Why Atlas, the Cloud? That’s Where the Money Is, Says PTC

Jim Heppelmann, CEO of PTC, would have been in a good mood when he explained the results of his company’s most recent quarter last week. PTC recorded its 8th straght quarter of increasing revenue—and it may have been the most profitable ever.

It wasn’t long into the presentation that Heppelmann chose to give a shout-out to the newly minted cloud app division of PTC.

“I am especially excited about our pure-SaaS CAD and PLM solutions. In its first quarter as part of PTC, Arena Solutions delivered record bookings, while Onshape bookings are tracking to more than 100% growth for the year. These impressive results clearly demonstrate the increasing investment that customers are making in SaaS solutions,” said Heppelmann. “With the strong leadership position we have captured in SaaS, PTC is poised to capitalize on this transition in the market.”

One might expect Heppelmann to be crow about his most recent acquisitions, Onshape and Arena Solutions. Onshape cost PTC more than it has ever paid for another company ($470 million).

We don’t expect quarterly calls to provide a complete company roadmap. There are a few signs of PTC’s intentions of making its applications cloud based and placing an emphasis on Atlas, its cloud-based platform.

Some CAD insiders have dismissed the Atlas web platform as hosting a few applications while PTC keeps its bread-and-butter applications on the desktop. But with the attention given to Atlas on this earnings call, we see a clear sign that PTC has ignited the Atlas rocket—and may well plan for it to be its application platform of the future.

The most compelling reason for making Atlas PTC’s platform of the future is also the simplest: the cloud is where the money is.

“PTC is essentially doing with Creo and Windchill what Microsoft has done with Office 365,” said Heppelmann. “When an on-premise workload shifts to SaaS, the ARR [accounting rate of return] of that workload roughly doubles. So, this is expected to become a significant source of growth for PTC in the mid to long term. Just as Office 365 has been for Microsoft.”

Indeed, Microsoft has made all its applications cloud-based—or, as Heppelmann says, “SaaSified” them. Cloud apps float above the desktop in a parallel world. Those on the desktop who see the light from the cloud (how about never having to hit “Save” again?) can go there right now. The others—whenever they are ready.

Heppelmann refers to this as “insidious Saasificiation,” no doubt making his PR team squirm at the negative connotation.

Clearly, Microsoft had one of its best quarters, due to gaming and cloud services revenue, according to the Wall Street Journal, raising its share price 50 percent over a year ago and making the company valuation almost $2 trillion—second only to Apple Inc. Adobe, the poster child of the let’s-go-all-subscription movement, is also making more money than ever with its full-cloud offerings. All hail to Salesforce.com, which stormed out of the gate with a cloud-based, subscription model and built the tallest tower in San Francisco, an exclamation point to success in the cloud.

“The bulk of the Onshape business continues to come from SOLIDWORKS replacements,” said Heppelmann.

This comes as no surprise as SOLIDWORKS has the most MCAD seats. The Onshape user base has been growing, though the biggest growth we know of has been in the non-paying education sector. We have not heard of any significant dip in the number of SOLIDWORKS users, however.

Heppelmann is more excited about increasing business in growth (non-core) areas where PTC has established a beachhead—often with CAD and PLM applications—and expanding business with emerging technologies, especially the Internet of Things (IoT) and augmented reality (AR), where PTC has acquired industry-leading solutions and where the company’s competitors have no answer.

“IoT delivered a third consecutive quarter of improving year-over-year ARR growth with strong new logo growth, and bookings up nearly 50%, while ARR increased 20% from a year ago,” said Heppelmann. “We’re seeing a good rebound from the slowdown caused by COVID-related travel restrictions and lockdowns that we saw a year ago.”

Every bit the CEO, but one who is amazingly cognizant of all levels of leadership, from knowledge of product minutiae to overarching strategy, Heppelmann continues to lead PTC to new conquests as well as assimilate recent technologies into the fold. Heppelmann may not be alone in reaching for the stars in our industry, distant, non-core markets (like AR and IoT) that have users, analysts and editors all scratching their heads, but his post-acquisition attention to integrating these technologies, his patient explanations to the less understanding combined with an unwavering guidance to the stretched PTC sales team makes him unique.

A partnership with Microsoft is mentioned as adding to PTC’s top line, as are partnerships with Ansys and Rockwell.

“Our Ansys alliance continued its momentum in Q2 with double-digit ARR growth,” reported Heppelmann. “PTC was named 2020 ANSYS Growth Partner of the Year at their Simulation World Conference.”

Echoing business in general, PTC acknowledges its business is returning to pre-COVID levels, at least in ARR if not in bookings. Heppelmann finds the return to vaccinations and the stimulus plans of the current administration “encouraging.”

Indeed, PTC’s ARR growth this quarter was 18% to $1.39 billion.

A rosy outlook is reflected in PTC’s upgraded guidance as it raises the expected revenue for the next quarter from between $1.71 and $1.74 billion (from between $1.45 and $1.47 billion projected earlier).

PTC’s debt has grown to roughly equal its annual revenue, possibly due in large part to financing the aforementioned acquisitions.

Heppelmann expressed delight in how well Arena Solutions has done the last quarter—though that does not mean PTC will leave it alone. Arena was in a revenue generating mode, says Heppelmann, due to its ownership by a holding company. We are more interested in growth than revenue, he said.

“Arena … almost all of their sales come from the United States, so the first thing we’re going to do is globalize Arena and sell it around the world just like all of our products,” said Heppelmann. “The second thing we’re going to do is integrate it to Onshape because customers that get excited about Onshape also get excited about Arena and vice versa.”

The Atlas platform now has three applications on it—and there will be more to come, promises Heppelmann as PTC simultaneously announced General Design Exchange (GDX) and Vuforia Learn (see PTC Adds Generative Design and AR to Atlas Cloud Portfolio). Heppelmann also let slip that Onshape was going to get generative design from the Creo product, marking the first technology transfer from the older Creo to flow into Onshape.

Unlike briefings of previous CEOs where CAD got short shrift, Heppelmann spends a respectful amount of time on Creo, extolling its enhanced model-based features, 3D printing capability (more lattices) and the connection to Ansys—both in real-time solution (Ansys Live) and more sophisticated analysis. No mention is made of PTC’s previous simulation solutions and certainly no confirmation that they have been renamed Chopped Liver.

The trillion-dollar construction market and the U.S. refocus on it has not turned Heppelmann’s head, although the CEO acknowledges that the massive spending on infrastructure will create a tailwind for PTC. Similarly, there will be tailwinds from the increasing use of 5G.

“Where AEC booms, so does construction vehicles and equipment. About one-third of PTC’s business comes from a category we call industrial. That includes John Deere, Caterpillar, Volvo, Bobcat, plus HVAC and other industrial equipment—the products that end up in new buildings.”

Similarly, he sees 5G as the powering growth in IoT, which can only help PTC’s ThingWorx business.