Earnings

Once again the Internet of Things dominated PTC’s earnings call — and no wonder: it captures the imagination as a huge opportunity and is a concept that people can understand. As excited as PTC CEO Jim Heppelmann is about ThingWorx, he’s quite clear: PTC is still exploring how its customers can use this technology and seeing how it needs to evolve to meet those needs; ThingWorx is sold by subscription, so a meaningful contribution to revenue won’t happen until next year; it’s not integrated with PTC’s other products (yet). ThingWorx gives PTC a new reason to call on clients but Mr. Heppelmann tried to point investors at what’s making PTC tick now: “when you get in your car, its transmission was likely designed with Creo. Our SLM drives the OEMs’ supply chain interactions and ALM is crucial for all the systems that ensure safety.”

On to the details — since PTC’s fiscal year ends in September, these results are for its fiscal second quarter, which ended in March:

  • FQ2 revenue was $329 million, up 4% year/year (y/y) as reported and up 5% y/y on a constant currency (cc) basis. Excluding the acquisitions made in the last year (Enigma, NetIDEAS and ThingWorx), revenue was up 3%.
  • By business line, total CAD revenue was up 1% t o $138.2 million (up 3% in cc). CAD license revenue was $37.9 million, up 2%; services revenue was up 12% t0 $6.4 million and support revenue dropped 2% to $93.9 million. The company saw double-digit license growth in Europe, but lower license revenue in the Pac Rim and Japan. CAD channel revenue was down 2% y/y. 
  • The PLM business (which includes the Windchill and Integrity brands) reported revenue up 5% y/y to $147.5 million. PLM license revenue was $39.3 million, up 12% y/y; services revenue was up 3% to $52.8 million and support revenue was $55.4 million, up 4%. PTC said that double-digit growth in
    the Americas was offset by single digit declines in Europe, Pac Rim, and Japan.
  • The SLM business (Servigistics, Arbortext, Enigma and ThingWorx) reported revenue was $43 million, up 12%; license revenue was up 11% to $8.1 million; services revenue was $17.9 million, up 12% and support revenue was $17 million, up 12%. PTC didn’t break it out, but since this category includes acquired revenue from Enigma and ThingWorx, organic SLM growth was somewhere between 2% and 12%. PTC said that SLM revenues grew by double-digit in the Pac Rim, Europe, and the Americas, but saw a double-digit decline in Japan.
  • By revenue type, total license revenue in FQ1 was $85.2 million, up 7% y/y. The company says it saw double-digit growth in SLM, including the contributions from Enigma and ThingWorx; and double-digit growth in PLM license revenue but low single-digit growth in CAD license revenue.
  • Revenue from the Americas was up 48% y/y, reversing the anemic 1% growth reported in FQ1. Revenue from Europe was up 25% (up 23% in cc) while Japan was down 50% as reported (down 43% cc) and the Pacific Rim was down 15% (also 15% cc). These seesaws show the impact of mega deals (>$5 million in a quarter): the Americas reported 2 and Europe reported 1 mega deals in FQ2 2014, which had none a year ago. Japan had 1 mega deal in FQ2 2013 but none this year.
  • Services revenue grew y/y for only the second time in 2 years , up 6% y/y to $77.2 million as reported, and even excluding NetIDEAS and Enigma was up 4%. Consulting services revenue was up 5% y/y — which would seem like a solid indicator of future implementations — while training revenue, was up 8%
    year over year. In its prepared remarks, PTC said that it saw strong double-digit y/y growth in CAD and SLM, and single digit growth in PLM services. PTC continues to work on its partner network, and expects to shift more business to them over time.
  • Support revenue (aka maintenance) of $166.3 million was up 3% y/y, slightly ahead of expectations.
  • By geo, non-GAAP revenue from the Americas was $134.4 million, up 13% y/y; from Europe, $128 million, up 8% y/y and up 6% cc; from Japan, $26.9 million, down 21% y/y but down only 10% cc and from the Pacific Rim, $36.7 million, down 7% y/y and down 8%  cc. Mr. Heppelmann said several times that the manufacturing economy appears to be improving in the Americas and in Europe — but weakness in Japan and uncertainty over new government initiatives in China mean the mixed picture will continue.
  • PTC reported that large deal activity (over $1 million in a quarter) has picked up, recognizing 35 deals in FQ2 totaling $78.3 million, up 35% y/y. That continues the trend from FQ1, when it reported 34 large deals. PTC also talks about mega deals (>$5 million), none of which closed in FQ1 2014, but 3 in FQ2. Mr. Heppelmann was asked a couple of times why he thought big deal activity was up. He said that customers tend to spend more freely when they feel good about the economy — several of the mega deals didn’t start out that way, but grew as PTC and the customers evaluated needs and budgets.

For FQ3, CFO Jeff Glidden sees total revenue of $325 million to $340 million, including license revenue of $80 million to $95 million, $75 million in services revenue and $170 million in support revenue.

PTC again tweaked its 2014 guidance upwards by $5 million to total revenue of $1,335 million to $1,350 million, including license revenue of $355 million to $370 million.

PTC’s earnings again reflect its diverse portfolio, with products all along the spectrum of brand new (ThingWorx) to aging (CADDS — yes, it was mentioned on the call. W00t!), many end-industries and the typical geo struggles. Licenses of this are up here but not there, the sales pipeline is strong but sales productivity could be improved, systems integrators are interested in the IoT and SLM offerings but not in CAD … it’s a confusing picture. But the bottom line is that PTC is not taking its legacy for granted any longer, and has figured out how to grow both old and new businesses.

I also like how Mr. Heppelmann characterized PTC as unique (I’ll update with his exact words when I can listen to the replay). He said that PTC has broken away from its traditional (CAD) competitors with SLM, ALM and, now, IoT. He also doesn’t see PTC competing with SLM, ALM, etc. pureplay vendors because of its CAD and PLM offerings. The point: Mr. Heppelmann says that customers now see PTC as a strategic partner, one to call on when looking at how the customer can take its business into new areas. That, in turn, opens new opportunities for PTC. It’s an interesting time.