PTC’s F22 is off to a solid start, with momentum expected to accelerate
PTC kicked its fiscal year off on a high note, with many metrics ahead of expectations. The facts, then some thoughts:
- Revenue in Q1 fiscal 2022 was $458 million up 7% (up 8% in constant currencies, cc)
- Recurring revenue was $405 million, up 5%
- Perpetual license revenue was basically flat year/year at $8.5 million
- Professional services revenue was $44 million, up 24%
- Looked at another way, software revenue by product group was $282 million in Core, down 2% as reported and down 2% cc; Growth software revenue was $62 million, up 12% as reported (up13% cc); FSG software revenue was $52 million, up 12% (up 12% cc) and, finally, Velocity software revenue was $18 million, up 646% over last year — with a big contribution from Arena
- Since revenue is affected by accounting rule 606, PTC points to ARR as a better measure — ARR, the Annual Run Rate, which “represents the annualized value of our portfolio of active subscription software, cloud, SaaS, and support contracts.” Overall, ARR was $1,496 million, up 12% (up 16% cc) and up 11% on an organic, constant currency basis — remember this is an annualized view, not for the quarter so don’t go multiplying this by 4!
- On that same ARR basis, let’s dive into the product sets. ARR for the Core products was $1041 million, up 11% cc; for Growth, $198 million, up 14%; for FSG, $190 million, up 6%; and, for VElocity, $78 million, up 688%.
You can see much more detail here.
CEO Jim Heppelmann told investors in the earnings call that “interest in SaaS [which I explained in detail here so won’t do again-Monica] has been driving strong bookings for what is very sticky software, which when layered into a recurring revenue model that is atypical of industry peers has allowed PTC to deliver performance in excess of market growth rates. This happened right through the pandemic, especially in the large core business that represents about 70% of our ARR and we fully expected to continue going forward … CAD and PLM both grew [ARR in] double digits, with strong growth across all three geographies. This is the 17th consecutive quarter of double-digit ARR growth in the core business and as we roll out our more aggressive SaaS strategy, I expect we’ll see many more.”
The fact that revenue from the Core –that almost 70% of total revenue– is growing even in the face of all of this messaging around SaaS is an indicator that customers aren’t turned off by it, and may even be buying into it. They’re still investing in what’s currently available, which is mostly not-SaaS (that’s anecdotal; PTC doesn’t say.) After all, Windchill has been partly SaaS-y for a while, with only some enterprises choosing that style of implementation, and it’ll take years to create SaaS equivalents for the entire portfolio. In the meantime, customers need to do their jobs, likely with on-prem solutions — and they’re buying them from PTC.
Even so, PTC continues to pin a lot of its hopes on Onshape and Arena, which currently account for just 4% of total software revenue. Mr. Heppelmann said their combined “ARR growth in Q1 was more than 650% due to the inclusion of Arena; on an organic basis [meaning, only Onshape, ARR was up] 53%. If you were to add Arena’s pre-acquisition results into the prior year to get a better pro forma comparison, then you’d have the Velocity business unit growing at 28% in Q1 — Onshape growing at 53%, and the larger Arena business growing in the low twenties. [This rapid growth] clearly demonstrates that industrial companies see the benefits of SaaS. We continue to ramp investments to expand technology leadership and to broaden the geographic presence of our Velocity businesses.”
That overall 28% growth rate is on a teeny base, so doesn’t really represent the sentiment of the majority of buyers. Onshape has a huge runway, in that it is still building out a sales channel ecosystem and most sales are still via online mechanisms. I’m not sure about Arena’s runway; I can’t help wondering if a lot of these buyers are waiting to see what PTC does for them, and the roadmap for Arena-to-Atlas.
Moving on to IoT, PTC says that market conditions are improving and that it saw “IoT and AR ARR growth of about 14% across both elements. We expect an acceleration of growth into the twenties as we get into the back half of the year.” Mr. Heppelmann added that one reason to expect this uptick is that PTC “realized we had over pivoted toward new logos, which is, generally speaking, less productive selling. And so we formed this Digital Thread [business unit], which brought CAD, PLM, IoT, and ARR together … to really lubricate how these products work together and how we position them together, and to be able to start anywhere and sell up and down that chain.”
That’s interesting: PTC used to delight in announcing new logos, the idea being that their “land and expand” method would turn each modest new logo’s initial IoT pilot into big bucks over time. By focusing on integration and cross-selling everything from CAD to IoT, PTC appears to have realized that users need more than just one component. PTC’s Digital Thread business had revenue in FQ1 of just under $400 million, 71% from CAD/PLM, 16% from Growth (AR and IoT), and 13% from FSG (Servigistics and a bunch of other brands). Looking back over the data PTC supplied, this is quite consistent, with the only real change over time being a slight wobble up or down in the importance of the CAD/PLM Core (from a low of 68% in 2019 to a high of 74% a year ago). Given the intent to now cross-sell, it’ll be interesting to see if that proportion changes in a meaningful and consistent way.
Outlook: PTC upped the bottom of its revenue range by $20 million for the full fiscal year, to between $1,870 million and $1,975 million, up 3% to 9% over last year.
Bottom line: PTC had a solid first quarter, with every indication that customers are buying into its SaaS-ification plans — or at least, not actively resisting since they don’t affect most buyers at this point. PTC has a lot of things to sell and appears to be working on a more unified go-to-market. End-markets appear to be improving … Lots of reasons to be optimistic about the year ahead.