PTC’s Most Excellent Quarter

During the pandemic, businesses still in business are lucky. Flat, as in revenue growth, is the new up. A business that shows growth and turns a profit is the exception. Such is the story told yesterday by Jim Heppelmann, PTC president and CEO, who presided over the company’s Q1 FY2021 earning’s call.

With North America sales of engineering software flat for most vendors, PTC can brag about the Americas’ ARR growth of 13 percent. It was the second straight quarter of double-digit growth led by “demand across our core and growth segments.” Those include Creo and Onshape, respectively. Growth in Europe was less, +8 percent ARR, while the Asia-Pacific region led all with +16 percent ARR.

“We see the booking strength reflecting a continuation of the secular demand trends we experienced in fiscal 2020 as customers accelerated their digital transformation initiatives in response to the new way of doing business,” Heppelmann said.

However, PTC does acknowledge a “lower backlog resulting primarily from COVID-19-related bookings pressure in FY20.”

PTC reported quarterly revenue of $429 million, up 10 percent from $391 million in the previous quarter. That is the second straight revenue increase in two quarters during the pandemic. Profit was $23.5 million, which was less than half of the $53 million in the previous quarter.

"Fiscal 2021 is off to a great start with double-digit top line growth and strong cash flow generation in the first fiscal quarter,” Heppelmann said in a press release. “PTC's results reflect strong demand across our product portfolio as customers continue to power their digital transformation initiatives with PTC's market-leading solutions."

An increase in revenue can be explained largely by business acquisitions and partnerships, notably Microsoft and Ansys.

PTC bought Arena Solutions for $715 million in cash, paying over 14 times revenue for the cloud-based, San Francisco-area PDM company. It was PTC’s biggest acquisition ever, eclipsing the previous high set by the $475 million paid for Onshape in 2019. While Onshape added little to PTC’s revenue, Arena brought with it around $50 million of annual recurring revenue.

A second mammoth acquisition in the SaaS space may have been enough to make PTC reorganize the SaaS business unit created after the Onshape acquisition. Heppelmann announced that the SaaS business unit, which includes Onshape, Arena and Vuforia, will be headed by 22-year PTC veteran, Mike DiTullio, previously executive vice president (EVP) of sales and commercial marketing. DiTullio is a graduate of West Point with a Bachelor of Science in management. No mention was made of Jon Hirschtick, who was made EVP and president of the SaaS unit after Onshape was acquired.

PTC entered into a revenue-sharing agreement with Ansys, the leading simulation company. Heppelmann sees the partnerships as a $100 million opportunity.

“Our Ansys-powered solutions had a solid quarter with 20 percent bookings growth and very healthy expansion activity that drove around half of Q1 bookings,” Heppelmann said. “We launched the broader and deeper Creo ANSYS simulation suite. We're expecting these ANSYS powered solutions to account for a high single-digit percentage of our new CAD ACV in fiscal 2021.”

PTC credits Microsoft for leading it into new markets, notably process and power industries.

“Microsoft has a lot of momentum [in all geographies], and we're drafting behind it,” Heppelmann said.

Rockwell, best known for rockets and avionics, has split and reinvented one part with a software focus and industrial automation called Rockwell Automation. Heppelmann credits Rockwell with delivering over 20 expansion deals and transactions in 27 countries. “The majority of Rockwell's deals continue to come from customers that are green fields for PTC.”

Rockwell Automation entered a strategic partnership with PTC in 2018 and invested a billion dollars with the company. In part to manage the PTC partnership, Rockwell announced they had hired Brian Shepherd, a 20-year PTC veteran, as senior vice president.

Despite big acquisitions, PTC still has quite a bit of cash in the bank ($399 million), which is quite a bit more than it had after Q1 a year ago ($238 million). It is no doubt due to the Rockwell Automation investment.

The conversion to a subscription model last year may be responsible for recurring revenue of $385 million, up 26 percent, although revenue from perpetual licenses was $8.5 million, down 6 percent.

PTC’s core business, which includes Creo, was $309 million, up 23 percent. SaaS products, including Onshape, are considered in the growth segment. PTC said there was “solid CAD performance in the high single-digits.” There was also “strong PLM annual run rate growth in mid-teens in constant currency.”

Heppelmann quoted analyst Jay Vleeschhouwer’s recent findings that PTC had the highest growth rate in the “traditional” CAD industry with its Creo and Windchill products.

A number of new customers were led away from competitors. Heppelmann named one and hinted at another—a “European OEM.” SharkNinja, the company known for high-end vacuum cleaners is now calling Creo its preferred and future CAD software, Heppelmann said. Though he declined to name the CAD software SharkNinja is moving away from, a quick check of SharkNinja’s job opening reveals the company also uses SOLIDWORKS.

In aerospace and defense, there was a major extension and expansion at Airbus, according to Heppelmann. There was a “competitive displacement” in one of their divisions. Along with a Windchill expansion, Airbus adopted ThingWorx and Vuforia in the manufacturing environment. He said it “is a great example of the cross-sell opportunity within our product portfolio.”

“Creo 7 incorporates our first Atlas-based offering, Creo Generative Design Extension or GDX as we call it,” Heppelmann said. Frustum, acquired by PTC in 2019, provides generative design on an “Atlas pure-SaaS elastic computing environment,” same as current Creo sessions now and future Onshape sessions. The company also has the simulation capabilities of ANSYS fully integrated into Creo.

Eager to show the Onshape acquisition was money well spent, Heppelmann touted its relative growth but avoided revenue attributable to Onshape subscriptions or their numbers.

“Onshape delivered a very strong quarter, with record bookings up more than 150 percent from its initial quarter at PTC one year ago, including a nice balance of new logo activity and expansion,” Heppelmann said. “Onshape's pure-SaaS CAD solution is quickly becoming a disruptive force in the SMB space, shaking up a mature market segment where PTC has been underrepresented for years.”

Heppelmann mentioned an exciting trend in the education market with Onshape.

“As the pandemic unfolded, we saw a real opportunity to help schools and universities because we have the only true school-from-home CAD solution that works on any device with no installed footprint,” he said. “PTC's academic team decided to pivot their focus to Onshape and set an aggressive goal to try to reach 1 million total education users by the end of fiscal 2021. That’s double the number of users that were participating in our education program across all PTC products at that time.”

It turned out to be wildly successful in terms of acceptance and penetration.

“I'm happy to report that already in January, we exceeded the goal of 1 million total Onshape education users, nine months ahead of schedule,” Heppelmann said. “Onshape is quickly becoming the education standard. It’s one of the greatest shifts I've experienced. Students and teachers love it. Clearly, we caught a wave as world events and the changing needs in education have accelerated this achievement. It's been incredibly rewarding to see how many educators and students have been able to take advantage of Onshape. Students who would not normally have access to CAD are now able to engage in STEM classes. Robotics teams are able to compete even when their season is canceled, and educators have been able to seamlessly continue their instruction because of their access to Onshape.”

But gifts are not forever. PTC was only sowing the seeds for future Onshape paid subscriptions, letting students and teachers get hooked with Onshape Premium for free. The free period, one year, will soon expire before the 2021-2022 school year. PTC is anticipating “converting” students and teachers into paying customers.

It is hard to guess how this will be met from the educational side with schools likely reeling from the pandemic and struggling to find their footing in the fall.