PTC’s CEO, Jim Heppelmann, is in a good mood – and for all the right reasons.
PLM and CAD sales are up as are revenues from IoT, and the effort made in developing the new subscription-based business model finally appears to be taking off. CAD and PLM software sales were up 10 percent during the 2016 fiscal year (FY). And, IoT revenues, from humble beginnings of a few million dollars when PTC acquired its IoT platform ThingWorx, has now grown to more than a hundred million, up around 40 percent in FY 2016.
It’s true that small revenues can accelerate quickly when measured in percentages. But in the case of PTC and IoT the trend looks sustainable, being underpinned by the IoT technology’s capability to win new “disciples” practically every minute of the day.
“Business is great. We are kicking butt,” Heppelmann said in today’s TV interview, adding that, “Revenues, profits and the market cap are growing. PTC had an absolutely unbelievable fiscal year in 2016.” In light of this sales success, it is somewhat paradoxical that PTC’s total revenues “formally” declined in FY 2016.
How is this possible? There’s a perfectly good explanation. The PTC leader drills deeper into this topic during the PLM TV News report.
As a matter of fact, the upward trend continued during PTC’s first quarter of FY 2017 (calendar Q4 of 2016). We’re talking about 31 percent year-over-year growth in new software sales, double-digit software sales growth in CAD, strong software growth in PLM and triple-digit growth in IOT software sales.
“That is the fourth quarter in a row where our growth numbers have been outstanding,” Heppelmann commented. Furthermore, he noted that PTC’s stock price has reached new heights, while also making it clear that the company’s situation is still complicated by the business model transition they are going through: moving from perpetual licensing to subscriptions.
In this PLM TV News report, we cover not only the implications of PTC’s business model transition, but also the development of the company’s IoT and PLM technologies. On the latter topics, we have an interesting interview with one of PTC’s biggest PLM customers, European air craft manufacturer Airbus’ vice president, Anders Romare.
Airbus Does Not Believe in One Big System
Romare knows a lot about Airbus’ PLM venture and, as one of the decision makers at the world’s largest consumers of PLM-related software and services, what he has to say about IoT, PLM and other technologies is important to developers such as PTC, Dassault Systèmes, Siemens PLM and Aras PLM.
Generally, Romare says that Airbus doesn’t believe in one big PLM system. Instead, he talks about “building blocks” based on a solid foundation consisting of a PDM backbone such as PTC’s Windchill and Dassault Systèmes’ CATIA V5. With 60,000 engineers and product developers, harmonization and the importance of people following predetermined processes mean new technologies can’t be adopted too quickly.
“We try to work on two dimensions,” Romare stated. “For the core PLM backbone, yes, we still need to harmonize across the company, with CATIA for CAD and PTC’s Windchill as the PDM system. It’s important to have one single backbone harmonized across the company. Then we try to build on top of those backbones with more agile layers where we can have faster development, faster cycles. We try to combine a little more of a ‘stable/slower backbone strategy’ where we harmonize, and then allow flexibility, agility and speed on the layer above.”
European air craft manufacturer Airbus’ vice president, Anders Romare is skeptical about the idea of one BIG PLM system. “I simply don’t believe in that idea,” he said in today’s PLM TV News interview.
On the layer above, Anders Romare is talking about areas such as the Internet of Things (IoT) and Industrial Internet of Things (IIoT), big data analytics, virtual and augmented reality, and things like solutions for additive manufacturing as well as cloud solutions to make sure that the European air craft manufacturer can have quick deployment on their infrastructure.
You also bought a substantial number of Aras seats. Aras is a PLM system, but you use it for the supply chain?
“That’s right, we don’t use it for the core enterprise PDM system,” asserted Romare. “Due to the size and complexity, we have many small and light PDM systems, as we tend to call them. There can be various types of systems integrating the supply chains, and a test environment where we need light PDM functionality. We have tested and proven the Aras solutions with good results, flexibility and quick turnaround time to develop and deploy applications.”
One important development when it comes to new technologies such as IoT are new business models. Is this something that happens at Airbus?
“Clearly, we can see a lot of opportunities to develop new business models and drive the growth of the company. These can be in many dimensions in small things, such as we are now providing an app for your smartphone if you like to fly on an A380, which many customers do. The customer can go on their smart phone and check how they can book a ticket. Depending on the airline, they can go on our app and find the best A380 route to fly wherever they would like to go. For a bigger example, today we are providing a Shubra helicopter service in a pilot environment. You go on the Shubra app on your smartphone, and order your helicopter to pick you up and take you where you desire. Modern technology enables you to do business in a completely different way than you did in the past.
The platform here for Airbus would be ThingWorx from PTC?
