Anyone who is prepared to invest close to $1.2 billion in software acquisitions in order to build the market's first more-or-less complete SaaS and cloud-based PLM and CAD package (PTC Atlas) must be sure about what he’s doing. It's a lot of money to invest in a trend that—although the prospects look good—no one can be sure will materialize.
To defend this venture, PTC CEO Jim Heppelmann, and his integrators and software developers, must put together a real "killer package": an Atlas platform for midmarket PLM, CAD and SaaS in the cloud that takes the market by storm and draws in significantly more than has been the case so far for the two pillars of the solution, Arena PLM and Onshape. It is not enough that 1 + 1 becomes 2; in the longer run, it must add up to 4.
Is this possible? It is tough, absolutely, but not impossible. If it works, it wouldn’t be the first time that a new combination puts "normal" technology and business dynamics out of play. Jon Hirschtick's great premiere creation, SOLIDWORKS, is a good example.
Heppelmann, who bought Hirschtick’s latest creation in 2019, the cloud-CAD software Onshape, seems confident in his predictions.
“CAD and PLM as SaaS solutions in the cloud will be the new normal,” Heppelmann said last week when the company announced that it is completing the acquisition of Arena PLM.
However, as of today the revenues of these two units are annually around a total of $60 million—around $50 million for Arena PLM and $10 million for Onshape—which must go up significantly to result in an acceptable ROI. PTC paid $715 million for Arena and $470 million for Onshape.
My prediction in light of last week’s confirmation that PTC will finalize the acquisition of Arena Solutions is that if anyone in this business can do it, PTC’s leader is a good bet.
“I expect that the SaaS market for CAD and PLM will experience ‘hyper-growth’—meaning more than 40 percent—for years to come. We are seeing that now. That means SaaS will grow an order of magnitude faster than the traditional market,” Heppelmann commented.
PTC's FYQ1: Happy Signs for Heppelmann and Hirschtick
Speaking of PTC finalizing the Arena PLM purchase and CEO Jim Heppelmann's statement around “hyper-growth”:
PTC’s results for its fiscal first quarter of 2021 contained several things that can get any shareholder into a good mood. It may not have been a question of a "hyper-growth mode" yet, as Heppelman said, but it was a really good result that he could put on the table. Total revenue was $429 million, up 20 percent as reported and up 17 percent in constant currencies.
Overall, the indications of where PTC’s business is heading are about strong growth and a growing SaaS business. Regarding Arena’s and Onshape's future, Heppelmann added:
“We will begin looking at the best ways for Arena to use more and more of the Atlas platform that came to us with Onshape. Arena and Onshape don’t do exactly the same things–Onshape is more data management and collaboration and Arena is more BOM, bill of materials solution–but will, over time, share more and more of the common architecture called Atlas.”
The Creation of an Attractive Mid-Market Platform
The acquisition is a confirmation of Heppelmann's view that the importance of SaaS solutions in the cloud are expected to grow significantly in the PLM, CAD and product development area.
Generally, in the case of Arena and Onshape this probably applies more to the midmarket arena than to the high-end OEM level, where predictions are pointing in a more cloud-resistant direction—at least when it comes to bets on cloud-based product realization software tools and technical platforms. For example, in automotive, aerospace and defense, IP protection still forms a hard-to-tear-down bastion of resistance. On the other hand, online aftermarket solutions and environments for autonomous vehicles have evolved to become necessary cloud-based areas, which helps to erode some of the resistance.
The combination of Arena and the previously acquired cloud CAD platform Onshape establishes PTC as the leading provider of pure SaaS solutions for the product development market, and expands PTC’s presence in the attractive intermediate market, where SaaS solutions become standard, Heppelmann claims.
“Together, Arena and Onshape will provide a powerful, clean SaaS CAD and PLM environment, positioned to capture the rapidly growing shift towards SaaS for product design, development and realization,” he says. “The combined solution enables manufacturers to improve collaboration and accelerate innovation, not least in the conditions created by the global pandemic.”
PTC’s ordinary PLM offerings, based on Creo (CAD) and Windchill (PLM/cPDm) solutions, Heppelmann adds, “are showing good growth in the traditional CAD and PLM market; now with Arena and Onshape, we will get a middle market package that is a leader in SaaS.”
“This acquisition is the logical next step in PTC's strategy to be the industrial SaaS leader," said Heppelmann. “A big first step was the acquisition of Onshape, the SaaS leader in CAD and collaborative design capabilities. Arena will enable us to round out the solution with full PLM capabilities and deliver the only complete CAD + PLM SaaS solution in the industry.”
SaaS Investments on Track to Exceed $120 Billion in 2021
Let’s also be clear that Heppelmann doesn’t stand alone in his belief. It is also clear that he is supported by respected analysts in his view of the development path. According to the independent PLM analyst Gartner, the total SaaS market is on track to exceed $120 billion in 2021.
