PTC Finds the Mid-Market Sweet Spot with Onshape, Arena

Q3 earnings call marks 2nd quarter of increasing mid-market penetration.

PTC's headquarters at Boston Seaport District. (Picture by David Ryan, Boston Globe.)

PTC’s headquarters at Boston Seaport District. (Picture by David Ryan, Boston Globe.)

PTC reported a profit of $51 million, marking yet another profitable quarter, its ninth in a row, though profit did drop from its high of $109 million in the previous quarter. Revenue was also down a bit (6%) to $436 million compared to $462 million the previous quarter.

PTC revenue from Q4 2018 to Q3 2021. (Picture courtesy of TenLinks.com.)

PTC revenue from Q4 2018 to Q3 2021. (Picture courtesy of TenLinks.com.)

Still, it was plenty enough to put CEO Jim Heppelmann in a good mood at the quarterly earnings call. Stringing profitable quarters together during the uncertain economic times of the pandemic is no easy feat. He attributed the company’s performance to a digitalization initiative and credited the company’s leadership in cloud-based applications as the major source of growth. The company’s acquisitions in SaaS (software as a service) products for CAD (Onshape), PLM (Arena Solutions), Internet of Things (IoT) and augmented reality (AR) technologies were “gaining mindshare as customers are realizing the value these innovative solutions can bring to their organizations,” noted Heppelmann.

PTC profit from Q4 2018 to Q3 2021. (Picture courtesy of TenLinks.com.)

PTC profit from Q4 2018 to Q3 2021. (Picture courtesy of TenLinks.com.)

Heppelmann signaled at least some semblance of normalacy, as the company welcomed vaccinated employees back to its gleaming, high-rise offices in Boston’s revitalized waterfront (the Seaport District), which it had to vacate not long after first occupying them because of the pandemic. However, the company will be keeping an eye on the spread of the more infectious coronavirus Delta variant, which may reduce the back-to-the-office approach if not repeat the general work-from-home arrangement that many tech companies had dictated.

Heppelmann is holding steady to guidance for FY 2021 and is confident that PTC will deliver “mid-teens” ARR [adjusted rate of return] growth and $340 million of free cash flow—the fourth straight year of “double-digit ARR growth” despite what continues to be economically uncertain times.

PTC’s competitors have not been as fortunate, said Heppelmann, without naming names.

PTC is more capable of a digital thread, taking customers from all the way digital, already having many customers that have “one foot in the digital world and one foot in the physical world.” Indeed, while the rest of the Big Four CAD companies (Autodesk, Dassault Systèmes, Siemens) cover design, simulation and manufacturing, PTC can spin its digital thread further, covering ownership and maintenance of customers’ products. PTC’s IoT, AR and digital twin technology and products are able to represent, monitor and perhaps even control machines from their sale to their end of life.

Heppelmann reminded us that PTC’s CAD cash cow, Creo, had been partially cloudified; its GTX (generative design extension) still awaits mass acceptance, but generative design is still in its “early days.”

Onshape and Arena were said to be enjoying solid growth, with Onshape having a “breakout” quarter and a 40 percent uptick in ARR year over year with a “very strong bookings quarter in the Onshape core commercial business with larger deal sizes and stronger renewals.” The Arena Solutions deal is still looking like a “great acquisition” as PTC appears to have been successful in expanding its customer base beyond the enterprise to small and medium-sized businesses.

A New Sales Space Opens for PTC

With Onshape and Arena in its portfolio, PTC seems to have created a mid-market sales space where it can now do business. Historically, PTC has been known by the companies it keeps as customers, targeting and hitting with big companies. Since its inception, when it revolutionized mechanical design with Pro/ENGINEER, the company has continued with Creo and Windchill. Big companies were where the big money was. But companies in this rarefied air are relatively few in number. By now, they are committed to the design and PLM applications they already have. So few and far between are defections from one CAD or PLM system among the Fortune 500 that when one occurs, it makes the news—company news and TenLinks news, at least, if not CNN. PTC pointed to one such defection in the recent earnings call—the “competitive displacement” of a PLM system by Cellcentric.

