The latest quarter results emphasize FSM leadership.
PTC’s CEO Jim Heppelmann took the opportunity at the last quarterly call to restate PTC’s intention to digitally transform the manufacturing industry, a transformation that would start with its customers who have chosen one or two of the company’s applications, but not all of them. For if they used all of the applications, they would have a digital thread.
PTC is not unique among CAD vendors with this approach. Each of the Big Four (Autodesk, Dassault Systèmes, PTC and Siemens) is convinced that their collection of applications constitutes the perfect blend—the way to achieve a digital transformation. Each targets different industries and their blends are unique, each made with different ingredients, and with applications internally developed or acquired.
PTC has chosen to address the service life of a product after it has been designed and manufactured, addressing the so-called long tail of a product. They are no doubt thinking that the most money is spent on a product during the life of that product—and not on its creation (not unlike children)—and so they might as well get in on it.
This long tail is known as service life management (SLM), of which field service management (FSM) is a part. For this, PTC acquired ServiceMax. Revenue from ServiceMax is eagerly anticipated, though none of it could be realized this quarter. However, PTC had to absorb the expense of the acquisition.
ServiceMax is just the latest piece of the SLM suite that PTC has assembled. PTC acquired Servigistics in 2012 for $220 million. Feeding into the SLM trend with content creation are the previously acquired Arbortext and Vuforia products, as well as the company’s core products, Creo and Windchill.
“Physical products are very different. If you want to change them, for example, you need to dispatch a truck to the customer site carrying a technician and spare parts. Spare parts are managed in our Servigistics software. The technician will need access to similar types of digital product information as those the factory used when creating the product. This service information is created using Arbortext and Vuforia,” Heppelmann said.
“As you can see, ServiceMax has great synergy with Creo and Windchill, because on one hand the service process consumes the digital product data created in engineering in the form of parts catalogs and service instructions,” he continued.
“Windchill serves as the system of record for the digital definition of all possible product configurations, and ServiceMax serves as the system of record for the actual physical instances of products that exist, each of which may have a slightly different configuration. As the infinity diagram (above) implies, there is a digital thread of product information flowing between these key systems in both directions throughout the product life cycle.”
“Aligning ServiceMax with PTC’s various offerings will lubricate this flow of data, creating tremendous business value. No competitor has a solution comparable to this.”
It sounds as if PTC’s long list of acquisitions were part of a master plan to become an SLM leader—that even Pro/E and Windchill, PTC’s first and long-considered core products—were only a means to an end. PTC has made SLM a division, and Neil Barua, once the CEO of ServiceMax, will serve as its president.
PTC says the SLM group is good for at least $300 million accounting rate of return (ARR).
Additional Highlights from the Call
Quotes below are by Jim Heppelmann, CEO, unless stated otherwise.
PTC has reported a revenue decrease of 8 percent to $466 million for the last quarter. The company still made a profit of $75 million, though $32 million less profit than in the previous quarter.
Not meeting expectations with investors generated a bit of a selloff after the results were announced and PTC stock dropped 5 percent (to $130.76 a share).
PTC may not have met the expectations it had set the last quarter or done as well as other CAD companies (Dassault Systèmes just had its best quarter in the last two years) but there’s no reason to panic—unless you’re Chicken Little.
“On the top-line metric of ARR we came in at $1.66 billion,” said Heppelmann, leading off the call.
“This was above the high end of our range and up more than 15 percent year-over-year. ARR, or annual recurring revenue, is a better metric than revenue,” said CFO Kristian Talvitie.
“Free cash flow, we delivered $172 million ahead of our guidance and up 28 percent year-over-year,” said Heppelmann. The cash flow, along with cash on hand of $388 million, will be helpful in paying off debt, the interest on which costs the company $125 million a year. PTC took out a $500 million loan and got a line of credit to help fund the $1.46 billion ServiceMax acquisition. The second installment of the transaction, $650 million, will come due in October.
PTC’s new product category, “authoring,” which includes CAD, recorded an increase in ARR of 5 percent globally to $696 million, and was highest in the Americas and driven mostly by Creo and Arbortext.
“Across all geographies, the largest ARR growth in terms of magnitude was driven by continued strong demand for Creo CAD and Windchill PLM products.”
PTC makes more with PLM than CAD, reporting ARR up 16 percent to $907 million for Windchill, Arena, IoT and retail PLM.
Creo+, the cloud-based version of Creo, is still on track for a May launch at the company’s annual user conference, LiveWorx.
PLM products (Windchill and Arena) had an ARR growth rate of 20 percent in Q1 across all geographic regions.
Windchill+, the SaaS version of Windchill is making “good progress” but has only “about a dozen” customers. PTC expects sales to take off, however. “We expect an S-curve type of ramp over multiple years for our Plus offerings.”
Next is Creo+, which will be introduced at LiveWorx.
In the last quarterly earnings call, PTC delighted in calling itself the biggest PLM vendor. This quarter, the company was proud to announce what is “very likely” the biggest CAD and PLM model in the world, the 3.5 million component National Ignition Factory (NIF) at Lawrence Livermore National Laboratory, produced with Creo and managed with Windchill. It was the first fission reactor to produce more power than it consumed last December.
“In PLM, we continue to significantly outperform the market, which has been growing approximately 12 percent.”
Half of the growth in the quarter was due to Windchill, with contributions by Arena and retail PLM plus Codebeamer and IoT, which PTC includes in its PLM category. Heppelmann implied that while Arena and ThingWorx are now profitable products, Onshape and Vuforia are still in the red. But the “burn rates are decreasing with scale.”
PTC, like others in the CAD industry, has not as of yet suffered from the mass layoffs occurring at big tech companies. So far this year, Amazon, Facebook, Google, Twitter, Microsoft and others have each announced that tens of thousands of people will be laid off.
While PTC will be slowing down its hiring, it is not planning any layoffs.
