From yesterday's meeting with financial analysts
(The Onshape acquisition closes in November, following normal regulatory approval and certain closing conditions.)
Jim Heppelmann (CEO, PTC): PTC and Onshape share a common vision around helping organizations transform the way they develop products. Onshapes peer multi-tenant SaaS [software as a service] platform is a perfect complement to our market leading on-premise product development solutions and coupled with our industrial IoT [internet of things] and AR [augmented reality] solutions, we can address an even broader part of the waterfront of digital transformation that’s sweeping across the industrial market.
Now if you step back and look at the PTC portfolio in fiscal ’19, you see that on top of a strong and stable core business, we have two great growth engines in ThingWorx IoT and Vuforia AR. As we head into fiscal ‘20 with the Onshape acquisition, we're now bringing on a third growth engine.
As part of our diligence process, we commissioned a market study from McKinsey that suggested the SaaS based CAD market would grow more than 35% year-over-year and represent nearly 20% of the total CAD market in five years. While Onshape is new, it sure feels familiar to us, because Onshape lives in the same CAD and PLM market space as our core business. It's simply a next generation SaaS version of a technology concept the PTC itself pioneered 30 years ago.
Onshape is not a distraction for us, but rather a doubling down on CAD and PLM to ensure that these core businesses will continue to grow and thrive over the longer term as the industry moves to SaaS.
As you know, we at PTC have been talking about the renaissance of CAD for some time. We realize that along with generative design, real-time simulation, augmented reality, IoT and Azure manufacturing, SaaS will surely play a role in this industry renaissance.
Once you realize how important SaaS will be and why, then you can't avoid the realization of how important Onshape, the only peer SaaS player will be to this industry. Onshape is the first and only from-scratch native SaaS product development platform that unites CAD, data management and collaboration tools in the next generation package.
Onshape is a very unique asset, because of the incredibly high cost of entry into the well-established CAD market, you simply won't find another CAD SaaS start-up out there. The only people who could even attempt to start up this bold are those with the track record so strong that they could raise nine-digit amounts of venture funding and pull in some of the industry's best talent, which brings me to Jon Hirschtick, John McEleney, and Dave Corcoran who founded Onshape and run the company today.
I think it's fair to say that Jon, John and Dave are some of the most accomplished entrepreneurs in the history of the CAD industry. They created SolidWorks to capitalize on the Microsoft Windows wave in the mid-1990s and then turned it into a grand slam after it was acquired by Dassault, helping to still position SolidWorks as the primary growth engine over the past two decades.
Ultimately these guys came to the understanding that SaaS would be as disruptive to the CAD establishment as windows was and that the CAD and PLM industry would surely move to SaaS just as nearly all other software industries already have.
I agree with their premise that SaaS is inevitable in our world and there are many strong reasons why. Onshape is a bona fide growth engine that will allow PTC to take share in the growth-iest parts of the CAD market. I'm eager to share the benefits that SaaS brings to the world of CAD and PLM, but since we have Jon Hirschtick here with us, I'd like to give him a chance to tell you first-hand what he and his team have been working on.
Jon Hirschtick (CEO, Onshape): I've spent my entire career since the 1980s in our industry working on CAD and other software for product development. I've been lucky enough to be part of some of the biggest moments in the past in our industry and I feel like today is perhaps the biggest moment I've experienced in our industry.
When Jim and I met earlier this year, it was so exciting to me that he had this strong clear vision we share for the power that a pure SaaS platform could bring to the product development world. It was so refreshing for me to see also Jim's understanding of and commitment to pure SaaS, pure cloud since so many others in our market are pursuing partial cloud approaches and frankly partial cloud has been shown to fail time and time again in other markets.
Beyond just Jim’s vision, he also obviously has resolved to take bold action to pursue his pure SaaS vision. And thank you Jim for the kind words about me and my fellow Onshapers. I'm very fortunate to be working with a lot of the great team that was with me when I founded and was CEO of SolidWorks. My Onshape co-founder John McEleney has also worked in our industry since the '80s, most notably as my business partner and another former CEO at SolidWorks.
Another Onshape Co-founder Dave Corcoran is a former VP of R&D at Solidworks and is one of the key minds that shaped several of the greatest products in our industry, including Solidworks and of course Onshape. I wish I had the time here to tell you more about each of the rest of the 100 or so people on the Onshape team, the fantastic group.
