PTC saw FQ3 momentum in Creo, Windchill; not so much in IoT

PTC reported fiscal third quarter results last night that were … Okay. You can read/see/hear all of the details here. PTC offers data on overall product buckets, geos, etc. that you should go check out. A few of the things I thought most relevant and then some thoughts on what it all means:

• Total revenue in FQ3 was $436 million, up 23% year/year (and up 19% in constant currencies, cc)
• Software revenue was $394 million, up 24%
• Recurring software revenue was $387 million, up 25% — about $20 million higher than expected but still down from FQ2 because of how the 606 accounting rule affects revenue recognition
• Perpetual license revenue was $7 million, up slightly year/year but basically continuing the planned decline as users switch to subscriptions
• A different way to slice these numbers: License revenue was $164 million, up 38% year/year but down $34 million from Q2. Support & cloud services revenue was $231 million, up 16% year/year and up $7 million from Q2
• And another way: Core software revenue in FQ3 was $271 million, up 18% year. Growth software revenue was $68 million, up 68% year/year, while FSG software revenue was $56 million, up 19%
• Services revenue was $41 million, up 20% year/year

OK. Those are the reported numbers. What might it all mean?

First, where is this growth coming from? Core. Core includes CAD and PLM (though not Onshape or Arena; those are in the Growth bucket), and the comments CEO Jim Heppelmann made to analysts indicated that PLM growth outpaced CAD, and, he believes, outpaced the market as a whole. He said that PLM revenue was strong in the Americas and in Asia, and across the customer base — and especially via the partnership with Microsoft. Looking at CAD (which here means Creo), Mr. Heppelmann said that all geos saw growth, and that Creo Simulation Live “continues to gain traction, driven by migration to Creo 7, with expansions” of installation picking up.

Not so awesome: IoT. Sales of ThingWorx are still growing more slowly than expected. Explained Mr. Heppelmann, “most of the slower growth in IoT is still related to hangovers from COVID. Sales have improved year-over-year, but they’re still not back to where we want them to be. In general, what we’re seeing is a good quantity of deals, but smaller deal sizes, which I just attribute really conservatism around people doing IoT projects in factories, and in general as they come back to speed following COVID.”

Unquantified but perhaps close to awesome: SaaS. Mr. Heppelmann said Onshape and Arena turned in “solid performances” in FQ3, with “Arena seeing strong traction with upselling as they increase penetration in the current customer environments, and keep retention rates high. By all measures, Arena looks to be a great acquisition.” (Gotta justify that high purchase price.)

Most of the rest of the data the company provided was based on ARR, the “annualized value of our portfolio of active subscription software, cloud, SaaS, and support contracts as of the end of the reporting period”. Many investors are bent out of shape today because the sequential (FQ3/FQ2) ARR growth rate was lower than expected — up 11% year/year in constant currencies but up only 2% from quarter to quarter. Thy wonder, could this mean slowing growth?

And there was one outlier question on the call: About Altium. Mr. Heppelmann was asked how he viewed the “electrical CAD market as an adjacent opportunity”. Never shy, Mr. H. got right to it:

“I’m guessing you’re probably referring to some activity between Autodesk and Altium. Altium is one of three main printed circuit board design software companies … We have a partnership with Altium. I’d like to find ways to strengthen that partnership, I don’t really see us trying to acquire them. For one thing, we’d have to top Autodesk price which I don’t know that we’re in the mood to do. And, secondarily, I don’t think they want to be acquired.

“I feel like there’s a good opportunity there for us to do more in the partnership, on one hand with Onshape and Arena, which are a nice fit in the lower part of the market with Altium, but with Creo and Windchill, which are also a nice fit. There are many Creo and Windchill customers who put circuit boards in their otherwise mechanical products. And the same would be true of Onshape and Arena. Altium is a good company; I’m perfectly happy if they remain standalone. And we look forward to strengthening our partnership because there’s lots of synergy on both sides of that partnership.”

Now we know.

Looking ahead, to the rest of fiscal 2021, PTC raised its revenue guidance to take into account the “beat” it saw in FQ3. Total revenue is now expected to be between $1,733 million and $1,763 million, or up around 20% over the last fiscal year.

Bottom line? A good quarter in the traditional businesses, perhaps a bit of concern for the new.