The Acquisition of Axeda Makes Things Work for PTC

On July 23, 2014, PTC, the Needham, Massachusetts-based provider of Product Lifecycle Management (PLM), Application Lifecycle Management (ALM), Service Lifecycle Management (SLM) and related offerings announced that it had signed a definitive agreement to acquire privately-held Axeda Corporation, a pioneer in the development of solutions to securely connect machines and sensors to the cloud. PTC will pay approximately $170 million in cash for the company.

This follows, by only seven months, PTC’s acquisition of ThingWorx, developer of the leading Internet of Things (IoT) rapid application platform, for approximately $112 million in cash. Together, these two acquisitions now firmly position PTC as the global leader in Enterprise Lifecycle Management (ELM) services through its wide range of offerings supporting both the Product and Service sides of the equation.

In a global services market increasingly being characterized as ‘connected’ (i.e., via the IoT), this acquisition makes a great deal of sense for PTC, as Axeda’s offerings complete (i.e., at least temporarily) the ‘hat trick’ of resources that PTC now has in its arsenal that allows it to support all facets of the enterprise manufacturing sector that it targets as customers.

PTC’s Leadership in the SLM Space

PTC historically has been a global leader in the PLM segment, competing head-to-head against companies including Autodesk, Dassault Systèmes and Siemens PLM, among others. Its acquisition of Servigistics in August 2012, rocked the SLM world as one of its principal vendors was ‘swallowed up’ by an unknown (i.e., to the SLM market) company on a near-unexpected basis.

The acquisition, in retrospect, was a critical component in PTC’s strategy to help manufacturing companies capture the enormous revenue potential in after-market services. It also set the stage for PTC’s vision in building out a technological infrastructure to enable these firms to transition to (and realize the big opportunities in) an outcome-based services strategy.

Other prior acquisitions, made by either the acquiring or the acquired company, have provided added depth to PTC’s current global Product- and Service-focused suite of offerings that also features Application Lifecycle Management (ALM) and Computer-Aided Design (CAD), among others. Most notably, these included PTC’s acquisition of 4CS, a leader in contract and warranty management solutions, in September 2011; Enigma, a developer of software that aggregates and delivers technical content in aftermarket service environments, in July 2013; and Atego, a UK-based developer of model-based systems and software engineering applications, just a month ago.

Prior to its acquisition by PTC, Servigistics had also just recently acquired MCA Solutions, a best-of-breed provider of service parts optimization solutions, in March 2012 – a good two-to-three years following its acquisitions of Click Commerce (2009) and Kaidara (2010).

However, once all of these acquired resources were housed under a single roof (i.e., PTC’s), the company surprised many in the industry by going after – and buying – ThingWorx, the up-and-comer platform provider that was taking the explosive IoT world by storm. This acquisition, more than any other, communicated the following two messages to the services community in a big way:

• First, it solidly positioned PTC as the global leader in each of its respective sectors within the Enterprise Lifecycle Management (ELM) world (i.e., but let’s not forget about Cisco Systems!); and

• Second, it clearly put the global business community on notice that PTC was placing the future of its entire portfolio in the connected hands of the IoT.

This latest acquisition of Axeda Systems further bolsters PTC’s IoT hold on the marketplace by filling in one of the few remaining gaps in the company’s support of connected products, people and things – that is, the software solution vehicle by which its IoT offerings can finally make their way into the market.

Focus on a Powerful IoT Strategy

Axeda bills itself as a provider of “the most advanced cloud-based service and software for managing connected products and machines and implementing innovative Machine-to-Machine (M2M) and Internet of Things (IoT) applications.” Its customers use the Axeda Machine Cloud™ “to turn machine data into valuable information, to build and run innovative M2M and IoT applications, and to optimize business processes by integrating machine data.”

The acquisition of Axeda also brings far more to the table than just its M2M offerings and existing customer base – it also instills a more familiar and ‘warm and fuzzy’ feel to the expanding PTC portfolio of IoT-based offerings. For example, most service managers in the SLM market would find it much easier to describe and explain the Axeda offerings than they would the ThingWorx platform offerings.

M2M has been around much longer than IoT and, as such, represents a more familiar topic for them to explain, explore and wrap their brain around. IoT – and, for that matter, ThingWorx, on the other hand – represents a much more complex, broadly-defined and to some, nebulous, platform-based technology that can be much more difficult to understand. Historically, SLM managers have had a far clearer understanding of the solutions they use than the platforms they run on (e.g., decisions that are typically made by their respective IT departments).