PTC, now with Onshape and Arena, both cloud-based (SaaS) and relatively inexpensive, lets the company target the small and midsized firms that compose the manufacturing mid-market sector. Manufacturers in the mid-market arena are cost-consciousness and IT averse. PTC refers to small customers that, with the help of its SaaS applications, have found 20 percent more time for designing, freed from the drudgery of having to install and maintain their software. Not having to keep IT staff and resources locally, offloading their functions to whoever is managing the servers, has been a key selling point of SaaS applications.

Dassault Systèmes has provided the dual mid-market/enterprise approach for PTC to follow. Dassault Systèmes has a team playing in the big leagues with CATIA, ENOVIA and DELMIA for some time. It has had a team in the minor leagues (no disrespect intended) with SOLIDWORKS. With Onshape and Arena, PTC now also has a minor league team. PTC might have already moved into third place in the mid-market space ahead of Siemens, which continues to treat the mid-market as a garden that needs no watering, expecting Solid Edge, its mid-market CAD application, to grow on its own. Or not, but it doesn’t matter. Siemens is most attentive to its NX and Teamcenter customers. Conversely, Autodesk continues to play in the mid-market. Small and medium is Autodesk’s bread and butter.

For now, PTC seems to be okay with increasing market penetration. Heppelmann stated that the company is investing in growth. The company remains as tight-lipped as it was with Onshape’s secrecy, refusing to reveal revenue or numbers of paid subscribers. We understand “breakout” performance and great growth, but we also understand growth from small numbers is not that difficult.

Electricity in the Air

PTC added an electrical design software in a stealthy move with an acquisition of some ECAD MCAD company or technology (details have been hard to find). Heppelmann downplayed the deal, almost calling it immaterial. It was not really an EDA company but one that will help mechanical design interface with EDA, he said. He referred to Autodesk’s failed $3.9 billion bid to acquire Altium, a major EDA player, earlier this year.

“I’m perfectly happy if they [Altium] remain stand-alone,” said Heppelmann. Analysts have reported Cadence, Dassault Systèmes and PTC as possible acquisition partners after the failed bid.

Autodesk’s failed bid for Altium and PTC’s mention of it reveals a lot about each company. We see Autodesk’s ambition to get big, get big customers—and to do it quickly.  There’s no time for slow, organic growth and fighting protracted battles hoping to oust established enterprise applications.

Autodesk may have thought that offering Altium a figure 17 times their annual sales would be sufficient. That initial offer was spurned by Altium, marginally increased by Autodesk, which was spurned again. The offer had represented a 42 percent premium over Altium’s stock price. Big Tech companies are known for making it far more lucrative for investors of companies they are acquiring, generating a no-questions-asked, where-do-I-sign frenzy, but they have more liquid assets (billions of dollars) to work with. For example, Google paid $3.2 billion for Nest (2014), Facebook paid $2 billion for Oculus VR (2014) and Microsoft paid $26 billion for LinkedIn (2016).

That Heppelmann noticed reveals PTC’s interest in big EDA. If PTC can leverage itself better than Autodesk, it could succeed in opening up the electronics sales space, an excellent corollary space to mechanical design for both mid-market and enterprise markets.

The marriage of big EDA and big CAD has only been achieved by Siemens, which in 2016 acquired Mentor Graphics for $4.5 billion, which remains to this day the biggest acquisition in our industry. Therefore, two of the biggest EDA companies, Cadence and Altium, remain single.

Build It and They Will Come

Heppelmann mentioned the generative design extension for Creo as an example of future-minded adoption of the cloud even for its ground-based application. However, generative design continues to be a curiosity rather than a mainstay for its users. Tech companies are well known for offering more tech than can be digested and then forcing customers to wait for the need to develop—not always a certainty. Cloud-based technology is one example and augmented reality is another. With augmented reality, PTC continues to increase its commitment. PTC’s investment and development of Vuforia
Instruct (an Atlas-based SaaS application that was announced this quarter) increases the possibility that users will discover PTC’s AR solutions when they find themselves finally ready for AR.  Heppelmann’s suggested substitution of AR inspection for the time-honored and traditional (read old and painstaking) method of visual inspection is a sure-fire winner, a game changer if there ever was one.

Of course, this depends on sales and marketing getting the word out—not something that can be taken for granted in a world that is without its usual means of promotion, tradeshows and media attention arrested by the pandemic.