PTC’s FQ2 featured ‘strong’ CAD, PLM performance
PTC announced results on Wednesday that were, in a single word, impressive. Growth across most revenue categories, product lines, channels — and with positive outlook for the rest of 2018, too, which means no deals were pulled from the future into the fiscal second quarter to boost its appearance. Indeed, on the earnings call CEO Jim Heppelmann said that one large deal slid out of FQ2 into FQ3 (and has already closed), so FQ2 could have been even better.
- Software revenue was $262 million, up 12%. That’s especially impressive given that the mix continues to shift to subscriptions —remember that subs are a smaller amount each quarter without the big bump upfront
- That continues shift to subs means that around 91% of FQ2 software revenue came from recurring revenue, up from 88% a year ago
- Subscription revenue was $113 million, up a crazy 72% from a year ago
- Perpetual license revenue was down 17% to $23 million —not a bad thing, given the planned transition to subs– and now accounts for just 7% of total revenue. Let’s think about that. I just looked at PTC’s annual report from fiscal 2008, when license revenue was 30% of total revenue of $1030 million, maintenance was 50%, and consulting and other services made up the rest. In 10 years, PTC has shifted itself from being a deal-hungry sales machine to one that, in theory at least, focuses on adding value to subscriptions because it knows that renewal will be as hard to close as a brand new deal. It certainly hasn’t been easy but it does appear that the company and its customers are weathering the transition.
- Total revenue in FQ2, which includes professional services too, was $308 million, up 10%
- Solutions Software (CAD, PLM, SLM, etc.) revenue was $234 million, up 10% as reported and up 4% in constant currencies (cc). PTC said growth came from “strong CAD, PLM and global channel bookings performance over the past several years, despite a 1000 basis point increase in subscription mix in Q2’18 compared to Q2’17. Strong bookings in the past mean revenue now and in the future — so we should see growth continue.
- As usual, PTC spent much of its air time on the earnings call talking about IoT, yet Solutions makes up solidly 90% of software revenue. A couple of nuggets from the earnings call: “Year-to-date CAD bookings have considerably outpaced market growth rates and our outlook for the balance of the year remains very strong” … “nine consecutive quarters of double-digit bookings growth in our reseller channel” … But “PLM declined sequentially in Q2 … due to the timing of large deals in the pipeline. On the first half basis, PLM bookings are tracking at market growth rates. The PLM pipeline for the back half of fiscal ’18 looks good and we expect this business to have a strong backup and deliver a full year growth at or above the market rate.” And, finally, SLM “has been performing below our expectations for a number of quarters [but] posted solid results in Q2 highlighted.”
- In response to an investor question, Mr. Heppelmann said “We’re starting to sell more and more PLM in the cloud.” That’s interesting, given PTC’s recent announcement of a partnership with Microsoft. Cloud adoption in PLM (outside of CAE solvers, renderers, etc.) is still nascent as privacy concerns slow adoption — but we all know it’s coming
- Solutions recurring software revenue grew 14% YoY and has grown double digits for five consecutive quarters. As our transition matures, recurring software revenue growth is expected to accelerate due to the compounding benefit of a subscription business model
- The rest of PTC’s products are lumped into IoT Software, which reported revenue of $29 million, up 33% as reported (up 30% cc). PTC said this “Recurring software revenue grew 34% YoY and 13% sequentially on continued strong bookings growth, driving our total IoT software growth. Q2’18 subscription mix was about flat with the same period a year ago. As our transition matures, recurring software revenue growth is expected to accelerate due to the compounding benefit of a subscription business model.”
- The channel, in general, seems to be doing well. PTC said that its channel “continues to exceed expectations, growing bookings double-digits for the ninth consecutive quarter.”
- By geo, software revenue from the Americas was $113 million, up 6% as reported and cc. Interestingly, PTC said that new bookings were up 19% “despite a 900 basis point increase in the subscription mix.”
- Software revenue from Europe was $98 million, up 20% as reported and up 8% cc with a “1200 basis point increase in the subscription mix in Q2’18 compared to Q2’17.” During his remarks, Mr. Heppelmann said performance in Europe is as expected and “based on the timing of large deals in the pipeline throughout the year primarily coming from our PLM segment.” PLM! Europe!
- Finally, software revenue from APAC was $51 million, up 10% as reported and up 5% cc. Mr. Heppelmann said that PTC saw “solid performance in China, Taiwan and Korea” and that progress continues in Japan, which now is tracking to a full year plan of modest growth.
Looking ahead, PTC sees the shift to subs continuing (obviously, since it is discontinuing sales of perpetuals in North America and Europe), which can continue to make for difficult comparisons in the short term. That said, FQ2 leads to optimism and an upward revision of revenue targets. Total revenue is now expected to be between $310 million and $315 million, or up 7% year/year, and up $13 million from prior forecasts. That $13 million takes into account a $10 million bump in recurring software revenue due to slightly higher renewal rates than previously estimated. For the year, PTC now sees total revenue of $1250 to $1260 million, up about 8% year/year — even with higher subscriptions driving a near-$40 million decline in perpetual revenue.
Let’s recap: Subscription revenue, up 72%; support aka maintenance down 11% but now included in subscriptions; perpetual licenses down 17% but, again, moved to subs. A work in progress as Mr. Heppelmann says: “We have to transform PTC into one of the premier software companies in the world. Our current plan says that by 2021, we will achieve revenues approaching $2 billion with double-digit growth rates and margins in the low 30s. [At LiveWorks in June, PTC will lay out for investors a long range plan through 2023]. I think you’ll enjoy seeing how compelling our business looks when all of the business model transition effects are finally behind us.” Okay then — but I think it looks pretty good right now.