“ThingWorx is a platform that will potentially play a vital role. We are using that package today, and we see a potential for that platform for the future, yes.”
Will he prove his critics wrong? PTC leader Jim Heppelmann has had a tough journey through PTC’s IoT venture. Some people argue that since this strategy was initiated, PTC's revenues have declined and profits have turned to losses. But to everyone who listens to what Jim Heppelmann has to say in the TV report, it is evident that this is a calculated dip in the revenue stream. “We are building an incredible business based on our new licensing model.”
Good News for Jim Heppelmann
This is all good news for PTC and Jim Heppelmann, who also said to PLM TV News that he shares Anders Romare’s views on the hardship of limiting an organization to using only one big PLM-system.
“Yes, I think the problem in Airbus, or anywhere, is that even if you have a PLM system, you only have one instance of it. Airbus has the 350, the 400 and the 380 programs, for example, and these programs are almost companies in themselves. They choose a set of tools, and then they go on their way. The next program, even if they use the same software, might deploy differently. What we need to do is to figure out how we can make things work together better, rather than just make them more homogenous,” said Heppelmann.
“You’ve examples of this in our CAD strategy, the thing we call Unite. CREO works with any CAD data; you don’t need to convert to CREO’s format before you can start to work with it. That saves time. The same goes for our PLM solution, particularly with our new product Navigate, which is built on ThingWorx, and connects to SAP and to other PLM systems so we can implement new processes without trying to rip and replace all the engineering systems. We can implement a system of engagement that ties into whatever systems of record you have in place.”
So, integration and interaction with other systems is part of what Jim Heppelmann regards as a necessity for the future. He knows that the world of industrial product realization is about dealing with IT diversity, and there are several pieces of evidence of how he contributed to materializing these ideas.
World leader in business software, SAP, got off to a late start in cloud computing, but has made up for lost time during the last couple of years. Their in-memory technology HANA is just one example of this, and has proven to be very powerful when handling large amounts of data. Together with new cloud technologies, HANA is a growing choice for installations of IoT concepts, and PTC is not going to miss the chance for gaining new customers on the SAP HANA cloud infrastructure. So, today they are a member of the HANA partner program.
The recent decision to join SAP’s partner program for the HANA Cloud platform is just one example of his pragmatism. Heppelmann wants to sell his stuff, and if he can find new customers in SAP’s cloud infrastructure, then he will bet on it -- the same as he already did with Microsoft’s Azure or Amazon’s AWS. And he doesn’t mind that SAP PLM is also a PLM competitor.
“There’s a number of accounts where we work together with SAP. Airbus and MES is just one example. I think the world is changing here. PLM is very important to PTC, maybe a little bit less important to SAP. But when I think of what we can do together at companies like Airbus, Zdef or any other common customer, to transform the way their processes work and having our technologies working better together, I think that makes us both excited.”
The core message from Heppelmann is that we will see more and more collaboration with everybody. We are not going to have more homogenous worlds, he said with an edge directed at Dassault’s chief, Bernard Charles, who is well known for these kinds of aspirations.
Massive Sale Success, but Declining Revenues – Heppelmann’s Explanation
What may have been a mystery for some people in the PLM business – the stock market excluded, because they have appreciated Jim Heppelmann’s business model venture – is that while software sales have gone up, total revenues declined in comparison to previous years. This is a stark contrast to the positive image that the rising software sales indicate. However, there is a perfectly good explanation.
Heppelmann said, “We at PTC are wrapping up our fiscal year 2016 as a year in which we have posted fabulous results in terms of bringing in new business, which we refer to as ‘bookings’, as in, ‘we booked an order.’ However, since many of the bookings now come in via subscriptions (versus perpetual purchases), our accounting regime has changed and we no longer recognize the revenue up front, but rather defer it into the future.”
So, when PTC won a $20M software order during the 4th quarter (Q4) FY16, per the old method they would have recognized the order total along with profits for that specific quarter, subsequently followed by a much smaller maintenance stream in the following periods. It would have made Q4 2016 look very good, but only a fraction of this would have been mirrored in coming quarters.
Under the new subscription model, PTC didn’t take any revenue during Q4.
“Instead we said, we’ll take $10M a year forever, depending of the length of the contract, renewals, etc.,” Heppelman explained, continuing, “So [the 20 million] did nothing to help Q4, but it will help 2017, 2018 and so on, to build a great revenue base. As you do this many times, you keep adding more and more to that base.” Consequently PTC, as the new model was planned, were calculating an expected revenue dip in the years following 2015.
Right now, PTC is at the bottom of the dip, but going into FY 2017 they will have the benefit of deferred revenues. Jim Heppelman expects a dramatic rise during 2018.
