PTC’s fiscal first quarter wasn’t perfect and it wasn’t a disaster — but the company’s handling of its conference call with analysts was truly masterful. As teenagers, we all learned that if we didn’t want to tell our parents something, we needed to direct the conversation elsewhere (our little sister’s latest despicable act, for example). PTC did something similar on Thursday, directing the conversation away from the CAD and EPLM businesses which account for the vast majority of revenue and towards the exciting opportunity it sees in IoT. Throw in the not insignificant contributions of retiring CFO Jeff Glidden, and it was a lovefest. I’m not saying PTC tried to hide anything or was untruthful — but it certainly steered us where it wanted us to go.

The details:

• Total revenue for the quarter was $325 million, flat year/year (y/y). A strong US Dollar, slowing manufacturing economies in Asia and Europe, and the shift to subscriptions were cited as the main reasons for the soft results. Competition and product release roadmaps didn’t come up once during the conference call.
• In constant currencies (cc — meaning if the exchange rates in the October – December 2013 period were applied to the 2014 results), total non-GAAP revenue would have been $327 million, up 4%. Currency is starting to have such an impact on both revenue and costs that PTC is considering raising prices in Europe, where products are priced in Euros. Of course, European customers are unlikely to be happy about a price increase, regardless of reason, so we’ll have to see how effective a tactic this proves to be.
• By category of revenue, GAAP-basis license and subscription revenue was $79 million, down 5% y/y as reported, Support revenue was $182 million, up 7% y/y, and Services revenue was $65 million, down 10% y/y.
• On a non-GAAP basis, license and subs revenue was flat y/y in cc with acquisitions accounting for a negligible $700,000. The company says it saw good results in Japan, the Pac Rim, and Europe but weakness in the Americas.
• By product area, non-GAAP CAD software revenue was down 13% y/y (down 9% cc) because of the strong quarter a year ago, when PTC was in the throes of a massive Creo upgrade cycle. The company said that it saw a “modest decline in revenue from new Creo seats, modules, and upgrades and a more significant decline in business from sales of other CAD software products, training software, and eLearning … 80% of our CAD customers have now adopted the Creo platform [and while] we continue to expect customers will transition to Creo, fewer large customers making the switch …” Total CAD non-GAAP revenue in FQ1 was $134 million, down 2% y/y but up 2% in cc. That’s worrisome — especially since PTC didn’t address how plans to jumpstart Creo growth in 2015 or explain why support revenue declined sequentially.
• EPLM software revenue was down 13% y/y (down 9% cc). PTC said the PLM business was “solid” but was offset by a decline in ALM. Total EPLM non-GAAP revenue was $140 million, down 2% y/y but up 1% in cc.
• SLM software revenue was down 23% y/y (down 20% cc). Total SLM revenue was $43 million, down 6# y/y and down 3% in cc. PTC said it is seeing longer sales cycles and more difficult close rates but believe this business will retiring to double-digit growth rates as it releases new capabilities.
• IoT didn’t exist as a category a year ago, so y/y comparisons can’t be made — but the business had a boffo quarter anyway. Non-GAAP IoT software revenue was $8.8 million, up 99% from FQ4 and up 31% from FQ4 on an organic basis. PTC made a big deal out of this on the earnings call: During FQ1, it added 42 new IoT customer logos, on its way to the 2015 target of 200. This is a bit like its PLM strategy of a few years ago, when it believed focusing on specific accounts would spur others to adopt technology.
• Why was support revenue up 7% y/y when everything else was flat to down? Because of strong perpetual license sales in F14 and the fact that FQ1 2015 was 6 days longer than the quarter a year ago. PTC cautions us not to expect this growth to continue; for all of F15, the company sees growth moderating to roughly flat y/y performance.
• By region, non-GAAP revenue from the Americas was $137 million, down 1% y/y. Non-GAAP revenue from Europe was $129 million, up 1% y/y and up 8% in cc. Non-GAAP revenue from Japan was $25 million, flat y/y but up 12% in cc. Non-GAAP revenue from the Pacific Rim was $36 million, up 6% y/y and up 7% in cc.
• Large deal activity was on par with a year ago, as 15 deals created a total bookings value of $26 million (last year: 14 deals for $28 million). There were no mega deals. To be clear: PTC now defines large deals as a contributing over $1 million in license and subscription bookings during a quarter; it had been revenue recognized during the quarter. (Mega deals are $5 million and greater.) By the new metric, the average large deal is smaller than it has been since FY13, at $1.7 million versus an average of $2.4 million.
• By channel, revenue from direct sales was up 3% cc but down 3% cc on an organic basis. Indirect revenue increased 11% cc and 11% cc on an organic basis, since those are mainly CAD sales, where there were no acquisitions.

PTC says that customers are surprising it with their embrace of subscriptions. Roughly 1% of license revenue in fiscal 2013 was from subs; that climbed to 8% last year and 19% in FQ1 ’15. The company expects it to average out to 15% for the year, but CEO Jim Heppelmann admitted that he couldn’t really predict what customers would choose in any particular deal.

Looking ahead, PTC sees the global manufacturing economy weakening, as the US recovery moderates and manufacturing in Europe and China slows. In all, PTC expects manufacturing in 2015 to be less robust than in 2014. As a result, the company set guidance for FQ2 at $305 million to $320 million (down 7% to down 3% y/y), and for the year at $1,320 million to $1,350 million (down 3% to down 1% y/y). Both are broad ranges that will tighten up as the year goes on and exchange fluctuations become more known. In FQ2, license and subscription revenue could swing from -10% to +7% y/y and from -3% to +5% for the year.

Phew. What does it all mean? Macroeconomic uncertainty is a given. IoT and SLM are exciting new opportunities for PTC and a great strategic move to embed more deeply with existing accounts, give reps a reason to call on dormant customers and reach new prospects. But they don’t yet move the needle at PTC to any measurable extent –IoT+SLM accounted for 16% of total revenue in FQ1– so a bit more about the strategy for ramping up CAD sales, boosting SLM back to growth, and the potential for the new Windchill in the Cloud offering would have been great. Maybe next quarter?