PTC beats expectations, fiddles with targets & ends most perpetual sales on 1/1

Jul 19, 2018 | Hot Topics

Bucking the trend, PTC announced fiscal third quarter results yesterday that showcased a product mix shifting the other way, as more customers opted for perpetual licenses, with the higher up-front revenue lifting PTC above its revenue guidance for the quarter. More details below, but it seems that PTC has fixed its problems in Japan, where perpetuals are often preferred; this boosted overall revenue for the region and the quarter.

The details:

  • Total revenue for the quarter was $315 million, at the high end of the company’s forecast, and up 8% as reported (up 5% in constant currencies, cc)
  • Software revenue was $274 million, above the target of $265 million to $270 million, and up 10% (up 7%).
  • Within that, Subscription revenue was $127 million, up 69%
  • Support revenue (aka maintenance on perpetual contracts) was $121 million
  • Perpetual license revenue was $26 million
  • Services revenue was $41 million, slightly below expectations, and down 6%
  • Solutions Software, which includes CAD, PLM and everything else not IoT, revenue was $242 million, up 9% (up 5% cc). PTC said that this growth is “due to the strong CAD, PLM and global channel bookings performance over the past several years, despite [the] increase in subscription mix in Q3’18 compared to Q3’17”. In other words, sales closed and booked years ago leads to subscription revenue growth today –that’s the whole point of the subs transition. The company also broke out that “Solutions recurring software revenue grew 13% YoY and has grown double digits for six consecutive quarters”. CEO Jim Heppelmann added on the call that ” CAD continues to benefit from our go-to-market optimization initiative, evidenced now by 10 consecutive quarters of double-digit bookings growth coming out of our reseller channel”
  • IoT Software revenue was $32 million, up 26% (up 24% cc) over last year and up 10% sequentially (over the prior quarter). And it’s not all new business: PTC says it saw 33% growth in recurring IoT software revenue, “due to the strong IoT bookings over the past several years. As our transition matures, recurring software revenue growth is expected to accelerate due to the compounding benefit of a subscription business model”
  • By geo, software revenue from the Americas was $118 million, up 9% as reported and in cc
  • From Europe, software revenue was $101 million, up 11% (up 3% cc) and
  • Revenue from Asia, $55 million, up 12% (up 9% cc) as Japan “appears to be tracking at or above its full year plan. We believe we have put our FY’17 challenges there behind us”
  • Channel wasn’t mentioned much, except that PTC says “Our global channel continues to exceed expectations, growing bookings double-digits for the tenth consecutive quarter.”

PTC also reports bookings, which were up 26% (up 23% cc) in total in the quarter. As you can see from the above, bookings are an indicator of future revenue, so worth paying attention to (even if they are unaudited). PTC says that, for the year so far, CAD bookings grew in the double-digits, PLM bookings “tracked above market growth rates after gaining renewed momentum in Q3”, SLM “posted solid bookings results for the second quarter in a row” and IoT saw “growth well above the market growth rate”.

One other important, IoT, note: PTC has been following a “land and expand” strategy in IoT since the beginning. Get into an account, do a pilot then expand to other parts of the business. That seems to be working, as PTC reports that “expansions accounted for over 50% of our ThingWorx bookings, and the number of six-figure deals grew over 80% year/year, driven by these expansions”.

During the earnings call, Heppelmann said that augmented reality bookings “almost tripled” in FQ3 –off of a
small base– and that over 10,000 enterprises have either bought or are testing Vuforia. Applications range from service and maintenance instructions and factory operator instructions to virtual product demonstrations. Vuforia was all over PTC’s LiveWorx last month; I owe you a blog post on some of the cool things people are working on.

In concert with the earnings release, PTC announced that it is ending perpetual licensing for most products. Starting on January 1, 2019, new software licenses for just about everything PTC sells will be available only by subscription, including in the previously grandfathered countries of China, India, Korea, Russia, Taiwan, and Turkey. If you have a perpetual license now (or buy one by January 1, 2019) you’ll be able to continue to use them, and to renew support. PTC’s Kepware will continue to be available through both subscription and perpetual licensing. PTC adds that “Other limited exceptions may apply” so check with your reseller or sales rep.

This announcement is a bit ironic, given that perpetual licenses enabled PTC to beat revenue targets in FQ3. But Mr. Heppelmann feels that the time is right: internal PTC problems aside, Japan already has a “large percentage of subscription bookings” and subscription bookings account for over two-thirds of bookings in China (double the rate of a year ago). Too, it’s a bit weird that the guidance given at last month’s investor day says that total bookings for next fiscal year will be 85% subscriptions, meaning 15% is still perpetual. That’s either insane growth in Kepware or key accounts have wiggle room to grow their perpetual base even in 2019. Or, of course, PTC might change that earlier guidance. Interesting, right?

The earnings call again focused on IoT, a fast-growing but still tiny part of the overall business. Mr. Heppelmann told investors that IoT “bookings growth in the quarter well exceeded the estimated market growth rate. IoT bookings in the quarter were basically neck-to-neck with PLM bookings.” Honestly, I would turn that sentence around: in FQ3, PLM bookings approached IoT rates, which are hyped and have so much buzz more buzz than PLM. We don’t have much visbility into PLM, specifically, but PTC said that “PLM delivered a solid Q3 with year/year growth in the low double-digits. Year-to-date PLM bookings are tracking just ahead of market growth rates and the Q4 pipeline is very solid.”

Taking all of this (and new currency assumptions) into account, PTC tweaked its guidance for the fourth quarter and, therefore, the year. For FQ4 PTC expects revenue of $318 million to $323 million. For the year, PTC now expects total revenue of $1.248 billion to $1.253 billion, down $5ish million from prior guidance. Total software revenue is now expected to be between $1.08 billion and $1.084 billion, driven by higher perpetual revenue and partially offset by currency. This would be growth of 9% to 10%.

One last thing: partnerships have been creeping into a lot of the news in our PLMish universe. Mr. Heppelmann told investors that yes, this is new for PTC, but important. “We said, ‘What to we need to do to be one of the best software companies in the world? We have subscriptions, and growth, and profit, but need an ecosystem, whether it’s SIs or partnerships with Rockwell and ANSYS and Microsoft — and I might, add MCR and Erickson and so forth” — so it sounds like we can expect more.