to customer knowing exactly what needs to be done. ThingWorx can have a significant impact in field service, spare parts planning, knowledge management from problem to solution — all will change once devices are connected. In ALM, he sees the opportunity to actively manage software across the entire fleet of products. Finally, in PLM Mr. Heppelmann sees IoT affecting requirements management, quality control and many other areas. Overall, he sees ThingWorx and PTC as helping customers make their IoT vision “so much more real, so much faster — it’s visual, fast, TW lowers barrier of entry to IoT by a factor of 10.” [PTC hosted an event for industry analysts last week to show ThingWorx and describe the strategy in more detail. I’ll recap that for you next week.] Of course, PTC’s December quarter was all about the existing products so let’s bring this back to what actually happened then. PTC’s fiscal year ends in September, so these results are for its fiscal first quarter:

• FQ1 revenue was $325 million, up 1% year/year (y/y) as reported and up 2% y/y on a constant currency (cc) basis. Acquired revenue was $2 million from Enigma and NetIDEAS, which is reflected mostly in the Services line (see below).
• By business line, total CAD revenue was up 3% t o $136.2 million (up 4% in cc). CAD license revenue was $34.2 million, up 15% on a weak quarter a year ago; services revenue was flat at $6 million and support was flat at $96 million. The company reports that some of the strength is due to rapid adoption of Creo, and that over 50% of the base has moved from Pro/E to Creo, and some is due to the slow, modest improvement in the economy in some parts of the world.
• The PLM business (which includes the Windchill and Integrity brands) saw revenue up 1% y/y to $143.8 million on a tough comparable — FQ1 a year ago included a mega deal that was mostly PLM. PLM license revenue was $34.1 million, flat y/y; services revenue was down 3% to $53 million and support revenue was $56.7 million, up 5%. PTC said that “solid growth in the Americas and Japan … was offset by a double digit percentage decline in the Pac Rim and a single digit percentage decline in Europe.” Mr. Heppelmann added that the “uptick in PLM is mostly due to economic effects”.
• The SLM business (Servigistics and Arbortext) suffered in comparison to the strong quarter it reported a year ago, when Servigistics reported its fiscal year end. Total SLM revenue was $45 million, down 4%; license revenue was down 30% to $10.9 million and support revenue was $17.5 million, up 14%.
• By revenue type, total license revenue in FQ1 was $79.2million, flat y/y, in part because of the tough comparable a year ago (the fiscal year end for Servigistics after its acquisition as well as a mega deal in the Americas). License revenue from Europe was up 15% y/y and up 12% in cc; revenue from Japan was down 7% y/y but up 14% in cc; revenue from the Pac Rim was down 21% as reported (no indication of cc) while revenue from the Americas was up 1%.
• Services revenue declined 2% y/y to $75.6 million as reported but declined 4% excluding the contributions from NetIDEAS and Enigma. Some of the decrease was planned, as PTC continues to shift more business to services partners. PTC expects to turn the decline around somewhat in Q2, when services revenue is expected to increase 3% y/y and in FY14, when it’s up 2%.
• Support revenue (aka maintenance) of $170.1 million was up 3% y/y, a significant slowdown from the more typical 7% y/y increases of recent quarters. I’ve asked PTC to clarify whether this is significant and will update if I learn more.
• By geo, revenue from the Americas was $138.9 million, up 4% y/y; from Europe, $127 million, up 6% y/y and up 2% cc; from Japan, $25.1 million, down 13% y/y but up 8% cc and from the Pacific Rim, $33.9 million, down 12% y/y both as reported and in cc. A lot of the local color is embedded above, but PTC did say that license revenue from the Americas was up 1% y/y, which means it lagged services and support. License revenue from Europe was up 15% — so ahead of the other sources. It’s a mixed bag of currencies, local sales climates and company-specific details.
• PTC reports large deals (over $1 million in a quarter) as a way to show that they are engaging with enterprises across many products and parts of the enterprise. The company reports 34 large deals in FQ1, up from 27 a year ago and the highest in 7 of the last 9 quarters. PTC also talks about mega deals, one of which closed a year ago but none in FQ1 2014. Mr. Heppelmann said that “mega deals are still out there and we expect to close some but are being more conservative in forecasting them — they could push out, get smaller …” His comments didn’t imply that these deals no longer make part of PTC’s sales strategy, just that their timing and size is more difficult to predict.

For Q2, CFO Jeff Glidden sees total revenue of $320 million to $330 million, including license revenue of $75 million to $90 million, $75 million in services revenue and $165 million in support revenue. For fiscal 2014, PTC sees revenue of $1,330 million to $1,345 million, including license revenue of $355 million to $370 million. That total is a slight tweak upwards of $5 million at both ends of the range. One interesting note: the company’s forecast for license revenue is an unusually wide range, with growth ranging from -6% to +13% for the current fiscal quarter and from +3% to +7% for the year. From everything that was said on the call, this range has more to do with PTC’s caution about customer sentiment than any execution problems of its own. Bottom line: PTC’s December quarter was good, there’s positive momentum around its CAD product line, good news in PLM … and a giddy atmosphere around the potential for ThingWorx. It’s a cool product in itself, and it give PTC the opportunity to engage with existing and new customers as they learn about explore how the IoT can transform their businesses. PLMish earnings are off to a good start!