News of PTC revenue and profit for the quarter was overshadowed by the announcement that CEO Jim Heppelmann was to be replaced by Neil Barua, formerly the head of ServiceMax. Heppelmann had introduced us to Barua at LiveWorx 2023, but news of his rapid succession, bypassing PTC insiders, came as a complete surprise to CAD insiders.
Heppelmann seemed to have been doing well—but then, what do we know? The revenue chart shows a general positive slope, though in the last quarter, it was flat. Flat does not sit well with private equity firms, where Neil Barua spent his formative years.
Heppelmann was upbeat and led off talking about “solid results” (no pun intended) for the quarter, including rising annual recurring revenue (ARR), cash flow and revenue and profit compared to the same quarter last year. However, a look at the profit curve over the last 4 quarters, which showed decreasing profit, may have attracted the attention of a restless board of directors.
When it came time to recount the wins and joys of the quarter—that which usually takes up the bulk of a financial call—it seemed too short. We did hear about the subscription licensing that is now providing record ARR (“performing so well compared to peers”) and cash flow (up 46% YoY), another uptick in Onshape subscribers, and so on.
The Legacy of Jim Heppelmann—Start Here
Presiding over what will be his last financial call gave Heppelmann a chance to recount the strategies that he is most proud of, and in effect, volunteer his own legacy.
First of all for Jim Heppelmann is PTC’s growth in ARR.
“Perhaps the single biggest driver of growth was unleashed in 2015 when we launched the full-on transition from a perpetual and maintenance model to a subscription business model. This was a short-term pain and a long-term gain type of strategy, and I’m pleased to say the pain bottomed out in fiscal 2017 and faded in fiscal 2019. We’ve been enjoying the long-term gain and growth rate ever since.”
PTC, the company that started a CAD revolution but gave away market leadership, followed Autodesk’s stated commitment to a full subscription model at the beginning of 2015. During Jim Heppelmann’s tenure, PTC acquired software as a service (SaaS) products, those with a built-in subscription model, notably Onshape for CAD and Arena for product lifecycle management (PLM), and set itself up with a SaaS platform of the future (Atlas) that ran in parallel with desktop-based platform centered on Creo and Windchill.
Although Onshape and Arena had increased subscriptions by percentage, the total number of subscribers and revenue for each of PTC’s SaaS product lines remain elusive, indicated Heppelmann. It may have been the first time that PTC conceded that the SaaS “growth driver is in its early stages and its impact is minor right now compared to what it promises to contribute in future years.”
Did we just hear that the SaaS acquisitions are being downplayed?
“You should consider that SaaS is not in our growth strategy per se,” says Heppelmann. “It is another tailwind that helps in our quest to drive our growth rates higher. “
It was ServiceMax and Codebeamer that received credit for being the real growth strategy gems, leading to the lucrative (our words) cross-selling.
Heppelmann may have talked about ServiceMax longer had it not been the most expensive Trojan horse that would ultimately cost him control of PTC. PTC paid $1.46 billion for ServiceMax—more than 10 times its annual revenue.
Heppelmann expressed pride in how PTC has achieved more offshoring of its R&D staff than its peers. PTC has 37 percent of its employees in R&D, on whom the company spends only 16 percent of its revenue. PTC’s R&D centers in India, including high-rise buildings in Pune (a day trip from Mumbai), have been in operation for 30 years—operations that CEO Elect Neil Barua, himself of Indian descent, may be keen to support.
Heppelmann last point of pride was “portfolio balancing,” the positioning of resources where they will drive the most growth. This was a combination of supporting low-growth products with high margins (Creo?) while reserving enough “dry powder” to invest aggressively in products that will develop into high-growth businesses.
That’s a nice way of saying what we might have described as “keeping your cash cows alive while attending to the calves.”
End of an Era
Heppelmann told us “life is calling me to a new chapter” after 25 years at PTC, half of them as CEO. He did not say what the next chapter might entail, nor did we expect to hear it on this call. Heppelmann is 59, an age when executives who are too young to retire and too proud to accept lesser positions seek board of director positions.
Heppelmann shed light on the internal process of appointing Neil Barua as the company’s next CEO. The board had hired Korn Ferry, an organizational consulting firm, and Barua emerged as its choice. Barua, who has already been a CEO twice by age 46, has a “longer career runway.” Although Barua may have only joined PTC in January of this year, by the time he officially takes the reins in February 2024, he will have become an insider, said Jim Heppelmann.
The next few months, we’ll have a brain dump, says Jim Heppelmann—though not in those exact words. Barua will meet important customers, “employee and shareholder constituencies,” and others, as well as learn products, competition, the industry … as much as Heppelmann is willing to tell and Barua can absorb, by the sound of things.
It is with some regret that we see Jim Heppelmann leave day-to-day activities at PTC. Heppelmann has an incredible operational and information bandwidth, an ability to engage you at your level no matter what level you are on—and a way with words that we have tried to show here, and which we will miss on future financial calls.