PTC’s FQ1 was good, but macroeconomic worries loom
PTC announced fiscal Q1 2023 results last night that were better than expected in some areas. Profit was up but not as much as expected, and ARR was bigger than expected even though growth slowed a bit … it was the mixed bag we’re becoming used to.
- Total revenue for the quarter was $466 million, up 2% as reported and up 9% in constant currencies (cc)
- Recurring revenue was $417 million, up 3%
- Perpetual revenue was $13 million, up 55%
- Professional services revenue was $36 million, down 19%
- Annual Run Rate, ARR, which the company feels is a better metric than reported revenue because of accounting rules, was $1.66 billion as reported, 11%, and $1.65 billion on an organic basis (meaning, no Codebeamer), up 10%. In constant currencies, ARR was $1.60 billion, up 15%, and on an organics basis, it was $1.59 billion, up 14% — Codebeamer contributed the additional 1%
- CFO Kristian Talvitie offered a bit more of an explanation of why ARR is a better metric, saying in prepared material that “While every $1 of ARR becomes $1 of revenue over the term of the contract, the timing of revenue recognition for on-premise subscription revenue under ASC 606 can vary significantly, impacting reported revenue and growth rates”
- By product group (this is new for PTC — see below for my comments on these new buckets), Authoring ARR was $696 million, up 5% (up 10% cc “in a market that had been growing 8%) ) on “Double-digit growth in the Americas and APAC; high single-digit growth in Europe; Growth primarily driven by Creo; Strong % growth in Onshape and Arbortext”
- Data Management ARR was $907 million, up 16% (up 20% cc in a market that’s growing 12%) on “18% organic constant currency ARR growth; Strong growth across all 3 geographic regions; ~Half of the growth was driven by Windchill; Strong % growth across ALM, Arena, Windchill, IoT, and Retail PLM”. Because you’re going to ask, PTC’s Windchill+ SaaS offering has “more than ten” customers in production, with dozens more on the way
- CEO Jim Heppelmann Creo+ will be announced at PTC’s big LiveWorx event in June (and, I presume, demoed — can’t wait)
- PTC uses shorthand for its new product groups, “CAD” is all authoring tools, including Creo and Onshape but also Arbortext. “PLM” is data management tools including Windchill and Arena but also including ALM (which is legit PLM) but also IoT, which is PLM-adjacent (to me). I’ve used the more descriptive (and longer) terms here for clarity; be careful when you look for comparisons across vendors
- By geo, ARR was up 16% (up 16% cc) in the Americas, on “double-digit growth in CAD and PLM, led by Creo and Windchill.” The company said it also saw “strong % growth in IoT, Arena, Windchill, and Onshape”
- In Europe, ARR was up 9% (up 15% cc) as “Double-digit growth in PLM led by Windchill; high single digit growth in CAD led by Creo, Strong % growth in Arena, Onshape, Arbortext, Servigistics, and Augmented Reality”
- Finally, in Asia, ARR was up 2% (up 12% cc) on “Double-digit growth in both CAD and PLM, led by Creo and Windchill; Strong % growth in Arena, Arbortext, and Servigistics”
Mr. Heppelmann said that PTC saw “broad-based strength across all product groups and geographic regions” in FQ1, but conditions are getting tougher. He told investors that “bookings softness, driven by [the] macroeconomic environment as opposed to competitive factors” across geos, segments, and channels will put pressure on fiscal 2023 results. On the other hand, PTC still sees strong renewals. Together that spells challenges in closing new customers but means that the company is likely to meet targets based on limited new business. After all, ARR growth only slowed from 16% in fiscal Q4 2022 to 15.5% in FQ1 2023 and exceeded the FQ1 target by $3 million.
He also said that PTC’s “resource rebalancing” in fiscal 2022 means that PTC isn’t announcing layoffs or restructuring. As he was talking about this, the slide (#6) also said, “Arena and ThingWorx are profitable now, while Onshape’s and Vuforia’s burn rates decrease with scale,” but he didn’t elaborate. My inferences: each business has a set of costs that aren’t related to size, like core R&D. Arena and ThingWorx now generate enough revenue to cover those costs and a bit more. Onshape and Vuforia need more income to cover those costs.
Mr. Heppelmann closed his prepared remarks by telling investors that PTC has a resilient business model due to subscriptions, excellent customer relationships, and “sticky” products that are hard to replace. Even so, the company is “already slowing hiring and is prepared to further adjust as conditions warrant.” To that end, the company’s outlook for fiscal 2023 now includes ServiceMax, which closed in early January. Go here for more on how ServiceMax fits into the overall PTC offer (slide #5). PTC expects cc ARR growth between 22% and 25%, roughly 11% higher at all points due to the addition of ServiceMax. That turns into revenue between $2.07 billion and $1.15 billion, up 7% to 11% for the year.
Company management was clear: this guidance is conservative, based on what they can see now. The PLMish buyers I’m talking to are similarly cautious, worried about the year ahead since no one has a clear idea what will happen with COVID in China, the availability and price of borrowing, supply chain challenges that might or might not materialize, finding and keeping talent, and a host of company and industry-specific concerns. We can already see some of this in the slowing bookings that PTC talked about in FQ1. But, as Mr. Heppelmann pointed out, these deals were pushed out and not canceled — and not lost to competitors.