PTC: 'Extremely Tight' Labor Market Is Hurting IoT Sales

Despite PTC's sluggish hiring efforts, the company says its IoT business is still growing 30-40 percent while its fledgling augmented reality business is experiencing more than 100 percent bookings growth. 'This business is blossoming into a big hit for PTC,' the CEO says.

PTC said an "extremely tight" labor market for sales representatives is hurting sales for its Internet of Things business, whose bookings growth surpassed the company's computer-aided design and product lifecycle management businesses for the first time.

The Boston-based industrial software vendor said its sluggish hiring efforts was one of two reasons it lowered its 2019 bookings forecast by $15 million, which was detailed in its second-quarter earnings. Roughly $7 million of the lowered forecast came from the IoT business.

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The challenges in hiring sales reps to push PTC's IoT and augmented reality software was a sticking point for analysts during the company's Q2 earnings call on Wednesday as the company's stock price plummeted more than 8 percent in after-hours trading.

"It's just a case of not moving fast enough to put in enough capacity to deliver on the growth," PTC CEO Jim Heppelmann said on the call.

The other reason cited for lower guidance was a decision early this year focus on profit growth over revenue growth for parts of PTC's service lifecycle management and application lifecycle management businesses, which Heppelmann said represent only five percent of full-year bookings.

Heppelmann said the two issues are connected as the company had laid off employees associated with its SLM and ALM businesses to shift headcount to its fast-growing IoT business — which is part of the company's workforce alignment plan that was announced last fall. The CEO said the issues carried over from the first quarter, when PTC blamed poor sales execution for more than $20 million in slipped deals.

"The key thing to remember is those are small businesses whose futures are not that promising," Heppelmann said. "Instead of trying to get one more year of growth, we'd rather take more share in IoT and AR […] where the businesses are growing like a weed."

Despite the company's hiring struggles, the firm reported strong double-digit growth for its IoT business, which includes PTC's ThingWorx platform and Vuforia AR platform. IoT software revenue grew 27 percent year-over-year to $37 million in Q2, the company said, while bookings for IoT software "grew much faster than the market growth rate of 30-40 percent” — which the company expects to remain the case through the end of the year.

Heppelmann said AR has been a large driver for the IoT business, with bookings growth of more than 100 percent from the previous. During Q2, the company landed its first seven-figure Vuforia AR deal while the number of six-figure AR deals have been accelerating, according to the CEO.

"This business is blossoming into a big hit for PTC," Heppelmann said.

Semiconductor foundry GlobalFoundries made a large investment last quarter in PTC's latest Vuforia product, Expert Capture. The solution allows workers to capture walk-throughs for procedures using AR, which Heppelmann said is important for the shifting demographics in the workforce.

"We're confident AR will become increasingly material," he said.

The company's total revenue for Q2 was $315 million under its old reporting method, which was changed last fall due to new accounting rules that change the way revenue is recognized. That figure represented a 2.8 percent increase from the same quarter last year. The company's reported Q2 revenue figure beat Wall Street's expectations by $3.2 million while its net earnings of 28 cents per share surpassed analyst estimates by 4 cents.

At the same time, the company's license and subscription bookings for Q2 increased 18 percent year-over-year to $112 million, with subscriptions representing more than 90 percent of bookings now — a push away from selling software with perpetual licenses that Heppelmann said is now complete.

In addition to earnings, the company announced that it has hired former PTC executive Kristian Talvitie as its new CFO. Talvitie is replacing Andrew Miller, who announced his retirement earlier this year and will stay on for a transition period.