PTC says Q4 revenue will be low because of … subs

Oct 3, 2016 | Hot Topics

PTC just announced preliminary results for Q4 of fiscal 2016 (ended last week) that show bookings will be well ahead of plan but revenue lower than expected. Blame math: more buyers chose subscriptions than perpetuals, which means revenue will be below expectations — and that means profit will be lower, too.

PTC said that it looks like bookings for Q4 are higher than expected, around $140 million, versus the previous guidance of around $115 million, including 2 mega deals (over $5 million each in bookings). That’s good, BUT: PTC thinks subscription will be around 70% of bookings, WAY higher than earlier guidance of 46%. More subscriptions means fewer perpetuals which means lower than expected revenue. The commissions to be paid because of beating targets also means that earnings per share will be below guidance.

The preannouncement also said that PTC scored a “competitive PLM displacement within one of the top Tier 1 global automotive suppliers”, as well as a “worldwide cloud implementation of PTC’s service parts management solution” – both in the same breath as the big deals. Combine the deals with the better than expected sales and, happy investors.

We’ll learn more on October 26, when PTC releases final data for the quarter.

What does it all mean? Several things to unpack here. First of all, customers like/dislike subs depending upon the advantages they see at any given moment. Perhaps these big deals went with subs (we don’t know that; I’m inferring) because of the flexibility in adding users in waves, or because they can add cloud users as needed. To say that subscriptions are good or bad misses the point: they’re a business model alternative (in PTC’s case) that offers benefits that are unique to each buyer.

Next, it’s really hard to align incentive programs to expectations. PTC seems to be saying that one reason earnings will be lower than expected is because of the compensation to be paid for exceeding subscription targets. It has also offered incentives to customers to get them to buy subscriptions — both of which likely played a role in the top and bottom line results. How do you get it just right? Trial and error, and all of the PLMish vendors are trying to figure out the right balance for internal and external motivators.

Finally, that competitive PLM displacement. PTC’s public comments have been so focused on IoT of late, that it’s good to see management’s focus isn’t completely removed from PLM. Nice. I’ve asked for more details and will update if I learn more.

For those who ask about preannouncements: PTC did this today to make known that revenue would be below the low end of guidance and likely also to set the tone for other earnings calls. Arch rival DS will now have to answer investor questions on October 25 about whether it lost an account to PTC, what its plans are about subscriptions and other items. PTC gets to control the conversation, at least for now.