“All in all, this makes short term (i.e., ‘this quarter’) revenue and earnings look weaker, since we don’t count orders that came in during the quarter. But it makes mid- and long-term revenue and earnings look fabulous, which is why the stock price keeps going up and up even though the uninformed spectator thinks we are doing poorly,” said Heppelmann, who has seen the stock price triple since he became CEO.
How is this possible? In today’s TV-report, Heppelmann drills deeper into this, and it is a good lesson for those who have been skeptical to what his ideas and regime would mean to PTC.
Jim Heppelmann’s vision is about closing the product lifecycle loop. It’s based on PTC’s PLM solution Windchill combined with the IoT platform ThingWorx, including the integration of new technologies in the augmented and virtual reality field.
“Disruptive Technologies are a Part of PTC’s History”
If you do things the same as everyone else, your solution will be the same as everyone else’s.
It’s always a good idea to listen to the best advice others can offer, but if you want to stand out and drive development forward to new heights, the bottom line is that you must go your own way. This is especially true if your ambition is to create something disruptive. Innovative ideas, financial resources and perseverance are the main ingredients in this recipe for success.
Looking back on PTC’s history, these characteristics seems to be built into the walls at the headquarters in Needham, Boston. The company was founded on such an event: when his employer in the late eighties, Computervision, showed no interest in his groundbreaking parametric, associative feature-based CAD, Sam Geisberg simply founded his own company, PTC, and realized the dream of such a system. This was ProEngineer, these days known as CREO. Today, every CAD system is based on 3D parametrics.
From 2000 to 2010, PTC’s leader Dick Harrison took the organization on a journey from being a small, lethargic CAD organization who believed that they could live on their past “parametric glories,” to becoming a modern enterprise PLM solution provider. He bought 14 companies over the course of that decade, and saw revenues grow from $658 million in FY04 to $1,075 billion in FY08.
When Jim Heppelmann took the helm 2010, he had another agenda in mind. His plan revolved around the idea of combining product development capabilities with field performance data from the products. This involved adding elements of control and analytics in between, and then feeding the data back into the product development system, with the intention of closing the product lifecycle loop. This has proven to be an excellent idea, especially after having invested heavily in IoT.
So far, the company has spent over $600M in direct investments, buying companies and solutions, and additionally spent some $400M to align their existing enterprise software business with the IoT solutions.
These have been large investments, but they have started to pay off: PTC is recognized as a market leader by at least five respected analysts such as Forrester and IoT Analytics. With an almost 20 percent share held by its ThingWorx software, PTC is the number one IoT platform on the market, according to IoT Analytics.
That’s one side of the coin. The flip side, some people argue, is that since this strategy was initiated, PTC's revenues have declined and profits have turned to losses. But to everyone who listens to what Jim Heppelmann has to say in the TV report, it is evident that this is a calculated dip in the revenue stream.
“IBM can throw around as much money as they want, but the bottom line is that they’ll probably waste most of it, versus PTC who has really put it to work and carved out a leadership position,” said Jim Heppelmann.
“IBM Can Waste as Much as Money as They Want…”
Heppelmann has been consistent and determined in his efforts, and he firmly claims that IoT capabilities are not only a natural extension of the company’s PLM strategy, but will also bring substantially higher levels of revenues to this classic PLM and CAD player. The same is expected of the new business model, discussed above, which PTC launched last year. “Up to 40 percent more revenue over time from customers under the new system,” asserted Heppelmann.
There are some skeptics, yes, but investors believe that the company made significant progress, and the “stock price is now trading at levels we haven’t seen since last century.”
Clearly the IoT platform ThingWorx, its connection back into the PLM system, PTC’s product definition solutions, and potentially the new business model, are all aces up Jim Heppelmanns sleeve. So far, the PTC leader has played his cards well, but the best is still to come.
With the deeper integration of all IoT-related software -- when all the components are, as Heppelman calls it, “integral” not “bridged” – PTC’s leader claims that they will definitely have a solution that is ahead of the competition in the IoT area. In fact, he says, they already are; but the gap is getting wider. As Heppelman puts it:
“IBM said they are going to spend $3 billion on IoT, and SAP said they are going to spend $2 billion. Jim Heppelman says, ‘Well, I already did spend $1 billion.’ There’s a huge difference between acquisitions, and the massive organic investment we already put into this. It’s easy to throw numbers around, but those companies need to spend a lot of money to catch up to us. You know, IBM can throw around as much money as they want, but bottom line is that they’ll probably waste most of it, versus PTC who have really put it to work and carved out a leadership position.”
So, is Jim Heppelmann on the right track? What are the views of one of their biggest customers? What does the competition look like? Is the way things are moving right now a personal revenge for Heppelmann?
Meet an optimistic PTC leader who may have proved his critics wrong.