According to PTC, “Axeda’s technology innovation, extensive customer base, and powerful partnerships directly complement the PTC ThingWorx business, and will accelerate PTC’s ability to deliver best-in-class solutions across the entire Internet of Things technology stack.” The two companies expect the transaction to be completed in PTC’s fiscal Q4 2014.

Why Axeda?

James E. Heppelmann, PTC’s President, Chief Executive Officer & Director, describes Axeda as “a leading brand today in the IoT market and an almost perfect fit to PTC in terms of what they contribute as compared to what we already have. When we factor in the scale that we will gain from Axeda in terms of technology, employees and IoT expertise, customers, partners and revenue, we believe that this acquisition will reinforce PTC’s clear leadership position in this dynamic new world of smart connected products in the Internet of Things.”

In his statement, Heppelmann cites what most of the industry would agree are the top reasons behind the company’s acquisition of the Foxboro, Massachusetts-based M2M connectivity pioneer, namely:

• Technology – Axeda had been a leader in the M2M space for the better part of the last two decades, and was a pioneer in the development of the technology, ultimately positioning itself as the global leader in Device Relationship Management, or DRM (i.e., while riding on the wave of Customer Relationship Management, or CRM, for most of that period).

• Employees – 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.

• IoT Expertise – Axeda is an acknowledged innovator in the IoT technology market, providing its long-time customers with “secure connectivity, and the ability to leverage machine data to create new business value” as “critical components of the Internet of Things (IoT) technology stack.”

• Customers – Axeda currently counts more than 150 customers on its books, “processing hundreds of millions of machine messages daily across multiple industry sectors.”

• Partner Base – Axeda boasts a “broad partner ecosystem” that includes leading mobile network operators (AT&T, Bell, Deutsche Telekom, Sprint, Verizon, Vodafone); edge device and design-in device makers (Cisco, Intel, Lantronix, Microsoft); systems integrators (Ericsson, Genpact, Tata Consultancy, Wipro); and business systems/ analytics providers (IBM/Cognos, Oracle, SalesForce.com, SAP, ServiceMax), in addition to its ‘new’ internal PTC and Servigistics resources); the company’s technology leadership has also led to several strategic OEM agreements with other leading IoT technology and solution providers.

• Revenue – The Axeda acquisition is expected to add US$25 million to US$30 million of revenue to PTC in its FY’15.

Need for New Pricing and Deployment Models

The acquisition of Axeda, however, will also likely lead to some restructuring – or, at least, rethinking – about the pricing model for the company’s offerings. For example, PTC’s (and Servigistics’) historical pricing schedules have essentially been built on a perpetual license platform. The ThingWorx model, on the other hand, has developed its pricing model exclusively on a subscription basis.

The Axeda pricing model may ultimately serve as a ’normalizer’ for future pricing, as its joint Axeda-ThingWorx solutions will most likely require “some upfront cost, but then scale typically according to the number of connected devices.” In other words, PTC’s future solution pricing will tend to “scale with the number of devices” involved or, possibly, with the number of users (i.e., the more users, and the more devices, the more the cost of the system).

Research conducted by Strategies For Growth℠ (SFG℠) confirms that the SLM market (1) is moving more toward a preference for a Cloud-based delivery system for its SLM solutions (i.e., by a ratio of greater than two-to-one over Premise-based), and (2) prefers a subscription pricing model over a perpetual license model by roughly the same ratio.

SLM and IoT: The Strategic Intersection

One other factor that Heppelmann only alluded to in his statements may also be of critical importance to the prospects for success of the market’s acceptance – and adoption – of the broader IoT technology; that is, that Axeda is a longer-tenured, better-known quantity in the global services community than either the term, ‘Internet of Things’, or the brand name, ThingWorx. As such, it may ultimately serve as an easier ‘selling point’ for PTC in promoting its IoT technology to the global services community – they already know the company, they ‘get’ the technology, they’ve already seen them at remote services trade shows and conferences, and they understand the rationale behind why PTC has targeted it as an acquisition candidate. This was not so much the case in the market’s perception of the acquisition of ThingWorx – and its IoT platform – just this past December.

Heppelmann also acknowledges that, “On the strategic side, we’re very pleased to announce the Axeda acquisition. With one foot in the Internet of Things, or IoT, world and the other foot in Service Lifecycle Management or SLM world, Axeda is a great complement to both ThingWorx and PTC.” We agree that the positioning of Axeda, surrounded by the PTC/Servigistics SLM offerings, and the ThingWorx IoT platform, will be well accepted by the SLM market as a whole.