We founded Onshape because we saw the problems product development teams have with installed software applications and sharing data by copying files, often thousands of files among different people and tools. Whether product developers realize it or not, they are all losing time, efficiency and innovation to these problems. At the same time we saw how companies using pure cloud, pure SaaS technology like Salesforce, Workday, NetSuite, Zendesk -- basically everyone were reinventing other software markets.
We saw that we could solve many of the problems in product development, but we would need as Jim said, to build a clean sheet, new generation system to do it, and that's what we've built with Onshape. Today we have thousands of customers using Onshape with story after story of them developing products faster than they ever could, being more innovative. The great products that they are developing with Onshape is our ultimate reward.
So it's probably easy for you to see why I'm excited to be partnering with PTC. PTC is going to help us dramatically grow the number of customers we can reach with Onshape. PTC is also going to draw on their strong technical breadth and depth to further broaden the scope of what we offer on the Onshape platform.
Jim Heppelmann: Let me share a few important thoughts about how Onshape fits with PTC's core CAD and PLM strategy. Our near term goal is to increase our participation in the growth-iest part of the CAD and PLM market, which really represents an adjacency to where Creo and Windchill play today.
Jay Vleeschhouwer pointed out in a recent report that last year there were 174,000 new seats of [high- and mid-range mechanical] CAD sold in the market globally, with Dassault Solidworks business taking about 80,000 and Autodesk Inventor business capturing about 40,000. Creo, CATIA, and NX fit the bulk of the rest.
In the near term and midterm it is that 70% of the market drove by Solidworks and Inventor that’s most interesting to pursue with Onshape. Onshape gives us an opportunity to both participate in and then disrupt this part of the market and we can enter and play with a very strong hand.
Thanks to the massive advantage in Innovation Velocity that Jon spoke up, plus some great new technology like generative design that PTC can share within the portfolio. We expect Onshape will quickly mature into a full-featured SaaS CAD Solution. There will be no glass ceiling on Onshape capabilities like SolidWorks endured over the years, because PTC's positioning will be that we have the best of two different worlds. Creo and Windchill are best in class in the On Premise world and Onshape CAD and PLM are best in class in the peer SaaS world.
It’s happened time after time that disruptive new technologies gain traction first in the SMB [small- and medium-sized business] space, where customers generally have more flexibility to switch and then proceed up market over time. We expect that any SMB buyer who looks at Onshape will stop dead in their tracks due to its amazing capabilities, plus all the fundamental SaaS advantages it offers.
I'm referring to cost of ownership, support for any type of client device, including phones and tablets, ease of getting started, collaboration that works like Google Docs, and plus no need for upgrade the patches, no file servers and software.
Of course in addition to SMB customers, Jon’s going to take orders from companies of any size, because in the long run the SaaS benefits are even more pronounced at the high-end. Like salesforce.com, we expect to get there overtime and believe the high-end competition will be very vulnerable to what Jon and his team of built. That's why we all have the axiom that death comes from below in the software industry.
I want to stress that PTC remains 100% committed to long-term aggressive development of Creo and Windchill. We want to be best-in-class with either deployment model. So we will continue our pursuits of real time simulation, generative design, additive manufacturing, IoT, AR, and all the other great things that we've been working on with Creo and Windchill.
But in parallel I expect you'll see many of the same capabilities that appear on Onshape and surprisingly quickly, giving the fundamental innovation velocity of a SaaS model. When the day comes that any Dassault, Siemens, Autodesk, or PTC customer wants to move to SaaS, we will be there ready to guide them.
But our real focus in the near term and midterm is on playing are strong to hand in the growth-iest part of the market where we simply don't show up today. If you back up to 50,000 feet, you can see that Onshape represents a huge and invaluable injection of SaaS technology, business processes, knowhow, and culture into PTC. Onshape will dramatically expedite PTC's own transformation to SaaS. The industry is most certainly headed there and PTC is now positioned to pave the path with Jon and his team up front leading the way.
I think this acquisition, PTC's biggest ever, will transform the industry, while both solidifying and accelerating PTC long term growth opportunity in CAD and PLM. We are excited to welcome the Onshape team to PTC.
