PTC closes Codebeamer deal, reports solid FQ2

May 3, 2022 | Hot Topics

PTC just announced that it has closed its acquisition of Intland Software and its Codebeamer. And that reminds me that I never did publish a note on PTC’s earnings last week — which were very positive. First, Codebeamer, then earnings.

PTC says today that Codebeamer “will significantly broaden and deepen PTC’s Application Lifecycle Management (ALM) footprint … PTC plans to offer the Intland Codebeamer next-generation ALM suite standalone and in conjunction with both its Windchill and Arena PLM offerings, and to continue to enhance and support its current ALM solution [Integrity]”. So: both Codebeamer and Integrity, both standalone and integrated.

Several of you got in touch with me after the deal was announced, wondering how this will work with/replace Integrity, acquired a decade ago. We don’t have any real info on that yet — stay tuned — but investors wanted to know why this acquisition was necessary, given that PTC already has Integrity — and PTC CEO Jim Heppelman’s answer is fascinating. He said that

“[PTC has] had reasonable success with the Integrity product. But we had some challenges with the Integrity product that I think are fixed in this next-generation Codebeamer offering. ALM is both a business by itself and is a key subsystem of our PLM system. When I look at Integrity versus Codebeamer, a couple of things stand out.

Number one is SaaS. We didn’t have a SaaS [ALM] solution and we didn’t have a path to a SaaS solution with integrity. It’s much older technology.

The second thing is Integrity had its own built-in source code management tools [but] the entire developer community has shifted to tools like GitHub, which it’s very, very hard to sell against — amongst other things because GitHub is free. Codebeamer is designed to work with all these other modern tools.

The third thing is that Codebeamer is really viewed as a sexy, best-in-class user experience. With Codebeamer, we’re leapfrogging far ahead of where we were with Integrity and leapfrogging the competition. [With Codebeamer], we now have an offering that allows us to go back on offense, back into automotive companies, back into medical device companies, aerospace and defense companies, anywhere where people put safety-critical or regulated software into products”.

PTC seems to be constantly making these make-or-buys evaluations. Make or buy a new vision for CAD? The answer seems to be a combo of acquired Onshape plus its stepchild, the PTC-built Atlas platform plus the decades of R&D that have gone into Creo. For PLM? Similar — a combo of acquired and house-built. For ALM? Acquire. And we shouldn’t forget partner: in CAE, for example, PTC has some in-house stuff but increasingly relies on Ansys to supply new capabilities.

Since this was an investor call, and because PTC’s earnings aren’t confusing enough, the company said that “Codebeamer will add roughly a percentage point of inorganic growth to FY 2022 ARR. Intland will join the existing ALM unit, so Codebeamer ARR will be reported as part of our FSG segment“, which will boost that segment’s growth to the “mid-single-digit range”. Why does that add confusion? Because FSG has been the company’s bucket of products-that-are-nicely-ticking-over-but-not-spectacular-strategic-growth-drivers. Adding in a “sexy, best in class, next-generation” game-changer seems … off. Oh well. I do hope PTC does discuss how Codebeamer is doing, independently of the overall FSG grouping.

The other big news recently was PTC’s sale of a portion of its professional services business to long-time partner ITC Infotech (ITCI). PTC’s rationale: services is high-touch and often low-margin, so moving that work to partners has long been a favorite strategy (and not just at PTC — lots of software companies do this). But the transition to SaaS makes this more complicated since many customers need help moving from customized installations to SaaS readiness. Mr. Heppelmann told investors, “rather than scale up [PTC’s service organizaton] to perform these projects, we’re planning to transition some of our key PLM talent into a new ITCI unit called DxPServices”. We’ll learn more about this deal’s impact on PTC’s revenue after it closes sometime during the current fiscal quarter.

OK. Time for a quick earnings recap:

  • FQ2 revenue was $505 million up 9% as reported and up 13% in constant currencies (cc)
  • PTC believes current accounting rules make its revenue lumpy, leading to uneven growth that’s open to misinterpretation, it prefers to look at Annual Run Rate (ARR), the annualized value of subscription, cloud, SaaS, and support contracts as of the end of each reporting period. At the end of FQ2, ARR was $1,532 million, up 11% (up 13% cc)
  • That FQ2 ARR total “includes a $4 million reduction associated with discontinuing our business operations in Russia”. CFO Kristian Talvitie told investors that PTC is accounting for the $4 million as churn in Q2, which Mr. Heppelmann described as “self-inflicted”. I’m not sure that’s fair …
  • By product bucket, Digital Thread – Core ARR was up 10% (up 13% cc) to $1,079 million as CAD and PLM both grew “in the double-digits”, and across all three geos
  • Digital Thread – Growth reported an ARR of $207 million, up 13% (up 15% cc) on increased cross-selling of IoT and AR — and on bringing to market the new Digital Performance Management (DPM) solution through PTC and Rockwell channels
  • Finally, Digital Thread – FSG “reported ARR of $195 million, up 6% (up 8% cc) as “Servigistics, Retail PLM, and Arbortext perform[ed] well”
  • But wait! There’s more. Velocity reported ARR of $83 million, up 27% (as reported and cc), on “mid-40s% Onshape ARR growth, driven by upsell/expansions, competitive win rates, and new logos” plus “mid-20s % Arena ARR growth – driven by upsell/expansions and new logos”
  • PTC also provides a spreadsheet of revenue – but no commentary. In FQ2, Digital Thread – Core revenue was $328 million, up 10% (up 14% cc); Digital Thread – Growth revenue was $63 million, up 3% (up 6% cc); Digital Thread – FSG revenue was $52 million, down 1% (up 2% cc); and Velocity revenue was $20 million, up 104% (as reported and cc)
  • Across geos, ARR in the Americas was up 12% (up 12% cc), on “double-digit growth in Digital Thread – Core and mid- 20s % growth in Velocity”
  • In Europe, ARR was up 9% (up 15% cc), driven by “double-digit growth in Digital Thread – Core and approximately 30% growth in Digital Thread – Growth”. Mr. Talvitie said growth here was “primarily driven by our core PLM and CAD businesses and strong growth in the IoT and AR segment … Europe has the largest mix of channel versus direct and the resellers continue to perform well”
  • Finally, in Asia, ARR was up 9% (up 14% cc) with our core CAD and PLM businesses again being the main drivers.”

There’s a lot more — see here for more detail and definitions.

Based on the better-than-expected performance in FQ2, PTC raised guidance for FQ3 and F2022. For the year, revenue is now expected to be between $1,905 million and $1,975, up 5% to 9% cc. ARR is expected to be $1,640 million to $1,665 million, up 12% to 13% cc (a slight goose upwards from the prior guide of $1,625 million to $1,660 million). PTC didn’t give Q2 revenue guidance but expects ARR to be between 1,580 million and 1,595 million.

OK. So what does all that mean? That PTC has a solid, diversified strategy and market approach: lots of products, technology partners, and sales channels. New stuff to sell and old stuff to support. Digital Thread – Core (aka Creo, Windchill, etc.) is growing revenue at 10% and ARR at 13% as reported — solid. The newer offerings, like DFM and Velocity (aka Onshape and Arena) are also doing well, though not yet able to contribute much to revenue. And now, a refresh of the ALM offer — I’d say PTC is firing on all cylinders.