Vendor Ratings, VDR Marc Halpern

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1 Vendor Ratings, Marc Halpern Research Note 20 August 2003 Vendor Rating: PTC s Financials Belie Its PLM Foundation PTC executes well delivering applications, but has posted declining financials in a tough market. Discrete manufacturers seeking product life cycle support should consider PTC, but watch the financials. Parametric Technology Overall Rating: What You Need to Know: Parametric Technology Corp. has invested heavily in product life cycle and will make further progress. Its large customer base, strong technology and healthy cash reserves will provide a buffer during the evolution; however, the vendor must address the challenges of broadening software functionality, building more visibility with senior executives and improving financial performance. Established customers and prospects that focus on mechanical and mechatronic products should consider PTC. However, they should prioritize PTC for creating and managing product definitions. Analyst Comments: PTC has built a solid product architecture as a foundation for PLM expansion. Now, it must convince customers it can support them for the long term. Detailed Rating: Initiative Corporate Viability Strategy Financial Marketing Organization Market Offerings Product/Service Technology/Methodology Pricing Structure Customer Service/Support Sales/Distribution Support/Account Management Rating Caution Strong Corporate Viability: PTC Needs More Than a Strong Software Architecture: Parametric Technology Corp. (PTC) is addressing the product life cycle (PLM) market by transforming established software assets for mechanical product design, product data (PDM) and collaboration into a new, scalable software architecture that addresses broader PLM needs. The company hopes to build traction by promoting its new PLM software platform among prospects and its established base of discrete manufacturers that already use PTC s Pro/ENGINEER applications for mechanical design, Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Pro/INTRALINK for workgroup PDM and Windchill for enterprise PDM. Simultaneously, PTC has introduced its Product First framework, which provides insight on PLM priorities and positions its software strategically. Although PTC has extensive product development experience, it has minimal experience in the other dimensions of PLM, such as managing financial resources, human resources, product portfolios and financial analysis. As a result, it will depend on services partners such as Accenture for such expertise. In addition, PTC is not positioned to address broader markets such as process industries, architectural engineering and construction (AEC), and retail. Healthy Cash and Large Customer Base Maintain Financial Viability: PTC is financially viable, but is posting poor financial results. The company could make a turnaround, but enterprises should be aware of the ongoing revenue declines and reported losses. Figure 1 summarizes PTC s revenue performance from 1994 through Figure 1 PTC s Revenue History (1994 Through 2003) Dollars in Millions $1,200 1, * Year *Estimate Software license revenue Combined maintenance and other services Maintenance only Other services only Source: Gartner Research (August 2003) The 2003 revenue estimates are based on financial analyst reports. The cash displayed reflects the balance sheet published at the end of PTC s fiscal third quarter, which was completed on 30 June PTC s revenue has steadily declined since 1999, with annual losses since its F2000 report (PTC s fiscal 20 August

3 year ends on 30 September). New software sales were lower for F2002 than for any year since F1995, although the company now has a greater breadth of software to sell. As 3D computer-aided design (CAD) went mainstream in the late 1990s, increased competition from lower-priced offerings forced CAD seat prices down. Also, tough economic conditions since 2000 have had an impact. Gartner Dataquest reported a user spending decline of 8.3 percent in the mechanical design software market for As a result, PTC is being challenged by strong downward price pressure on its key revenue generator, combined with a difficult economy, which has slowed purchases of mechanical software and its Windchill-based PLM offerings. On a positive note, new software licenses and maintenance represent a healthy 75 percent of total revenue (which is higher than in 1995), and no single customer accounts for more than 10 percent of PTC s business. PTC is also controlling costs, mostly by reducing personnel and selling assets, including real estate. It is maintaining a high cash reserve of approximately $200 million. Therefore, PTC s maintenance revenue, its breadth of customer base and the company s strong cash position provide buffers against financial erosion. PTC s Brand Value and Product First Theme Have Market Traction: Designers and engineers recognize PTC for its design and engineering software. However, the engineering presence does not give PTC the visibility it needs with senior-level executives to promote its broader PLM platform. Therefore, PTC adopted its Product First messaging, which asserts that companies cannot succeed without sound product strategy and execution. We like PTC s messaging because it s simple, memorable and accurate about PLM value. It showcases PLM as a business application strategy with importance comparable to enterprise resource planning (ERP), supply chain (SCM) and customer relationship (CRM). However, PTC needs to convince the appropriate audience of senior executives. SAP and Oracle have that presence, and they may prove to be PTC s biggest challenges. Competitive challenges will increase as the ERP II vendors continue improving PLM support. Most users will need ERP II capabilities and PTC s best-ofbreed capabilities to support PLM processes. Strong Organization: PTC has a strong leadership team and a sound organizational structure. As of the end of its 3Q03, PTC had 3,671 employees, with about 90 percent distributed nearly evenly across sales, services and product development. PTC dedicates the bulk of its development resources to its new PLM offerings, although it must continue to commit resources for design and data software acquired from Computervision in Market Offerings: PLM Application Suite Needs Broader Focus: Overall, PTC has a good software start with a strong architecture. However, the breadth of applications does not yet address the extent of PLM needs. PTC made a major investment to evolve an integrated suite of modular PLM applications from its legacy of CAD, computer-aided manufacturing (CAM), computer-aided engineering (CAE), PDM and visualization solutions. Windchill, PTC s Java-based software foundation for PDM and collaboration, underpins each member application. Every application supports a specific business need, such as design, project, sourcing and PDM. Conceptually, the suite enables a customer to create a broad enterprisewide PLM infrastructure by deploying these applications individually or as bundles that address focused, business-specific processes. This approach increases the chance that customers will get measurable value from each application more quickly than with large-scope enterprise software deployments. PTC has a series of goals for this approach: 20 August

