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Parametric Technology Corporation's Bold Vision Drives Growth and Innovation

Written By: Michael Bittner
Published On: November 18 2005

Background

Parametric Technology Corporation (PTC), one of the top product lifecycle management (PLM) vendors, has a bold vision for the future. Its PLM software solutions include enterprise level product development process solutions, small and medium business (SMB) solutions, and industry solutions that are used by over 40,000 companies worldwide in aerospace and defense (A&D), automotive, consumer products, footwear and apparel, high tech and electronics, industrial equipment, and medical products.

PTC viewed 2004 as a year of stability, product enrichment, and profitability. It had an end-of-year net income of $35 million (USD) on revenues of $660 million (USD), which was a considerable accomplishment given that in fiscal year 2003, the company experienced a net loss of $98 million (USD). Credit for 2004's success was attributed to the vendor emphasizing and focusing on its installed base and driving down its internal expenses while moving products forward. Timing also had a little bit to do with PTC's turnaround as the software market, in general, slowly pulled itself out of the doldrums. The PLM market continues to grow and enterprises continue to spend as global manufacturing becomes more complex due to outsourcing, and as global product development emerges as a critical business capability.

Bold Projections of Growth

In 2005, PTC continues its disciplined approach, but now focuses succinctly on growth. Nobody has ever accused PTC of being timid about its intentions and the company has publicly announced its bold intention to reach $1 billion (USD) in revenue, with 20 percent operating margins by 2008. This bold goal is reminiscent of Oracle's past marketing campaign which touted that fortune 500 enterprises could collectively save $1 billion (USD) via the implementation of its Oracle E-Business Suite, just as Oracle itself claimed to have accomplished internally. In Oracle's case, this assertion was hard to verify, and analyst firms looking for verification found that a good portion of the savings were in soft, subjective savings.

However, in the case of PTC and its ambitious goals, there is no subjectivity. As a public company, its financial results are available to the public, and given that its goals specifically target its revenues and operating margin, verification will require no more than a quick look at the end-of-year results in 2008.

Setting bold goals for a software company is risky, but also intriguing and motivating. It also warrants a clear and concise plan of action with tight internal monitoring, so that tactical adjustments can be made quickly. If the plan includes product expansion, performance, and innovation, then it is a win-win scenario for the software vendor and its clients.

If fiscal year 2005 results are any indicator, PTC's ambitious long term growth projections might be justified. The company reported fiscal year 2005 (ending September 30, 2005) revenues of $720.7 million (USD), up 9 percent over 2004, and a generally accepted accounting principal (GAAP) net income of $83.6 million (USD), which was well above the fiscal year 2004 net income of $34.8 million (USD).

Growth Strategies: A Road Map to $1 Billion (USD)

PTC developed a strategic long term plan for growth that includes multiple components, each with its own plan of action for execution. The plan also entails organic growth and growth through acquisition. Its various growth strategy components are summarized below:

Strengthening maintenance revenues. This first component is PTC's continued efforts to get closer to the existing installed base by delivering superior customer service and release strategies. Beginning in 2004, the vendor's objective was to strengthen its maintenance revenue stream, to re-establish maintenance agreements for existing clients, and to broaden maintenance agreements for new accounts.

Strengthening distribution channels. PTC expanded its capabilities and reach by adding more than eighty value added resellers (VAR) in 2004 alone. Its total number of VARs now exceeds 275 and the vendor believes that a sizable sales force in the Asia-Pacific region is imperative to leverage its primary market share in China, Taiwan, and India. Transforming the distribution model is a critical component to PTC in order to reach its lofty revenue goals.

Product performance and innovation. In 2005, PTC also initiated a more comprehensive and specific release strategy for Pro/INTRALINK 8.0 and Windchill 8.0. The strategy will supplement PTC's vision of a global product development opportunity that will benefit manufacturing customers and present PTC as a global solution provider. In addition, PTC has made a heavy investment in Pro/Engineer Wildfire to enhance its performance and make it easier to learn, more productive, and more flexible to users.

Vertical strength. PTC will also enact vertical "go to market" strategies and product development plans, by targeted industry. The vendor's vertical strength will encompass the entire cycle, from sales and marketing to development, implementation consulting, customer services, and maintenance. Far too many software providers only consider product functionality, and perhaps sales, when espousing vertical depth, but do not take into account the other human resources that need to understand unique industry requirements. PTC hopes to fill this void with its vertical approach.

Strategic account growth. PTC deepened its prospect and client profiling for major accounts, which involved the restructuring of some sales positions shifting them toward consultative relationship-oriented positions offering vertical expertise.

SMB growth strategy. The vendor's improved reseller channels help address the fast-growing, low end, three dimensional (3D) and computer-aided design (CAD) market. This is a more profitable model to cover small accounts, and the reseller channel also sells the new hosted WindChill offering for SMBs.

To further tap into the SMB market, the vendor offers PLM On Demand. PLM On Demand is a hosted PLM solution set with a new delivery model and operates through a partnership with IBM, arguably the industry leader for on-demand applications. It is powered by WindChill technology, and offers ProjectLink and PDMLink as initial components with plans for expansion of component offerings.

Strategic acquisitions. PTC views strategic acquisitions as complementing organic growth and the vendor will build its acquisition "currency" through its improved financial performance. However, this argument only holds true if the acquired products are integrated and sustained properly. Recent acquisitions made by the vendor include Arbortext, a supplier of dynamic enterprise publishing; Polyplan, a manufacturing planning and process management solution provider; and Aptavis, a focused PLM VAR and partner for retail, footwear, and apparel.

Conclusion

The software market in general, and the PLM market in particular is experiencing healthy growth this year and is expected to continue throughout calendar 2006. The PLM applications category is expected to grow more than twice the rate of customer resource management (CRM) or supply chain management (SCM) through 2008. Still, PTC's goal of $1 billion (USD) in revenue by 2008 is a stretch that will require corporate diligence and a lot of hard work on the vendor's part, along with considerable market strength and some global economic fortune. Its lofty goal equals a compounded annual growth rate (CAGR) of 12% over the next three years. But whether PTC actually achieves this milestone by 2008 is not necessarily the most important element of this bold projection. Growth and product innovation with sustained profitability is the real objective, and these are the characteristics that the PLM market should strive toward. PTC has taken the aggressive approach of publicly marketing a set of difficult-to-achieve financial goals as a motivation to drive financial and product performance. This alone is to be commended, even if the end result may fall short.

 
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