PTC’s Q4 and fiscal 2018 results, released last week, were solid yet investors were displeased because the forecasts for F19 presupposed a faster transition to subscriptions than many expected. Remember: subs mean lower initial revenue but a longer tail, so revenue forecasts were below expectations. Add in some accounting changes and … underwhelmed Wall Street. And that’s a shame because PTC’s reinvention is real and good things are happening, even with the legacy CAD and PLM products.

During the earnings call with investors, CEO Jim Heppelmann summed it up this way: “FY 2018 was another solid year for our CAD business. Over the past two years, CAD has delivered a bookings growth CAGR in the high single­ digits, which outpaced overall CAD market growth rates. It was also ahead of the lower single­ digit growth assumptions built into our long-range targets. Turning to PLM, following a solid Q3 with year­ over­ year growth in the low double digits, our PLM business finished the year with Q4 bookings ahead of plan and up 33% sequentially. Over the past two years, core­PLM has grown at a bookings CAGR just ahead of market growth rates. Our new investments in cloud­ based augmented reality design review and additive manufacturing are paying off. IoT had good Q4, capping off a strong year.This was driven both by new customer acquisition and by expansions, with the latter accounting for over 60% of fiscal 2018 ThingWorx bookings.” Firing on all cylinders, though ALM and SLM didn’t come up on the call.

The details, all using GAAP measures:

• Total revenue for FQ4 was $313 million, up 2%
• Subscription revenue was $142 million, $10ish million more than expected and up 69%
• Perpetual license revenue was $27 million, at the top end of guidance
• Maintenance revenue was $118 million, about $5 million less than expected as customers took advantage of PTC incentives to convert subs
• Total software revenue was @287 million, up 9% as reported and up 8% cc
• Professional services revenue was $25 million, $15 million less than expected. PTC explained that this was due to a $14.5 million write-down resulting from settlement of a customer dispute. Absent that, it appears services would have been to plan
• During this time of transition to subs, PTC highlights bookings to show customer intent. License and subscription bookings were $149 million in FQ4, up 4% as reported and up 5% in constant currencies (cc). For the year, bookings were $466 million, up 11% (up 9% cc)
• The details matter: PTC says FY18 CAD bookings performance was “good” and that the past two years bookings growth was “in the high single-digits, well outpacing overall CAD market growth rates, and well ahead of the lower single digit growth assumptions built into our long-range targets”
• Also for the year, PLM “delivered good results, and over the past two years, core PLM has grown at a bookings CAGR just ahead of market growth rates”. I’m not sure what that means in numeric terms, but PTC clearly wants us to understand that it thinks it is taking market share
• IoT bookings over the past two years were up “near the higher end of the 30-40% estimated IoT market growth rate”, with 60% of FY18 growth due to customer expansions. Mr. Heppelmann told investors that “IoT didn’t quite surpass PLM in the full fiscal 2018, it was close and we expect IoT to handily surpass PLM to become our second largest source of bookings in fiscal 2019” [presumable after CAD]
• By geo, bookings were up 20% in the Americas in FQ4, for an overall 20% bookings growth in FY18. In  Europe “bookings declined in FY’18, but against very strong results in FY’17, when this region delivered 28% constant currency growth”. APAC had a “strong fourth quarter [for bookings] and delivered more than 20% bookings growth in FY18, led by Japan, which saw  “double-digit bookings growth” in FQ4 i keeping with the company’s recovery plan
• Back to revenue, which is backwards-looking. Recall that PTC no longer gives revenue data by product set, grouping it instead into Solutions and IoT. Solutions revenue was $250 million in FQ4, up 5% (up 4% cc). PTC cited “the solid CAD, PLM and global channel bookings performance over the past several years” — in other words, the subs model is working. As is PTC retooling of Creo’s UI, improving performance and so on — Mr. Heppelmann said “Creo looks great, works great, viewed as the premium product in the industry.”
• IoT Software revenue was $37 million in FQ4, up 45% (up 45% cc)
• By geo, revenue from the Americas was $124 million, up 10% (up 11% cc). Revenue from Europe was $103 million, up 3% (up 1% cc), and from APAC, $60 million, up 15% (up 16% cc).

As usual, a lot of numbers. For Fiscal 2019, which started on October 1, PTC now sees roughly 90% of revenue coming from subscriptions, as only Kepware will be available via perpetual/maintenance. The company issued revenue guidance of $1.16 billion to $1.18 billion for software, of which only $55 million or so is expected to be perpetual. Total revenue for the year is expected to be between $1.32 billion and $1.34 billion, up 5% to 7% as reported and up 8% to 9% cc. For FQ1, PTC sees total revenue of about $320 million.

PTC also used its earnings call to update its financial model and how it will account for subscriptions. Given the speed at which subs are ticking over PTC now thinks subs will be 88% to 90% of bookings in FY19 and 95% in FY’20. That ripples into revenue and profitability in subsequent years making investors unhappy in the short term but, PTC says, “the increase in subscription mix is expected to benefit the business over the long term”.

Finally, PTC announced that it is adopting ASC 606, an accounting rule that changes how subscription revenue is recognized. It basically allows companies to recognize part of a subscriptions as “license revenue”, which can be recognized upfront, and rateable support revenue, which is recognized over the period of the subscription. It’s mind-numbing but matches more closely how a company’s revenue and expenses are incurred. If I sell you a $100 subscription, it may cost me $50 to close the deal. If it’s a 4-year subscription, current accounting practice has me record $25 in revenue but $50 in expenses, which looks like a net loss — even if I collected all $100 up front. So the 606 adoption more closely aligns to how PTC (and the other software companies that are adopting it) do business. For the foreseeable future, PTC says it will report using both current (605) and the new (606) methods. We’ll sort it all out with the Q1 report.

So, what does it all mean? PTC made a big deal of saying that this was the 7th consecutive quarter of growth for a number of metrics, and that’s my main takeaway from the Q4 results. After years of tiny incremental growth or growth in some areas but not others, PTC is finally firing on all cylinders. Yes, the transition to subs makes it seem slow, but that’s just math — customers are buying, seeing value in PTC’s products. And perhaps PTC is taking some share, which means it’s more in the competitive game than it has been for years.

PTC also, in F18, finally acknowledged that it cannot do it all alone. Partnerships are key to its growth, especially in IoT. PTC+Microsoft apparently had 28 joint selling opportunities in F18, and there are almost 200 in the pipeline. Microsoft, with tentacles into nearly every company on the planet, will help PTC work with prospects interested in both smart connected products (SCP) and smart connected operations) (SCO). But SCO is where the Rockwell partnership comes most heavily into play: PTC said that it has already closed “several” PTC+Rockwell IoT deals in the quarter, one with a U.S.-based company that hadn’t been a meaningful PTC customer. The ANSYS partnership is also on track, with a Creo+Discovery Live product expected out during this quarter. (It was interesting: Mr. Heppelmann said that the partnership isn’t only about Discovery Live and that PTC plans to integrate the “full breadth of the ANSYS simulation suite into Creo over time”. Hmmm.)

Products cranking. Partnerships in high gear. There’s a lot to like here.