PTC’s subs lead to a good FQ2 & perhaps a decent 2020
PTC’s fiscal second-quarter couldn’t have been more different from Dassault Systemes’. PTC’s total revenue of $360 million was up 24%, beating expectations by a whopping $19 million. How could PTC have seen such a different selling environment?
We’ll explore that below, but first, PTC. CEO Jim Heppelmann said that just about every part of his business performed just slightly below expectations, largely because over 95% of software revenue is recurring. Mr. Heppelmann contrasted that to PTC in 2009, when a double-digit decline in booking decline led to a double-digit revenue decline. Too, since 2009, PTC has added so much to its product portfolio –tools that enable remote design and engineering. digitalization, remote monitoring, and so on– that is in demand right now. A silver lining in an otherwise very dark cloud.
You can get all of the details here on PTC’s Investor website. These are my main takeaways:
- Total FQ2 revenue was $360 million, up 24% as reported (up 25% in constant currencies, cc), “driven by strength across our Core and Growth businesses”
- “Core” is PTC-speak for CAD+PLM, which reported revenue of $234 million, up 36% as reported (up 38% cc). PTC said in prepared remarks that this growth was due to “very high growth in subscription revenue, partially offset by an upperteens YoY CC decline in perpetual support revenue”
- PTC also noted that “Substantially all our Core product software revenue is recurring”, which was up 35% cc
- “Growth“, which PTC defines as IoT, AR and Onshape, reported revenue of $43 million, up 22% as reported (up 23% cc), was led by “upper-30%” cc growth in subscription revenue, partially offset by a mid-teens YoY CC decline in perpetual license revenue
- Finally, revenue from the Focused Solutions Group grabbag of SLM, ALM, and other solutions was $43 million, up 12% (up 13%), with a “low-40% YoY CC growth in subscription revenue, partially offsetting a mid-teens decline in perpetual support revenue”
- More geo info is at PTC’s website, but the high points are as you’d expect: stronger growth in Europe (39% cc) and the Americas (28% cc), slower growth in Asia (22% cc)
- On the income statement, recurring software revenue was $316 million, up 32%. Revenue from perpetual licenses was $8 million, down 20%. Professional services revenue was down 13% to $35.5 million
PTC has modeled a conservative rest of its fiscal year, ending on September 30. Keep in mind that it won’t have October/November/December 2020 in this fiscal year, which many companies are counting on to end the year strong and (we all hope) pandemic-less. Since it won’t have that in this fiscal year, PTC sees “a severe disruption in new bookings growth, down 30% [from a year ago] at the midpoint for the second half of the year.” That leads it to revenue of $1,400 million to $1,430 million for fiscal 2020, or growth of 11% to 14%. That forecast is down from a prior one of $1,445 million to $1,525 million — maybe 6% lower, not bad in this climate.CFO Kristian Talvatie said this was a combo of lower perpetual sales, slower/pushed out services engagement and companies option for shorter-term contracts in their subscriptions. The company wasn’t specific as to FQ3 vs FQ4 but hinted at a weaker FQ3 and a modest sequential improvement in FQ4.
As for Onshape, still not a big revenue contributor. But, because it is totally on the cloud, Mr. Heppelmann believed that Onshape took 5%-10% of the education market (likely from Solidworks, he said) as educational institutions had to quickly shift from on-prem CAD to cloud CAD in their labs. He sees that as seeding a lot of commercial users, over time, as those students graduate into the workforce and take Onshape with them.
Mr. Talvatie said that April was actually pretty good. Mr. Heppelmann monitors what he calls the “done number”, how a quarter stacks up to the prior one, and to the historical average. He said that FQ3 isn’t done yet but it is where it should be. China, he said, was already back where it should be towards the end of last quarter, but the “US is two steps behind that. Europe was behind but may be coming back — no one knows. We’re just trying to be prudent in our guidance.”
As to the big three partnerships, Mr. Heppelmann said that Microsoft had the greatest business benefit in the quarter, Rockwell led PTC to many new accounts, and ANSYS wasn’t quite to plan — but all three had a decent quarter even though all three suffered late in the quarter.
One investor on the earnings call asked about customers abandoning contracts — which could clearly have a negative impact on revenue. It’s at the back of everyone’s mind: “it’s great that you have all of these subscribers, but what happens if they cancel? Just not pay?” First off, subs are generally prepaid, so that’s cash already in hand. Then, Mr. Heppelmann was very clear: PTC has contracts too, like rent for the new HQ in Boston that’s been empty for 6 weeks — PTC can’t get out of that, so customers can’t get out of theirs. Contracts are contracts and must be honored. [That’s a hard line. Looking backward, PLMish companies have extended payment terms and otherwise worked with selected critical customers to keep them in the fold.]
Finally, cloud. Mr. Heppelmann said many times that PTC wants to create a complete SaaS offering, where any function is possible within 15 seconds of clicking on the “start” button. He believes that the Onshape acquisition enables PTC to leapfrog its competitors — but, even so, getting everything to the cloud and that kind of availability will take time.
So, why did PTC and DS have such different results in the March quarter? it comes down, in my opinion, to the offering. DS’ 3DEXPERIENCE platform is touted as transformation and can combine many different user personas, application types and business processes — a hard sell when companies are unsure about embarking on big IT projects. PTC also sells transformation (it is on every Buzzword Bingo card ever, after all) but of a more modest nature, with sandbox IoT projects, for example. And we can’t ignore the math: PTC says 95% of software and 88% of total revenue is recurring, compared to DS’ 83% of total. That means PTC’s revenue is already in the books to a greater degree than DS’. Finally, industry exposure: PTC is less dependant on revenue in consumer-focused industries than DS is. Of course, that last is only so useful: if no one is buying what manufacturers are making, PTC will also, ultimately, suffer. But let’s hope it doesn’t come to that.
My bottom line: PTC echoed what we’re hearing from across IT: uncertainly about right now but confidence in longer-term prospects. Reliance on subscriptions, where renewals are easier to confirm. Greater impact on end-industries that sell to consumers and less on core industrial customers. PTC says its biggest verticals (industrial equipment, defense-related aerospace, commercial (not consumer) electronics) aren’t really slowing, so demand should stay steady.
The biggest takeaway of all is how different PTC (and the rest of the PLMish universe) is today, compared to 2009. Not perpetual but subs. Not desktop only, but across platforms and access points. Not just CAD and PLM, but products targeted at many different use cases and user types. Not just direct sales, but channel and partner, too.
Given all of the unknowns, that diversity may be the key to 2020 and 2021.