PTC’s FQ1: a mixed bag with lots of Creo love

Jan 25, 2019 | Hot Topics

Investors were underwhelmed at PTC’s fiscal first quarter 2019 earnings news, since the company said its bookings were at the lower end of its guidance, leading to weaker FQ2 revenue guidance. I’m a glass half-full type of person and prefer to look at the fact that PTC beat its revenue and profit estimates for FQ1 due to strong performance in Asia, which had recently been a problem area.

But why, I hear you asking, do bookings matter? Bookings are the commitments customers make today to buying in the future — and in that future, bookings turn into revenue. That’s important, since many investors look at bookings to judge the health of the business as PTC completes its transition from perpetual licenses to subscriptions. PTC said that the bookings miss is due to nine deals, totaling $20 million, that slipped out of FQ1, in part due to poor sales execution. On the upside, PTC kept its guidance for the fiscal year unchanged, meaning that it expects most of those deals to close. Sometime. On the upside, PTC kept its guidance for the fiscal year unchanged, meaning that it expects those deals to close. Sometime.

Think the US government shutdown doesn’t have consequences? CEO Jim Heppelmann said that part of the bookings miss was directly related to it: “The 9 large deals pushed out of Q1 include … around $2 million in U.S. government deals that slipped because of the government shutdown that began on December 22nd — simply because there was nobody there to process the deals.” Nobody there. What a sad statement. We’ll have to watch for similar effects from the rest of our PLMish universe.

The details:

  • PTC reported many GAAP and non-GAAP figures because it’s adopting accounting rules that allow it to recognize subscriptions more in line with how costs accrue in relation to that revenue. Depending on which method, total revenue was either $335 million or $339 million. We’re going to use ASC 605 because that’s comparable to prior years. So:
  • Total non-GAAP (ASC 605) revenue was up 10% to $339 million
  • Subscription revenue was $148 million, up 47%
  • Maintenance revenue was $109 million, down 17% as the company shifts users to subscriptions
  • Perpetual license revenue was up 23% to $42 million on what the company said was “higher than expected last time perpetual license purchases in Asia”
  • Total software revenue was $299 million, up 12% (up 15% in constant currencies, cc)
  • Professional services revenue was $39 million, down 5%
  • License and subscription bookings were $101 million, more or less flat compared to a year ago on a cc basis
  • By sales channel, Mr. Heppelman said that the indirect channel and direct deals below $1 million, grew in the mid-teens year over year, which he “view[s] as a positive sign”
  • Recall that PTC now offers Solutions Software and IoT categories for its product revenue discussion
  • Solutions revenue was $265 million, up 11% (up 13% cc), with recurring software revenue up 9% (up 11% cc). Mr. Heppelmann said that “Q1 was another great quarter for [the] CAD business. Following two years of high-single-digit growth, in Q1 the CAD team delivered bookings growth well in excess of market growth rates. The last time perpetual buys in APAC certainly contributed to Q1 bookings but we were pleased to see continued solid performance from our indirect channel on a global basis.” PLM, on the other hand: “the large deal slippage included a large component of PLM.”
  • If you stuck around for the very end of the earnings call, you heard Mr. Heppelmann say this: “Our CAD business did phenomenal, our PLM business of course was part of the big deal issue but that business is strong and we’re winning competitively and we’re winning analyst awards. We feel good about where we are.” Mic drop.
  • IoT software revenue was $34 million, up 30% (up 31% cc). with recurring IoT software revenue up 35% cc. Annualized recurring revenue (ARR) was $1.045 billion, up 13% cc
  • By geo, Americas software revenue was$123 million, up 9%; revenue from Europe was flat (up 2% cc) due to the end of perpetuals and the big deal misses; revenue from Asia was $76 million, up 49% (up 53%) on the big push to end perpetual license sales.

Mr. Heppelmann said that, as of January 1, “we have implemented all of the subscription transition program elements and they have achieved their desired effects, so the subscription transition program is now effectively complete. As of now with the small exception of Kepware, we only sell subscription software across our mainstream product lines and geographies.”

He sounded cautious about the rest of the fiscal year, saying that the “macro environment appears more uncertain than it did just four to five weeks ago, thanks to a combination of factors such as weakness in Germany and China, ongoing trade tensions, the government shutdown, and significant stock market volatility.” Even so, he didn’t change overall guidance for fiscal 2019, of revenue between $1.245 billion and $1.295 billion. For FQ2 revenue is projected to be between $283 million and $298 million.

There was no real update on the financial impact of the Rockwell, Microsoft and ANSYS partnerships, other than to say that “as they mature, [they] could help cushion against a potentially softer demand environment.” For those keeping track, Creo Discovery Live hits the market next month.

The company also announced that its CFO, Andrew Miller, will leave PTC before the end of fiscal 2019, and that the search for his successor is underway.

I am often asked why the grab-bag of technologies that PTC brings to the market makes sense. Does a CAD guy influence IoT purchases? How does PLM affect the decision for field service tools? My take on it: It starts in CAD — without that, the rest of this digital world is hard to create. From there, it’s a question of technology and user experience: can the tools do what we need, and do we transact with the vendor in a way that makes us feel understood and supported? If you’ve got one but not the other, the deal is not going to happen. But PTC has been successful in working from Creo into Vuforia (augmented reality, AR) into Windchill (PLM) into Servigistics (field service, SLM) and so on. But it starts in CAD, and it’s heartening to see Creo get the attention it deserves.