Heppelmann goes on to say that, “The Axeda deal will be synergistic for us on multiple levels. Because we don’t really have a pre-established fiscal year 2015 financial baseline to compare against, it’s hard to say in a meaningful way how many pennies of accretion it might add, but I can tell you, first, that there is a meaningful cross-sell opportunity, because our research indicates that Axeda customers generally love ThingWorx and vice versa.”

Smart, Connected People, Products and Technology – The PTC Strategy

Thus, the acquisition benefits both PTC and the existing Axeda customer base with a strong market reputation and positioning aspect as well. In fact, Heppelmann adds that, “In less than a year, PTC has quickly scaled to a position of leadership in helping manufacturers seize the opportunity presented by a smart, connected world,” and that “We believe the combination of ThingWorx, Axeda and our existing SLM and PLM solution portfolio, will establish PTC as the only provider of true closed-loop lifecycle management solutions for the Internet of Things.” As such, he continues, “PTC intends to leverage the Axeda technology portfolio to complement its existing ThingWorx^® rapid application development platform and its existing Service Lifecycle Management (SLM) and extended Product Lifecycle Management (PLM) solution portfolio.”

The press release announcing the Axeda acquisition further emphasizes that, “Core to Axeda’s IoT technology is the ability to enable companies to establish secure connectivity and remotely monitor and manage a wide range of machines, sensors, and devices. The Axeda Machine Cloud Service includes machine-to-machine (M2M) and IoT connectivity services, software agents, and toolkits that enable companies to connect their products to the cloud using virtually any communication channel (e.g. cellular networks, the Internet, WiFi, or satellite). Axeda’s end-to-end security strategy covers all levels of the IoT technology stack, including network, application, user, and data security. Axeda has attained ISO 27001:2005 certification, supporting the company’s focus on delivering the highest levels of security, performance, and availability.”

What’s Next for PTC? And SLM?

In many ways, what’s next for PTC will also foretell what’s next for SLM, as the company comprises a significant share of both the current – and the expanding – global SLM marketplace. The easy bet would be: more acquisitions to come, as PTC has historically set its sights on the technologies, platforms, expertise and customer bases it covets – and, then, goes after each of them full throttle, yet thoughtfully.

However, in moving forward so quickly after such a major series of acquisitions, it can be too easy to let some things fall between the cracks. As such, there are a few observations – and recommendations – that can be made, based on what we all (i.e., both the research analysts and the marketplace) have seen thus far.

To take full advantage of its dominant place in the world market, PTC may wish to:

• Communicate to the marketplace – (i.e., not necessarily ‘spilling the beans’ beforehand, or giving away too much information – just continue conveying the ‘why’s’ as things happen, and providing updates at 90/180/365 days or so after the fact (e.g., via announcements, newsletters, podcasts, etc.).

• Combine ThingWorx and Axeda into a single entity – which will help the marketplace better grasp and understand the PTC strategy.

• Tie PTC’s expansive portfolio of technologies, applications and offerings to the growing phenomenon of big data and analytics – thereby assuring its customers (and the market, as a whole) that its IoT strategy, emboldened through its well-thought-out acquisitions, will support all aspects of its customers’ businesses.

• Embrace the subscription pricing model – but recognize that much of the market will still need to be ‘educated’ as to exactly what it is, and how it will benefit their bottom line.

Other recommendations could also be made. However, now would be a good time to focus on the ones that will have the most immediate impact.

Summary

For some, what makes PTC’s acquisition of Axeda so appealing, is that it provides the company with something it did not necessarily attain as a result of the ThingWorx acquisition – that is, (1) a much larger customer base; (2) a more familiar and aware general market base of service organizations that may have just started their initial due diligence into prospective vendors and solutions for IoT; and (3) an already existent IoT platform-based firm with a strong reputation, and a well-established presence at industry trade shows, remote services conferences and in M2M-related trade magazines.

As such, by acquiring Axeda, PTC not only acquires its technology, employees, expertise, customers, partners and revenue – it also acquires a strong market voice for promoting the acceptance of remote services, M2M and the Internet of Things to a quickly learning – and hungry – global services community. Between Axeda and ThingWorx, PTC’s message can be more clearly communicated to interested parties in all aspects of the connected world – from both a technical and marketing perspective. The combination may be unbeatable!