Catchup: PTC ends fiscal 2021 on a high note, invests in SaaS for the future

Jan 19, 2022 | Hot Topics

We’re about to get into earnings season when public companies talk about the quarter or year that ended in December. This is a ritual every quarter, of course, but many of the January/February earnings releases talk about the entire year just ended, and lay out ambitions for the year to come. Companies whose financial year ends in September reported this in November, making it a challenge to compare like-to-like. In an attempt to make this a bit easier for us, I’m going to recap PTC and Siemens fiscal 2021 earnings in the next few weeks, as we head into their peers’ calendar 2021 reports. Starting with PTC … And if this is too long for you, there’s a recap at the bottom.

PTC had a busy fiscal 2021 (ended September 30). It acquired Arena, reorganized (again), went all-in on the Atlas platform, and grew the focus on selling via software as a service (SaaS) models. A summary of results:

In fiscal Q4,

  • Total revenue was $481 million up 23% as reported and up 21% in constant currency (cc)
  • Recurring revenue was $429 million, up 23%
  • Perpetual license revenue was $10.4 million, up 20%
  • Sliced another way, license revenue was $199 million, up 42%, while “support and cloud services” revenue was $240 million, up 10%
  • Services revenue was $41 million, up 27%
  • PTC considers ARR as a crucial measure of its success; ARR at the end of FQ4 $1.47 billion up 16% (up 16% cc). On an organic basis, that was up 11% (up 12% cc)
  • Looked at by (new) product group, software revenue in Core was $302 million, Growth was $67million and FSG was $56 million, up 18%, 21% and 23% respectively, Core is Creo CAD+Windchill PLM, Growth is Vuforia AR/VR+ThingWorx IoT and FSG is most of the rest, but excluding Onshape and Arena <– Corrected since initial posting
  • Onshape and Arena, even though CAD and PLM, are in a different category, Velocity. It reported total revenue of $10 million in FQ4 software revenue, double that of a year ago <– Correction: The $2million I had originally was for FQ1; FQ4 revenue was $10 million
  • The company reported signing its largest-ever PLM deal with a medical device maker in FQ4. Even so, Windchill revenue grew (only) in the mid-teens
  • PTC batches together Core+Growth+FSG into “Digital Thread”. Total software revenue in Digital Thread n FW4 was $301 million, up 25%
  • PTC said IoT ARR (not revenue) grew in the mid-teens. This business used to grow at ridiculous rates off a very small base so mid-teens is comparatively slow
  • You can find geo and other info on PTC’s investor site, here.

In its earnings presentation, PTC also said that average deal sizes are growing again in PLM and that the Ansys (CAE) and Microsoft (IoT) alliances continue to perform well.

For the full fiscal year,

  • Total revenue was $1,807 million, up 24% (up 20% cc)
  • Recurring revenue was $1,616 million, up 26%
  • Perpetual license revenue was $33 million, up 1%
  • Services revenue was $158 million, up 10%
  • By product group, software revenue in Core was $1,162 million, Growth was $237 million and FSG was $210 million, up 23%, 34%, and 14% respectively. Total software revenue for Velocity for fiscal 2021 was $41 million, up 472%
  • For the year, Digital Thread software revenue was $1,609 million, up 23%
  • For those keeping track, for the year, Core software revenue was 70%, Growth was 14% and FSG was 13% of total software revenue. It remains undeniable that PTC is a CAD/PLM company with ambitions to grow that product expertise in new directions
  • For the year, ARR growth was 16% in total, and 12% organic –meaning no Arena, which closed in the fiscal second quarter. PTC didn’t disclose the size of Arena’s revenue contribution other than to say it was “modest”
  • PTC no longer gives revenue by channel type, but we do know that ARR is 70% direct/30% channel, which is similar to the last-reported revenue data
  • CEO Kristian Talvitie during the earning call told investors that fiscal 2021 revenue growth is attributable to “solid execution, longer contract durations, and [that] modest contribution from Arena” but that it will continue to fluctuate because of the way subscription license revenue is recognized up-front recognition because of the ASC 606 accounting rule
  • Mr. Talvitie also pointed out that PTC had guided to total revenue in fiscal 2021 of $1,733 million to $1,763 million (up 19% to 21%) and wound up delivering ahead of guidance, at $1,807 million, up 24%.

