PTC blew past forecasts in FQ1, raises guidance for year

Jan 28, 2021 | Hot Topics

PTC reported results for its fiscal first quarter of 2021, ended December 31, 2020, last night — and they were pretty darned good. Before we get too excited, though, it’s important to note that accounting treatments created some of the better-than-expected growth. But even taking that into account, it was a great quarter.

The highlights:

  • Total revenue was $429 million, up 20% as reported and up 17% in constant currencies. Many parts of the business performed well, but at least some of this topline growth is an artifact of how PTC (and ANSYS and most other software companies) account for large subscription deals that cover a long contract term. Accounting rule ASC 606 lets companies recognize revenue in better proportion to the cost of sales, giving revenue a bump almost like in the days of perpetual license sales. It’s not clear to me how much of that 20% year/year growth is related to ASC 606 accounting treatment (4%?) — but large, long-term deals are a good thing, no matter how the accounting works
  • By revenue category, recurring revenue was $385 million in FQ1, up 26%; revenue from perpetual licenses was $8.5 down 6%, and professional services revenue was $36 down 15% — remember that PTC is trying to shift services to partners (and that the last FQ1 was pre-COVID)
  • By product group, revenue from the Core business was $309 million, up 23%. PTC doesn’t give much detail revenue for these groups; they talk ARR (Annual Run Rate), which PTC says “represents the annual value of our portfolio of active renewable customer contracts as of the end of the reporting period, including subscription software, cloud, and support contracts”. On that ARR basis, the Core business did really, really well — ARR was up 12% cc in FQ1, based on “solid CAD performance in the high single-digits” –this doesn’t include Onshape, which is in the Growth category– and “strong PLM ARR growth in mid-teens cc”. Looking at CAD, CEO Jim Heppelmann said that bookings were “strong … across all geos, including competitive wins”, which were often driven by interest in the Creo Ansys Simulation and Creo Simulation Live (CSL). On the competitive front, Mr, Heppelmann said PTC was winning against competitors (without naming names) because, customers tell him, they’re looking to consolidate CAD environments onto one product set, which he said often favors PTC
  • In PLM, Mr. Heppelmann told investors that Windchill saw “mid-teens ARR growth (cc), [which] continues to outpace market growth, [and] exceeded expectations across geos, with strong bookings performance in Europe and Asia, and broad-based strength across verticals led by automotive, electronics and high-tech, aerospace and defense and medical devices.” Again, he said, “competitive wins contributed to this strong performance”. Here, Mr. Heppelmann singled out Airbus, where PTC expanded its Windchill footprint to another group, Airbus’ single-aisle designs, and then expanded upon its PLM implementation by adding new IIoT (ThingWorx) users in manufacturing as well as augmented reality (Vuforia) in engineering, maintenance, and training
  • One lesson from this: the CAD and PLM biz is far from over. We’re seeing competitive displacements (though rare, they do happen), and also still seeing expansion into new user types. Maybe 20 years ago, someone theorized that there were 50 consumers for every one CAD creator; I don’t think we’re anywhere near penetrated at that level, and today’s new technical and commercial mechanisms for delivering PLMish data open the field ever wider.
  • The second lesson: PTC’s strategy of land-and-expand works, no matter where they land first. Growing outwards from PLM to AR seems like a natural extension that many others will copy
  • Revenue from the Growth businesses was $68 million, up 29%. Growth includes IoT, AR, and Onshape. Mr. Heppelmann said that the IoT business saw “high-teens ARR growth cc in the quarter, driven by solid performance in the Americas and Europe with new logo acquisition showing signs of improvement” — meaning that the quarter benefitted some from expansion in existing accounts but that, unlike recent quarters, PTC is also reaching new customers. He said that there was no concentration in any specific vertical, but that PTC saw “broad-based demand … with notable expansions in process manufacturing”
  • The AR business reported “ARR growth well above the market growth rate, driven by strong bookings growth”. In FQ1, PTC signed 3 deals over $500,000 –a record– along with [or including, I’m not sure] six-figure deals in Automotive and A&D for Vuforia Studio and Chalk”
  • Onshape reported “ARR growth acceleration, driven by bookings growth of >150% year/year”. Mr. Heppelmnn said there was a healthy mix of new logo and expansion activity across broad range of verticals on the commercial side of the business, and that Onshape continues to grow in education, reaching one million education users — and that mileston was hit nine months ahead of schedule. On education users: those get a one year license for free. Given how many people/educators/students signed up at the start of the COVID pandemic, many are reaching the end of that free period, and PTC will be working to convert those users to paying customers. Looking ahead, Onshape has a “strong pipeline heading in Q2’21, with a growing number of six-figure deals”. Onshape. Six-figure deals!
  • That leaves FSG, the Focused Solutions Group, a catchall of “other’ — Arbortext, Servigistics, retail, etc. It’s not expected to grow rapidly but as PTC said during its December investor event, it’s “highly profitable” and one of FSG’s objectives is to “Operate healthy bottom line businesses providing funding for other PTC investment areas”. At any rate, revenue from FSG was $52 million, up 1% (though it’s important to note here that software revenue was $46 million, up 3%).
  • By geo, ARR was up 12% in the Americas (up 13% cc), up 17% in Europe (up 8% cc) and up 22% in Asia (up 6% cc). PTC commented that FSG struggled in the Americas (retail and airline customers are hard-hit by pandemic), so had strong Core performance and Europe saw “very strong bookings performance with large Core product wins and expansions in Automotive and A&D.”

