PTC's ramp deals: "nothing but goodness" in a solid FQ2

PTC reported results last night that were quite good, though a lot of what interests me (at any rate) is buried inside unhelpful product buckets. When PTC says “CAD” in these earnings announcements, they mean any authoring tool, whether it’s Creo, Onshape, or Arbortext. Similarly, "PLM" is any management solution, such as Windchill, Arena, or ALM. And when it says ARR, it means Annual Run Rate, which “represents the annualized value of our portfolio of active subscription software, cloud, SaaS, and support contracts as of the end of the reporting period.”Anyway, here’s what PTC said:

• Total FQ2 revenue was $542 million, up 7% as reported and up 13% in constant currencies, cc
• Software revenue was $501 million, up 8% (up 8% cc)
• Within that total, perpetual license revenue was $9 million, down 7% as PTC continues to transition Kepware to a subscription model
• Recurring revenue was $492 million, up 9%
• Professional services revenue was $41 million, down 4% as PTC transfers transition some of its professional services to DXP services, its Windchill implementation partner
• Total ARR was $1.81 billion, up 23% (26% cc), and CFO Kristian Talvitie pointed out, above the high end of the company’s guidance. On an organic cc currency basis (meaning excluding ServiceMax and Codebeamer), the ARR was $1.63 billion, up 11% (up 13% cc)
• By product group, “CAD” software revenue was $196 million, down 8% (down 3% cc), and “PLM” software revenue was $305 million, up 22% (up 28% cc)
• When including software and services, “CAD” revenue was $198 million (down 8%, down 3% cc), while “PLM” revenue was $344 million, up 18% (up 24% cc)
• By subtraction, then, “CAD” services revenue was the typical $1 million, while “PLM” services revenue was $40 million, down 5%
• By geo, software plus services revenue from the Americas was $256 million, up 26% (as reported and cc); from Europe, $209 million (down 6%, flat cc), and from Asia, $77 million (down 3% as reported, up 7% in cc)
• Using PTC’s ARR metric, the total ARR for the “CAD” product line was $714 million at the end of March, up 7% (up 10% cc). CEO Jim Heppelmann said the company saw “double-digit growth in the Americas and Asia and high single-digit growth in Europe — this growth was primarily driven by Creo [in real money terms], though Onshape saw a strong percentage growth.”
• The PLM ARR was $1,100 million, up 36% (up 39% cc), with 16% organic growth. The company saw “double-digit” organic growth across all geos. Windchill drove organic ARR growth, but there was also strong organic percent ARR growth in Arena, IoT, and SLM. 
• PTC’s channel is important, but the company no longer shares the revenue contribution of each, choosing instead to focus on ARR. By that metric, the direct channel accounted for 74% of the total, continuing the climb from 71% a year ago — which makes sense, as PTC increasingly signs large deals via its direct sales teams. The direct channel contribution was up 28% (up 31% cc) over last year; indirect grew 10% (14% cc).

OK. What does all of this mean? The main brands, Creo and Windchill, were the main drivers of FQ2 growth, though they are buried in buckets that blur the lines between products.

And it looks as though prospects are good, as Mr. Heppelmann said organic and acquired product bookings were “strong” in Q2 — though he did echo Dassault Systemes’ concerns about closing business in China: “While we did see continued booking softness in small and medium business, and in China, this was offset by bookings strength in Europe and in the U.S..” Speaking about specific products, he said that “Windchill and Codebeamer, as well as IoT and AR, [bookings were strong] … Onshape had a record bookings quarter, helped in part by a large household name electronics company, making the decision to move away from SolidWorks and standardize instead on Onshape to gain the advantages of SaaS and agile product development.”

One interesting comment: some of PTC’s big deals seem to be slow roll, meaning a few seats initially but then a ramping up in following years. Mr. Heppelmann calls these “ramp deals” and said that this buying strategy “pushes more of the bookings into deferred ARR, which benefits fiscal '24 and fiscal '25 ARR growth more than it does fiscal '23”. In one sales engagement, he said, a European automotive customer wanted a 20-year deal for Windchill and Codebeamer. “The fact that an automotive OEM wants to understand commercial terms over the next two decades speaks to how sticky our software is. Clearly, they expect to have it for a while.”

This fascinates me — I remember learning that some Japanese companies lay out 100-year strategic plans, which seemed impossible when I learned about this in business school. And no knock on PTC, but to presume that any technology will be predictable over 20 years … I’ll be at Liveworx in a few weeks and want to learn much more about this, if at all possible. Anyway, back to the results:

Mr. Heppelmann told investors that PTC is “taking share [in CAD] because both products are growing double digits. Creo is growing low double digits, and Onshape is growing at a multiple of that. Creo is a little bit in the upper half of the market. And today, Onshape is typically a little bit in the bottom half of the market. They're both, for example, competing against SolidWorks but perhaps at different ends of the SolidWorks base. Creo might be taking customers that have kind of outgrown SolidWorks, and Onshape's taking customers that might feel SolidWorks is too heavy, too expensive, too complicated, and requires a system administrator. They really like the idea of web-based technology. Both products are doing very well. [With] Creo, we're talking 22, 23 quarters in a row we've had a double-digit growth rate. You can't do that unless there's something good happening.”

Mr. Talvitie told investors that PTC’s pipeline for large deals is “pretty good” “across our major geos and verticals. We've seen good interest in [aerospace and defense], in automotive, industrial, med-device, life sciences or med devices; we continue to see good business momentum and good pipeline generation.”

And about those ramp deals. Mr. Heppelmann explained that “They make it a little bit more difficult for us to predict ARR though because, for example, if we were to get a very large order, I suppose we could take a smaller one that started all at once and go get another order later to grow it. But yes, in that environment, we'd rather take the larger order now with a ramp because it's got the customer locked in; ramps are irrevocable … There's nothing but goodness in ramp deals.”

This all led PTC to make a minor adjustment to fiscal 2023 guidance: The company tightened ARR to $1,925 million to $1,950 million (from $1,910 million to $1,960 million) and revenue to $2,080 million to $2,140 million (from $2,070 million to $2,150 million), which would be growth of 8% to 11%. Remember that PTC’s fiscal year ends September 30, so it has more visibility into its entire fiscal year than most other PLMish vendors). PTC didn’t give revenue guidance for Q3.

More on all of this after LiveWorx in a few weeks.