4 Allay the fear that deployments might take too long, cost too much and deliver too little. Conceptually, the deployment of each application becomes a step that delivers value in a multistep deployment strategy. Give customers greater flexibility to define their own path toward achieving an enterprise PLM environment, because they can limit their selection to those applications that address their top priorities, and they can make these selections in any order. Enable established PTC design customers to evolve into PLM smoothly. For example, the new design software, Pro/ENGINEER Wildfire, employs the same data representation as the legacy design software, Pro/ENGINEER. This avoids the need to translate databases. PTC has partially fulfilled its goals, and the architecture suggests that PTC will make further progress. The majority of customers have not migrated to the new generation of software. Feedback from early adopters indicates strong integration of the new design software with Windchill-based collaboration and PDM functions. However, they seek more visibility of design data across PTC s PLM applications. Also, PTC has not completed the migration of all legacy design functions to a common look and feel. PTC does not provide adequate support for product portfolio (PPM). Support for the production phase and after-market needs should be extended. Strong Software Technology and Application Architecture: PTC s software infrastructure should serve the company and its customers well through at least 2008 (0.7 probability). PTC transformed its software suite from CAD-centric solids modeling to PTC s Java 2 Platform, Enterprise Edition (J2EE)- compliant Windchill software. A common business object and process model supports services such as workflow, configuration, change, security, design data and presentation as a foundation to scalably build applications. PTC s architecture supports interfaces and integration to external applications through XML, enterprise application integration, Web services and Microsoft s.net. The architecture makes application, creation, packaging, maintenance and extension efficient, as PTC designed it for the reuse of software objects. Making PTC s Pro/ENGINEER design software conform to this architecture was critical. Feedback from early adopters plus Gartner s independent hands-on evaluation suggests success, although the work is not complete. PTC also made a smart move by isolating parametric, feature-based design functions into an independent software kernel called Granite that PTC now licenses. Therefore, third parties can build software that obviates the need to invest in data exchange to share features, parameters, object history and geometry with PTC-built applications. Aggressive Pricing: PTC has done a good job of packaging and pricing its design software. Design software pricing and packaging conforms well with the rest of the industry. Basic desktop CAD costs $5,000 per seat (30 percent annual maintenance), whereas higher-end packaging that bundles engineering functions, collaboration, data and project with design can cost as much as $20,000 per seat, with annual maintenance at 20 percent. However, evidence indicates that PTC aggressively prices solutions such as PDMLink lower than industry-average street prices to capture market share and put pressure on competitors. Gartner has seen PTC s PDMLink pricing at 40 percent lower than competitors on bids, whereas its consulting and deployment services pricing is 40 percent higher. PTC justifies PDMLink pricing by assuming that customers will also buy other applications for a full PLM infrastructure. 20 August