And, in case you missed it, PTC closed its acquisition of Arena and rejiggered its organization a bit to accommodate. Note that Arena closed after the quarter ended, so couldn’t be counted towards revenue — but it’s likely that customers interested in SaaS as a software delivery/commercial mechanism took the imminent acquisition into account when looking at their IT choices.

I’ve been getting a lot of questions about what PTC is going to do with two CAD products, two PLM products, and its new Atlas platform. Mr. Heppelmann told investors that (my notes, not verbatim):

We have a very well understood strategy. We will begin looking at the best ways for Arena to use more and more of the Atlas platform that came to us with Onshape. Arena and Onshape [‘s PLMish functions] don’t do exactly the same things –Onshape is more data management and collaboration and Arena is more bill of materials– but will, over time, share more and more of the common architecture called Atlas.

We have shared that we are developing versions of Windchill and Creo that will use the Atlas platform so that they can be delivered in a SaaS model. Those products will retain full upward compatibility from the on-premise versions that exist today and that we will continue to maintain. There is a good strategy here for how this stuff evolves and none of it’s going to be a revolution because we’re bringing all the customers with [us]. It’s a situation that will evolve over time, toward a cleaner kind of steady-state in the end.

No timeline and (I think) quite a lot of work to do before there is a fully SaaS version of what we today call Creo. But it’s coming — PTC told investors that Creo 7 incorporates the first Atlas-based offering, Creo Generative Design Extension. This uses the Frustum Generative Design Engine acquired in 2019 and sends the simulation to an Atlas SaaS computing environment.

Given how strong FQ1 was, Arena’s likely contribution to revenue, and currency movements, PTC raised its guidance for the rest of fiscal 2021. Using the caution that COVID-related economic conditions “remain stable near-term [and] improving in the second half of FY’21”, PTC now believes revenue for fiscal 2021 will be between $1,690 million and $1,730 million, up 16% – 19% from fiscal 2020.

So, what does it all mean?

First, as we thought based on preliminary comments about the December quarter, business was good. Shutdowns and restrictions continued, obviously, but people are working and sales are closing.

PTC benefitted from the shift to more remote work as its customers continue on their “going digital” initiatives and use more of PTC’s portfolio. Adding ANSYS CAE to CAD, the release of Creo 7 with Frustum generative design, the hubbub around the Arena acquisition — all created reasons for customers and prospects to (re)engage with PTC. And they seem to be engaging across the portfolio, since the FQ1 2021 performance was balanced across the Core and Growth segments, across geos, and across verticals. A solid start to 2021.