Schnitger Corporation

PTC’s FQ3 was better than feared, leads to slightly raised expectations for FY20

PTC’s FQ3 was better than feared, leads to slightly raised expectations for FY20

Aug 5, 2020 | Hot Topics

PTC announced what it would announce on July 8, so last week’s earnings release wasn’t in any way a surprise — but the color and context around the news is what matters. A quick review, then on to the broader picture.

The details:

  • Total revenue in FQ3 was $352 million, up 19% as reported and up 20% in constant currencies (cc), “driven by strength across our Core and Growth businesses, as well as the impact of ASC 606 and related business policy changes”
  • Recurring revenue was $310.6 million, up 22%
  • Revenue from perpetual licenses (still sold on a very limited number of products) was $6.8 million, down 26%
  • Professional services revenue was down 18% to $34.3 million
  • By business grouping, revenue growth was characterized as strong in Core and Growth, and in the mid-single digits in FSG
  • Core, which is CAD and PLM, reported revenue of $230 million, up 33% (up 34% cc). PTC didn’t break down revenue components but did say that PLM “delivered double-digit ARR growth with broad-based strength across all major geos”, while CAD ARR growth was in the “high-single digits, with notable strength in China as economic conditions stabilized” (See below for comments on ARR)
  • Growth, into which PTC lumps its IoT and AR brands and, for some reason Onshape, reported revenue of $40 million, up 9% (up 10% cc), dragged down by those products still sold on a perpetual basis. PTC said Onshape performed as expected
  • Finally, the Focused Solutions Group (FSG — basically, everything else) reported revenue of $47 million, up 8% (up 9% cc)
  • By geo, revenue from the Americas was $142 million, up 30% (up 31% cc) — with “mid-30% recurring software revenue growth partially offset by a high-20% decline in perpetual license revenue”
  • Revenue from Europe was $107 million, up 18% (up 20% cc) on “high-teens growth in recurring software revenue”
  • Finally, revenue from was APAC $68 million, up 28% (up 28% cc) on “~30% growth in recurring software revenue”

Many of CEO Jim Heppelmann’s comments to investors centered on ARR (Annualized Recurring Revenue) metrics, so it’s important to understand what PTC means when it uses this measure. PTC’s ARR represents the “annualized value of renewable customer arrangements as of the end of the reporting period, including subscriptions, cloud, and support contracts“. So if a contract was signed in June but didn’t start delivering value until July, it’s not included in the FQ3 ARR –this becomes important later on in this post– but ARR does, eventually, turn into recognized revenue. Got it? On to Mr. Heppelmann’s comments.

For the Core business, he said “[F]Q3 was the 11th consecutive quarter that our core ARR growth rate is in the double-digits … with ARR growth of 10% outpacing the market growth. The juxtaposition of Creo and Windchill being up a combined 10% in a quarter where DS’s CATIA and ENOVIA businesses were down a combined 10% is interesting. I attribute that 20 point disparity to the great progress PTC has made to strengthen our products and to strengthen our business model”. Not shy, is Mr. Hepplemann.

He added that “PLM[‘s ARR] performance was broad-based, with double-digit growth across all three major geographies, led by the APAC region”.

Mr. Heppelmann said that PTC saw CAD “ARR growth in high single-digits, with APAC leading the way, followed by the Americas and Europe.” Onshape’s revenue is recognized in the Growth bucket, but Mr. Heppelmann said that “PTC has far more confidence in the future of Onshape than with the day we pulled the trigger on the acquisition nine months ago, we just feel like it was a great move both as a CAD tool, and then really something special in terms of this Atlas architecture that’s going to help us in many ways”. (More on Atlas, below.)

PTC doesn’t give channel metrics any more, but he did say that sales In Europe, were affected by partners’ inability to make new sales due to the “patchwork of government shutdowns across the regions”. Even so, he said CAD renewal rates were “extremely strong”. CFO Kristian Talvitie later added that historically, the channel contribution has been in the “mid-20s to 30% of PTC’s overall business and as we look out over multiple years, we think that the opportunity for that is to push to the high 30s, approaching 40% of the business over a period of time“.

Sticking to channel for just a second longer, Mr, Heppelmann said that PTC has begun to roll Onshape out to selected channel partners, in part because Covid-19 created such demand for cloud solutions. For now, he said, Onshape is available via the partners “who are in the best position to invest in new sales capacity [because they’re selling Onshape in addition to Creo]. We’ve taken a couple of dozen of our biggest and best resellers, who are adding incremental new capacity and selling Onshape into the lower end of the market, typically against SolidWorks. They’re continuing to sell Creo to customers who need the more advanced functionality of a higher-end product”.

Lots more detail on Creo Simulation Live (the partnership with ANSYS — going well, a seven-figure deal was signed in FQ3) and deals closed with Rockwell and Microsoft, two other major partners. Go check out the company’s website for details.

Atlas is PTC’s coming-soon platform, which will generalize the Onshape’s SaaS architecture to underpin, eventually, PTC’s entire product portfolio. Mr. Heppelmann said work is “proceeding full speed ahead” but that Atlas wouldn’t be ready for several years — it’s not simply a matter of shoving existing tools onto a new platform, but re-thinking and re-architecting each tool to make appropriate use of Atlas. He used the analogy of Microsoft Office 365, which is just enough like the desktop version to be accessible but takes advantage of the appropriate elements of the cloud.

One last thing: PTC also announced last week that it has signed a follow-on deal with the US Navy, after a successful pilot. PTC is going to “power a cloud-based digital transformation and modernization effort around [how] the Navy operates and supports its fleet of ships and submarines. PTC software will be used to create a model-based digital twin of each ship that will be used by more than 15,000 users and an expansive supplier network to optimize lifecycle costs and maximize operational availability“. This is truly important, as the Navy has been trying to do this in some form or another since my Computervision days; I really hope NAVSEA and PTC can pull it off.

The initial contract is small, but the project could grow to an ARR of “over $25 million in year five, ” which could make it “PTC’s largest run rate customer”. Mr. Heppelmann said the Navy had made public that they’ve “set aside $97 million for this contract, and that the first order was a little over $3 million”. Meaning, a potential $94 million to go. Investors were all over this — but it’s important to note that this is not a guaranteed ramp (as some PTC contracts are) and that this uses commercial software that, if this program proves successful, could easily be applied across the US government’s asset base and in countless commercial scenarios as well.

In all, it’s good to be PTC right now.

The positive developments of FQ3 led management to raise guidance. The bottom end of revenue guidance ticked up $15 million or so, to $1.415 billion for the year, with the top end of the range unchanged at $1.43 billion.

So what does it all mean?

That PTC was able to push back against some of the Covid-19-related headwinds — not because it saw the pandemic coming (who could?) but because the combo of subscriptions and cloud let it continue to serve its customers, close renewals and create a pipeline of deals for coming quarters.

Clearly, that design and engineering software continues to be a good place to be. Total revenue of $1.42 billion for F20 would be growth of around 14% — impressive given all of the macro-economic uncertainty.

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