PTC reports Core up 21%cc in FQ2 but leaves F2021 targets (mostly) alone

May 3, 2021 | Hot Topics

PTC reported results last week that were both good and worrisome. The details, then what I think it might mean:

  • Total revenue in PTC’s fiscal Q2 2021 was $462 million, up 28% as reported and up 22% in constant currencies (cc) — well ahead of guidance and everyone’s (meaning Wall Street’s) expectations. CFO Kristian Talvitie said that solid execution, longer contract durations, and a modest contribution from Arena led to the beat
  • Recurring revenue was $415 million, up a cool $100 million (or 32%) from a year ago
  • Perpetual license revenue was $7 million, continuing the planned decline, down 16%
  • Services revenue was $40 million, up 13%
  • PTC also supplies non-GAAP metrics to help investors understand the future impact of subscription bookings. ARR, or Annual Run Rate, “represents the annualized value of [the] portfolio of active subscription software, cloud, SaaS, and support contracts as of the end of the reporting period.” Using PTC’s definitions, ARR was up 18% in FQ2, (up 15% cc) over a year ago. On an organic basis (meaning, excluding Arena), ARR was up 14% (up 11% cc)
  • Looking at that software revenue in a different way, license revenue was $198 million, up 55%, while support (aka maintenance) and cloud services revenue was $224 million, up 14%
  • Looking at this by product groupings, PTC says the Core Products Group reported software revenue of $299 million, up 27% (up 21% cc). The Growth Product Group had software revenue of $70 million, up 63% (up 58% cc), and the Focused Solutions Group had software revenue of $53 million, up 13% (up 9% cc)
  • The problem for investors came with ARR, which in the case of Core was far lower than the reported revenue. Core’s ARR in FQ2 was up 13% (up 10% cc) year over year so far slower than revenue growth of 21% cc. Even so, the company said that the “demand we see for our core products and SaaS offerings, combined with a strong pipeline heading into the second half of 2021, supports our outlook for the year.”
  • Within Core, PTC said CAD performance was “solid, with ARR growth in the high single digits” and that demand was strong across all major geographies, while PLM ARR growth was in the mid-teens and especially in medical devices, industrials, and aerospace.
  • PTC also gave insight into Onshape, saying it had a strong quarter, with “ARR growth of more than 40% [and] with bookings on track to grow more than 100% for FY’21.” PTC reported that the opportunity to cross-sell Onshape and the rest of the PTC portfolio is increasing, which I take to mean more enterprise engagement and expansions.
  • And about Arena: integration is proceeding, and Q2 performance seems as expected. PTC reports that it saw “ARR growth in mid-teens” with medical devices and high-tech manufacturing continuing to be the top verticals. PTC says it has a roadmap for cross-selling programs, and to expand geographically. Renewal rates remained high.
  • I usually fill in the revenue-by-geo section using data from the company’s SEC filing, but that hasn’t been made public as of this writing (nothing nefarious — it’s usually a bit after the earnings release goes public). Looking at ARR (so NOT revenue), PTC says that in the Americas, ARR was up 22% (up 21% cc), driven by Arena, Augmented Reality (AR), and solid Core performance. ARR in Europe was up 14% (up 8% cc) on strength in AR and high-teens growth in IoT. Finally, ARR in Asia was up 19% (up 16% cc) on “strong performance across all segments”.

The news was mostly good – the concern the investors I spoke with had was the lack of sequential growth in ARR. In a perfect world, revenue-related metrics go up both year/year and from quarter to quarter. It doesn’t always work that way, especially when foreign exchange is factored in. Too, the lack of growth in Focused Solutions (the cash cow of legacy products at PTC, kept around to be slow but steady earners for the company) was concerning, as most see continued challenges for that part of the business’s main customers in commercial aviation and retail.

PTC’s performance in FQ! an FQ2 as well as the closing of the Arena acquisition led the company to tweak but not raise its guidance for the year, tuning the revenue growth target range from 16% to 19% to 17% to 19% — meaning that revenue guidance is now $1,710 million to $1,740 million.

During the earnings call, CEO Jim Heppelmann also talk about PTC’s SaaS vision, now that Arena has closed (and, subtext, Autodesk is acquiring UpChain). Mr.Heppelmann essentially reiterated PTC’s commitment to using PTC Atlas as the platform on which legacy CAD (read, Creo) and PLM (read Windchill) offerings will reside by 2024. atlas architecture by 2024. They’ll join Onshape, Arena, Vuforia, and Thingworx on Atlas, which will, the company believes, make it far easier to cross-sell the entire portfolio. (But not to worry: Mr. Heppelmann said that PTC would “continue to offer on-premise versions of core products indefinitely, [since] a growing number of our customers want to enjoy the great benefits of SaaS but at the same time, prefer not to switch off their current enterprise systems.”

So, TL;DR. What does it all mean? Investors seem to focus more on the 30% of the business that is volatile than on the 70% –Core CAD, PLM, etc.– that is the engine that drives this bus. Core revenue growth of over 20% is great. As Mr. Heppelmann pointed out, FQ2 was “14 quarters in a row of double-digit growth in the Core business”. A vision that refreshes the legacy products and gives customers and prospects a way forward is also very attractive. Yes, there are ARR problems and foreign exchange challenges — but if 70% of your business is growing at 27%, (and BTW grew at 25% for all of last fiscal year), why not focus on that instead? I don’t think CAD is dead, and PTC’s customers seem to agree.