During the FQ4 earnings call, CEO Jim Heppelmann laid out plans to accelerate PTC’s move to SaaS, saying that PTC would invest something like $45 million (gained via restructuring) to “Increase capacity on Atlas, Accelerate SaaS capabilities of core products, [and[ Increase Onshape and Arena product development and sales capacity.” PTC needs to shift these resources because, he told investors “customers want to move to SaaS, and are looking for PTC to lead that transition” and SaaS offerings will enable PTC to capture market demand that its competitors cannot, right now, meet.

At the investor day that followed the results announcement (you can see it here), Mr. Heppelmann explained more about why and how SaaS is good for both customers and PTC. Boiled down, customers pay someone –maybe internally, maybe externally– for on-prem servers, storage, sys admins, integrators, and others AND pay PTC for software access/licenses and maintenance. By working with PTC in a SaaS model for all of this, PTC believes it can cut customer costs nearly in half while more or less doubling the revenue to PTC. Is this realistic? PTC says it is — and that it already seeing this near-doubling of revenue to PTC when customers move from on-prem to SaaS Windchill. It expects this to increase as it rolls out multi-tenancy later this year.

How will PTC get there? Well, besides enabling lots of software to do things it currently doesn’t and building out its SaaS-enabling Atlas platform, it needs to start building customer momentum. PTC will do this via what it calls “lift and shift”, moving current customers (first, on-prem Windchill PLM) to SaaS. Creo and other products will follow in time. But everything the company has said indicates that PTC is in no hurry to move all customers to SaaS; move when ready.

For fiscal 2022, in November 2021, PTC forecast total revenue of $1,850 million to $1,975 million, up 2% to 9% as-reported or 4% to 11% cc. Mr. Talvitie again said that ASC606 makes on-premise subscription revenue difficult to predict. ARR growth isn’t affected by these accounting treatments, and is expected to be up “in the mid-teens”.

One more thing. PTC just yesterday announced that the United States Air Force is expanding its use of PTC’s Servigistics Service Parts Management solution as part of its supply chain modernization program. PTC says this is a five-year contract that could be worth up to $95 million if all of the contract options are exercised. That’s big; we don’t hear much about Servigistics anymore as PTC’s focus has shifted from it to IoT and then to AR/VR and now to SaaS. This news serves as a reminder that PTC has a huge number of assets in the market, and that the story is very complex.

I hear you. TL;DR (Too long; didn’t read). Bottom line?

PTC’s fiscal Q4 and 2021 were good and set the foundation for many changes, both underway and to come. We’ll be looking to see how competitors did, to gauge whether PTC is actually taking share or just keeping up with the market — and for how much focus these companies are putting on those traditional product lines. PTC is betting on continued growth within manufacturing; how do competitors plan to grow their addressable market(s)? (Investor-speak for “what else can we sell current customers?” plus “who else will buy current products?” plus “what new stuff for new customers do we need?”)

SaaS. PTC is basing its strategy on the premise that SaaS is what customers want. How focused are PTC’s peers on SaaS? What are they seeing? Do customers really want this? How badly? On what timeline? For what classes of products?

By investing in Atlas, the SaaS platform, PTC is giving itself the opportunity to reinvent its core products. That could be just moving the current functions and features to the cloud, but I don’t think so. The success of Onshape shows that customers demand more modern/fresher/better/a rethink, which is both an opportunity to get it right and the potential to completely blow it (I think PTC is more likely to get it right but we’ll see). What’s the competition’s plan?

One of the interesting things about earnings is that the scheduling of these reports used to be based on when the accountants had all of the data, reliably complete and analyzed to the extent that the CFO could answer challenging questions from investors. Nowadays, with these conference calls all online, it’s also a marketing exercise — controlling the narrative, as they say in politics. PTC put out a bunch of challenges to competitors with its fiscal 2022 plans — how will competitors respond?