PTC’s FQ3 was OKish but weak bookings make investors unhappy

Jul 25, 2019 | Hot Topics

After what looked like a blockbuster LiveWorx last month, with buoyant customer use cases and technology roadmaps galore, PTC yesterday announced results that felt … flat. Some of the details (see them all here), using ASC 605 accounting because that enables us to get at growth rates:

  • Total revenue was $322 million, up 2%
  • Subscription revenue was $172 million, up 35%
  • Perpetual support (aka maintenance) revenue was $100 million, down 18%
  • Perpetual license revenue was $11 million, down 59%
  • Professional services revenue was $40 million, down 2%

On an ASC 606 basis, which accounts differently for subscriptions, PTC’s total revenue was $295 million, leading to a reported GAAP net loss of $15 million but on a non-GAAP basis, a positive net income of $27 million.

Expectations for FQ3 had been for a bit more revenue and no net loss but the real news is about PTC’s ability to book future revenue — the whole reason for the transition to subscriptions.

In his opening remarks to investors, CEO Jim Heppelmann said that “we had not anticipated some of the aftereffects of our subscription transition that are creating headwinds to bookings growth this year.” He gave two examples: channel bookings in China and Russia “declined materially following the end of perpetual license sales there” but said that PTC’s limited exposure in those countries mitigated the pain — but even so, “cost us a few points of bookings growth against our plan”.

Second, said Mr. Heppelmann, many of PTC’s largest accounts have been converted to what the company calls volume purchase agreements, VPAs. “For customers that did not convert, in most cases, we increased the support price.” [Bet they loved that –Ed.] “As the customers who did not convert come up for support renewal again, we get another chance to try to convert them to subscription. We are seeing a much lower hit rate on this second pass as these customers are less incented to convert given that they’ve already accepted the higher support pricing. We will need to adjust the offering, but in the meantime this year-over-year slowdown in large VPA conversions cost us a few more points of bookings growth.”

Add some issues hiring sales people and you get … lower than expected sales activity. In PTC’s case, that means the bookings metrics which are related to future prospects. Investors don’t love that and sent PTC”s share price down 15% after the news was announced.

Mr. Heppelmann sees this, in totality, as a “one-time step-down to what I see as a new normal bookings baseline. The good news is that this new baseline will be a lot easier to grow from going forward.” That’s true — and just math.

But what about the quarter just ended? That can’t have been all bad news, can it? No, turns out FQ3 was … OK (using ASC 605 data):

  • Software revenue $282 million, up 3% as reported and up 6% in constant currencies (cc) was driven by 13% cc growth in recurring software revenue
  • Solutions Software revenue was $244 million, up 1% as reported (up 4% cc)mainly on strength in recurring revenue, which grew 11% cc. During the conference call, Mr. Heppelmann said that CAD and PLM bookings declined in Q3 especially in the CAD channel for the reasons he outlines above but that, in general, “PLM had a pretty decent quarter”
  • IoT Software revenue was $38 million, up 21% (up 24% cc), driven by 38% cc growth in subscription revenue. PTC said FQ3 was a “very strong quarter for new IoT bookings, which surpassed CAD and PLM bookings for the second consecutive quarter”
  • By geo, software revenue from the Americas was $131 million, up 11% on “notable strength in subscription revenue”
  • From Europe, software revenue was $103 million, up 2% (up 9% cc) “driven by a 43% cc increase in subscription software revenue.”
  • And from Asia, software revenue was $48 million, down 13% (down 10% cc) due to a “91% decline in perpetual license revenue following the end of life of perpetual licenses on 1/1/19.” On the plus side, APAC recurring software revenue grew 19% cc notable strength in subscription revenue
  • No specific were given about channel vs direct, but aside from the issues discussed above, “the channel had a respectable quarter”.

There were some positive notes on the call: PTC closed 76 deals that included Creo Simulation Live “with average deal sizes well above Q2 levels”, including a large follow-on order with a defense contractor who “intends to deploy Creo Simulation Live to hundreds and potentially even thousands of engineers across multiple business units.”

PTC also closed five 7-figure IoT deals, including 4 expansions and 1 new logo deal, and saw a ramping up in 6-figure deals for Augmented Reality offerings. The partnership with Rockwell Automation continues to grow, closing 34 deals in the quarter, and with Microsoft, closing 36 deals “with a notable increase in average deal size fueled by 3 7-figure transactions”.

CFO Kristian Talvitie said that PTC was reining in expectations for the rest of the fiscal year. For FQ4, under ASC 605, PTC expects total revenue between $330 million and $338 million. For the year, total revenue was lowered by $8 million to a range of $1.31 billion to $1.32 billion, which would be growth of 7%.

OK, so what does it all mean? PTC is fine, they’re not going anywhere and they will keep making the products you use. They say they’re not losing deals to competitors (not what DS said yesterday …) but are having trouble converting their largest customers to subscriptions. And that’s been the problem all along, hasn’t it? Customers want what they want, how they want it — if they don’t want subscriptions and you keep charging them more for maintenance under traditional perpetual, they start to examine their options. As Mr. Heppelmann said, it’s about the carrot and the stick — sweetening the offer until the customer bites. I don’t, personally, believe the stick is a viable option.

PTC will host an investor event in November — let’s see what we learn then.