5 Until 2005, most PTC customers will prioritize PDMLink to address ongoing PDM challenges, and they will not buy many other PLM applications (0.7 probability). In the meantime, customers benefit from the low prices, while PTC loses, because it misses an opportunity to generate more revenue. When evaluating PDMLink, users should negotiate vigorously on software, but focus more on services, which cost more than the competition s. Customer Service/Support: Reduced Flexibility on Maintenance Discounts Poses Customer Relations Challenges: PTC sells through direct and indirect channels. The direct sales organization addresses strategic accounts and industry verticals. PTC has a global network of roughly 180 resellers that focus primarily on desktop design and engineering software for small and midsize businesses (SMBs). Some large systems integrators (SIs), most notably Accenture, partner with PTC on major consulting, service and software contracts. In 2003, PTC has been under increased business pressure to reduce the flexibility of maintenance discounting. Gartner has seen increased customer feedback that, when negotiating new maintenance contracts, PTC has been trying to pull back on software and maintenance discounting with established clients. Some reported that PTC has been attempting to make maintenance discounting contingent on volume purchases. Although this makes business sense for PTC, it is proving to be a relationship challenge with customers especially those that plan their IT budgets with maintenance discounts as an underlying assumption, based on the long history of that practice. Customers should ensure they clearly understand their opportunities to gain maintenance discounts and negotiate them for the longest periods possible. Support Services Deliver Satisfactory Value Overall: PTC supports three service organizations: consulting and implementation services, education and technical support. Most customers express satisfaction with technical support; however, some indicated that support personnel are not sufficiently educated to answer questions about new PLM software and Granite. The education service, which provides Web-based and on-site training, also seems to do a good job. Established customers that migrate from Pro/ENGINEER to Pro/ENGINEER Wildfire should prioritize negotiations on education services. Pro/ENGINEER Wildfire promises clear value over the established Pro/ENGINEER, but early adopters report major changes in the way the software is used. Enterprises provided the most uneven feedback about implementation and consulting services. Customers using PTC services for product design support were more consistently satisfied than those who engaged PTC for Windchill Enterprise deployments. Many early Windchill adopters reported the need for extensive Java programming to deploy. They also felt that PTC was learning at their expense, rather than expertly guiding the effort. PTC dramatically reduced the amount of Java programming needed to deploy Windchill when it introduced pre-configured applications such as PDMlink for PDM, ProjectLink for project, PartsLink for sourcing and DynamicDesignLink for sales engineers to configure products. However, adopters of the newer software reported that deployments sometimes still require some Java programming. Windchill customers that negotiate with PTC implementation services for Windchill Enterprise, PDMLink and ProjectLink should push for contracts that specify payment when PTC fulfills the scope. When customers engage a PTC services partners such as Accenture, they should ensure that PTC remains involved and aligned with the scope and schedule of work. Related Research and Ratings: PLM Market Requires Best-of-Breed and ERP Capabilities 20 August

6 Product Life Cycle Management Predictions for 2003 Rating Definition: Strong Caution Strong Negative Solid provider of strategic products, services or solutions. Customers: Continue investments. Potential customers: Consider this vendor a strong strategic choice. Demonstrates strength in specific areas, but is largely opportunistic. Customers: Continue incremental investments. Potential customers: Put this vendor on a short list of tactical alternatives. Shows potential in specific areas; however, initiative or vendor has not fully evolved or matured. Customers: Watch for a change in status and consider scenarios for short- and long-term impact. Potential customers: Plan for and be aware of issues and opportunities related to the evolution and maturity of this initiative or vendor. Faces challenges in one or more areas. Customers: Understand challenges in relevant areas; assess short and long term benefit/risk to determine if contingency plans are needed. Potential customers: Note the vendor s challenges as part of due diligence. Difficulty responding to problems in multiple areas. Customers: Exit immediately. Potential customers: Consider this vendor only if there are no alternatives. Acronym Key AEC CAD CAE CAM CRM ERP architectural engineering and construction computer-aided design computer-aided engineering computer-aided manufacturing customer relationship enterprise resource planning 20 August

7 J2EE PDM PLM PPM PTC SCM SI SMB Java2Platform, Enterprise Edition product data product life cycle product portfolio Parametric Technology Corp. supply chain systems integrator small and midsize business Core Topic Engineering and Manufacturing - Strategies, Applications and Technologies ~ ERP II, Supply Chain & Manufacturing Parametric Technology Web Location: 20 August