Matt Hedberg: First of all, do you have a sense for how many of your customers have expressed interest in a SaaS based offering? I'm trying to get a sense for you know that customer migration over time from Creo and Windchill to Onshape.
And secondarily, I think you noted that you're going to continue to invest in CAD and PLM on your legacy products or your core products. How should we think about that gap in functionality closing over time, if in fact that these SaaS based CAD market is growing as rapidly as you suggest?
Jim Heppelmann: McKenzie did a study of around 230 customers. They reported very strong interest in the concept of SaaS. You know, some concerns that SaaS products weren't mature enough yet, always some concerns about switching costs, and the larger the enterprises the stronger their concern, but huge amount of interest. And now I would say, you know one of the things PTC came to realize is that this Onshape product is actually much better than we thought it was, much more advanced than we thought it was.
So we sort of think that the world hasn't processed how fast this product changes. You know while we were talking to the Onshape guys, they did their 101, 102, and 103 upgrade of the entire customer base. So there's an innovation velocity here that's amazing and I think it's probably fair to say that you know Onshape is a mid-range product today, but on a very fast improvement vector, and you know we at PTC would be incented to offer up any of the great technology we might have to put into that improvement vector.
So this is a product that is better than what most people think it is, and improving extremely fast, and there's a very large amount of interest. You know the kind of punchline result of the study from McKinsey was that they think that we see a 35% CAGR [compounded annual growth rate] over what's there today and that would lead to slightly under 20% market penetration by true SaaS in the next five years.
Steve Koenig: Any comment on how Onshape competes or differentiates with Autodesk Fusion?
Also, what channel would you use to see it, and is there an existing Onshape channel or will be building one what’s the go-to-market going to look like?
Jon Hirschtick: You mentioned our competitive position with Autodesk. I think their vision aligns with ours. They say that the cloud future is SaaS, it's just they don't back it up with the goods yet. We align completely on the idea that you have to have a pure cloud, pure SaaS platform and offering. Autodesk today offers a partial solution, mixing installed software with cloud, partial cloud services, and so forth. You know those strategies are not things that we believe are the way to deliver the value we seek to deliver to customers and so we think we have a big advantage there.
Jim Heppelmann: Our studies showed that Onshape pretty much goes toe to toe with features and functions against Solidworks, but beats then for anybody who wants SaaS, because SolidWorks doesn’t have SaaS. And our studies said that against Fusion it’s a better, much cleaner better more complete SaaS model and blows them away on functionality. So we think we're in a very good strong competitive position against both of those with the Onshape Technology.
Sterling Auty: So with Onshape, if it's 1%, it sounds like this is about a $10-million revenue generator in terms where Onshape is and if I take 5,000 or so subscribers times the printed pricing that kind of supports that idea. For $470 million net cash, it’s a big multiple to pay. And I don’t think anyone disagrees that they've got the leading technology on the market, but they’ve been around for a number of years and we're seeing slow adoption at this point. Just to play devil's advocate, what was the buy versus build decision, $470 million invested internally.
Jim Heppelmann: It cost Jon, with an incredible team of the best guys in the industry, six or seven years and $100 million to get to where he is right now. So for me, it would be a little harder to do that entrepreneurially-efficient thing. So our estimate is it would take us at least five years and several $100 million to build what he has. So there are several $100 million of synergy here.
Now the second thing I’d tell you about the price is that this is a unique asset. It’s the only one out there, which gives Jon of course some negotiating leverage. Another point is it's the same revenue multiple that we paid for Frameworks and it’s the same revenue multiple that Dassault paid for Solidworks at the same size if you adjust the difference between multiples on perpetual versus multiples on subscription revenue streams.
So I think you and I both would agree that $100 million ARR [annual recurring revenue] stream is worth more than $100 million of perpetual one-time streams. So if you take the difference in those multiples and gross up what Dassault paid for Solidworks by that factor, you get to what we paid for Onshape. So I think I can triangulate on this many different ways, and I think this is a very good buy at this price. It's a win-win for both parties.
So to help further unpack all the moving parts, we're hosting an Investor webcast on November 18 where we will reveal our long term financial targets, show you how we plan to get there and provide more insight as to how Onshape plays in the picture.