Software subscriptions are rising briskly, but that means a short-term hit in revenue.
PTC CEO James Heppelmann told Wall Street what he thought was great news; new booking of software subscriptions in the second quarter of 2016 were above the high-end of previously issued guidance. This is great for the long-term future of PTC, but Wall Street is more interested in the short term. As reflected in financial press coverage, the headlines were not “PTC subscription bookings rise at a hot pace” but more like “Q2 income drops 57%” and “PTC reports Q2 loss.”
But Heppelmann isn’t backing down. “While a higher subscription mix negatively impacts near-term reported revenue and earnings, we believe significant long-term value will be created for our customers and shareholders by transitioning to a subscription model.”
Subscriptions were 54% of total revenue, more than double PTC’s guidance target for the quarter. Heppelmann was pleased: “Our program appears to be hitting on all cylinders; and based on our updated guidance, we’re effectively a full-year ahead of our subscription transition plan.”
Revenue in the second quarter of fiscal 2016 (ended March 31, 2016) was $273 million, down 13% from the same quarter a year ago. PTC posted a net loss in the quarter of $5 million, compared with net income of $5 million a year ago. PTC says currency fluctuations negatively impacted revenue by $9 million in the quarter.
Bookings of license and subscription revenue in the quarter was $86 million, $5 million above the high-end of PTC’s guidance range, and up 14% from a year ago. PTC says every 1% change in the subscription mix (as more sales move from perpetual licenses to subscriptions) impacts annual revenue by $3 million.
Service and support revenue in the second quarter was $209 million, down 8% from 2Q15.
Revenue by regions:
- North America revenue was $118 million, down 12%
- Europe revenue was $100 million, down 10%
- Asia/Pacific revenue was $53 million, down 26%.
PTC no longer breaks out revenue for specific product lines as CAD, PLM, or their service software and Internet of Things (IoT) lines of business. Instead, they now report revenue divided into two areas: Solutions Group and Technology Platform group. Solutions Group is all their software products before their venture into IoT; Technology Platform is IoT. For 2Q16 Solutions group revenue was $253 million, down 17% from a year ago. Technology Platform revenue was $19 million, up 103% from a year earlier.
PTC is now reporting percentages of total revenue by industry; here are the breakouts for the second quarter:
- Automotive: 13%
- Electronics & High Tech: 16%
- Federal, Aerospace & Defense: 15%
- Industrial Products: 34%
- Life Sciences: 5%
- Retail & Consumer: 8%
- Other: 9%
What do we think?
Despite the attention paid to short-term results, investors actually seem to be patient; the stock took a tiny dip when quarterly results announced, but in the next 12 hours gained 6%. Corporate customers like the ability to record software purchases as operating expenses instead of capital purchases. In that regard, PTC is seeing much less resistance to licensing than Autodesk, which serves a more retail-oriented audience. If PTC continues to steer clear of so-called activist investors, they should come through this transition to subscriptions a much stronger company.