Naturally, business IT, CRM and ERP solutions stand for a major part of these investments. However, the wheels have started to turn in the PLM area. As the product development market responds to the COVID-19 pandemic, those who are early in realizing the effects of SaaS benefits—especially in digital transformation—have a lead that can provide significant gains as the development of virtual product development and manufacturing moves in this direction.
With PTC’s purchases of the new software from Arena Solutions and Onshape, combined with things that were previously on the SaaS side, the developer is now creating its own SaaS unit.
PTC Strengthens SaaS with Its Own Division
That new unit includes Arena, Onshape and PTC's AR platform Vuforia for Augmented Reality technology.
This combination of products is interesting in many aspects, not least of which is the fact that PTC has seen a boost for the Vuforia business during the pandemic.
“Yes, the COVID-19 pandemic has greatly accelerated interest and demand for AR as a way to provide instruction, mentoring and collaborative support of front-line workers in factories and plants,” asserts Heppelmann.
“For example, more than 10,000 companies used our ‘free Vuforia Chalk’ during the first wave of COVID-driven shutdowns. For nearly all, that was their first experience with AR. Knowledge workers like you and I have great digital tools that allow us to work very effectively from home, but front-line workers cannot work from home by definition, and have not had any sort of equivalent digital tools to make them more productive. But AR is changing that, and this has been a driver PTC’s AR growth,” he says.
He added that as a percent of sales, AR has grown from nearly zero to more than 10 percent of PTC’s sales in the past four years.
“The AR business showed an 80 percent growth rate again last year. We believe that PTC’s market share in the industrial world is greater than 50 percent share, and based on our strong leadership position and high level of investment, we would expect to sustain that for a long time to come,” Heppelmann says,
The New Unit Will Be Led by Mike Ditullio
The expanded business unit will be led by PTC's longtime global sales manager, Mike DiTullio. He is replaced in his previous post by Jamie Pappas.
Pappas has led the company's regional sales in Asia, Europe and most recently in North America, and has consistently driven strong results in each role.
“The expansion of our SaaS business unit means that we can focus on integrating the Arena team into PTC and utilizing the expertise we have in our SaaS portfolio,” Heppelmann comments on the organizational changes. “Mike DiTullio has demonstrated his ability to adapt organizations to drive growth, and I am confident that in this new role he can help us take advantage of our SaaS technology leadership position. Jamie Pappas is a skilled veteran sales manager within PTC, and I am equally convinced of a smooth transition when he takes on his new role. PTC is fortunate to have such a strong bench with sales and business leadership.”
The Creation of PTC's SaaS Package Atlas
According to the plans presented by PTC as mentioned above, Arena PLM will be one part of a packaged solution called Atlas. The second heavy piece in this SaaS setup from PTC will be the cloud CAD software Onshape. The creator of this relatively young actor, on the other hand, is a veteran in the CAD area: Jon Hirschtick, the man who in the mid-1990s created SOLIDWORKS, one of the CAD area's biggest successes.
When PTC announced the purchase of Hirschtick's new creation—the then five-year-old cloud CAD company Onshape—for $470 million, it was the second time he managed to sell a new unique technology. When it debuted on the market in 1995, SOLIDWORKS was the world's first desktop CAD solution, enabling everyone to use 3D technology in their design work.
But Onshape is also unique, as the first 3D CAD solution developed for the cloud under a "Software-as-a-Service" (SaaS) concept. In short, you rent the software online.
The point of Hirschtick's Onshape is not that CAD technology itself is the most remarkable kind. Instead, it is primarily about how the solution is distributed and how easy it is to start working with. You can, after all, use fairly advanced 3D CAD to simulate and share models without having to install any software on your own computer, or even having to store anything on your computer. All you need is a network connection and browser, and you can immediately start working, although of course it is also still possible to work offline.
“The acquisition of Arena is the logical next step in PTC's strategy to be an SaaS industrial leader,” says Heppelmann. “A major first step was the acquisition of Onshape, the SaaS leader in CAD and collaboration design opportunities. Arena enables us to round out the solution with full PLM capacity and deliver the only complete CAD + PLM SaaS solution in the industry.”
Together, these two solutions will be the pillars that carry the Atlas package.
Arena Generated Around $50 Million Last Year
Finally, it should be noted that Arena Solutions, specializing in PLM for the high-tech side, ended the 2020 calendar year with about 50 million dollars in revenue, which reflects double-digit growth in 2019. This is not at all bad given the tough situation created for PLM developers.
With these figures, however, it is still one of the smaller players in the PLM area from the perspective of revenue size. This does not prevent the revenues added to PTC from having a good impact on the company's growth on the PLM/PDM side.
In total, in 2019 PTC withdrew 32.3 percent of its revenues on the cPDm side, a figure which may rise sharply in connection with the integration of Arena PLM and Onshape, and will be completed with a well-packaged complete platform for SaaS and the cloud.
If the double-digit growth can continue, if Onshape can move into a momentum given a strong Atlas package, and if Heppelmann’s hyper-growth prediction come true, I think PTC can move mountains.