Mar 23, 2014

PTC-ThingWorx dual-aggregation business model

I was recently in discussion with an executive from an M2M service provider who was marveling at the sizable sum - $112m plus a possible earn-out of $18m - for which ThingWorx was acquired by PTC.

By way of context, PTC supplies software and service solutions to discrete manufacturing organizations to help them create and service their products; example products include heavy machinery, medical devices, air-handling and fire-protection systems. While PTC has been in business for over 25 years, ThingWorx was established as recently as 2010. Its aim was to create a platform to speed up the process of developing applications for smart, connected services involving people, systems and devices.

The acquisition should not come as a surprise to readers of this site. The pattern of corporate initiatives in the connected devices market and the rising role of end-user companies were anticipated at the end of 2012.

Now, ThingWorx is expected to contribute over $10m in revenues over the coming 12 months. Very approximately, this works out at a multiplier of over 10x revenue which is at the extreme upper end of recent acquisition valuations in the overall M2M sector. What accounts for such an apparently high valuation?

A lot of the puzzlement about PTC’s valuation of ThingWorx stems from a conventional assessment based on value-per-connection. This is to be expected in a market that is fixated on market potential as defined by billions of connected devices. After all, how large a base of connected devices could ThingWorx have amassed during its relatively short existence?

The key to understanding the valuation placed on ThingWorx is to view it from PTCs perspective and business model. Here is a company that supports manufacturers many of which supply high asset-value and business-critical items of equipment. PTC provides software and services based on sophisticated software tools which are used to manage application (ALM), product (PLM) and service (SLM) life-cycles and supply-chains. Increasingly, PTC’s manufacturing customers are looking to manage their devices remotely. They are also interested in approaches that facilitate the development of new applications, such as those that mesh machine data with other data sources (e.g. agricultural machinery and micro-climate information), to improve operational efficiencies and/or to support new applications. ThingWorx's platform and application development tools (a graphical approach that is promoted on the strength that applications can be developed without coding) immediately modernizes PTC’s software, licensing and support services model.

The opportunity to leverage ThingWorx’s platform is a crucial element of the acquisition because PTC’s existing customer base aggregates so much demand from different manufacturers. PTC claims to have 27,000 active customers and over 1.9m active commercial seats for its software licenses. That is a huge customer base for the 3-year old ThingWorx to tap into.

ThingWorx’s platform contributes another ‘aggregation’ aspect to the overall business model. ThingWorx has invested some of its efforts in creating a ‘marketplace’ for application enablement tools from different vendors in the M2M/IoT eco-system. This encompasses plug-in modules from equipment suppliers (e.g. Libelium, Digi etc) as well as from connectivity platform providers (Kore Telematics, Wyless etc.).As a result, devices running on different connectivity platforms can now be accessed via the ThingWorx platform and device management interface. The ability to orchestrate applications across a heterogeneous population of devices is after all one of the features that distinguishes IoT from M2M.

As illustrated above, the combined PTC/ThingWorx business model sits at the intersection of two large funnels; one addressing the demand side (discrete manufacturing companies worldwide) and the other aggregating supply-side capabilities (connected-device enablers).

Arguably, ThingWorx brings a much needed capability that PTC’s customers would be looking for over the coming years. Part of PTC’s acquisition price therefore reflects the avoided cost of creating its own IoT platform, assuming that it had the requisite expertise and platform-development window of opportunity. PTC’s acquisition fee should therefore be evaluated in the context of investments that companies like Bosch and GE are making to deliver IoT platform solutions.

There remain a number of open issues with this acquisition. How well will ThingWorx be integrated into the much larger PTC? How will ThingWorx scale its employee expertise to handle the opportunities available through PTC’s existing customer base and will ThingWorx retain the capacity to offer a direct-to-market solution of its own (e.g. a PaaS self-service option to manufacturers that don’t require the sophistication of PTC’s Application-, Product- or Service-Lifecycle Management tools)? And, to what extent will suppliers of the connectivity enabling components continue to cooperate and possibly seek a licensing fee from PTC?

The development where a major (manufacturing sector) user integrates an IoT platform into its core business should ring alarm bells for traditional M2M platform and solution providers. What will happen if and when other large users – think about home appliances, personal health care devices etc. – decide to adopt a similar strategy? Or, PTC’s move could just be viewed as providing fresh inspiration for the emerging IoT market.

5 comments:

  1. On 23 July 2014, PTC announced that it had signed a definitive agreement to acquire privately-held Axeda Corporation for approximately $170 million in cash.

    The acquisition is expected to add $25 million to $30 million of revenue in FY'15.

    http://www.axeda.com/about/news/ptc-acquire-axeda-expand-internet-things-technology-portfolio

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  2. 14 Nov 2014 update

    Just spotted this additional data point:

    At the time of its acquisition, Axeda will have approximately 160 employees, primarily located in the United States and, as such, represented far more personnel than that acquired by PTC as a result of the ThingWorx acquisition. When the Axeda deal closes (i.e., in just a few weeks) PTC’s total IoT organization will increase to more than 250 people, virtually overnight.

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  3. 24 Sep 2015 update

    It's interesting to see this acquisition "Autodesk Signs Agreement to Acquire SeeControl" which replicates PTC's strategy of extending its product life-cycle management process by adding on the component that handles devices once they are out in the field.

    http://www.machinetomachinemagazine.com/2015/08/28/autodesk-signs-agreement-to-acquire-seecontrol/

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  4. 13 Oct 2015 update

    Qualcomm is selling its Vuforia (augmented reality - "AR") business and developer ecosystem to PTC for US$65m.

    The Vuforia platform supports smartphones and tablets using Android and iOS and Vuforia-enabled apps are able to recognize a range of everyday objects like books, magazines, toys, product packaging and more. This may be a way for PTC to create AR applications to help field-maintenance staff to manage/maintain/repair complex machines.

    http://recode.net/2015/10/12/qualcomm-sells-its-vuforia-augmented-reality-business-to-ptc-for-65-million/

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  5. 1 Feb 2016 Update

    Decoding the IoT Platform
    http://www.deskeng.com/de/decoding-the-iot-development-platform/

    Useful context from a PTC spokesperson about the added value of an IoT platform in the managing a product's full life-cycle.

    “IoT provides a connection point to bring business value to customers, and PLM is a key part of that,” explains Matt Sheridan, PTC’s director of PLM. “It provides the opportunity to take information coming from the design world and leverage it across a product’s whole lifecycle.”

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