EUR 850.00 For Business Accounts Only

Morningstar | PTC Has Carved Out a Narrow Economic Moat in the Discrete Manufacturing Space

PTC started as a computer-aided design software provider but over the years has expanded into product and service lifecycle management, or PLM and SLM, and more recently entered the burgeoning Internet of Things market. We believe the company has been able to cultivate a large and sticky customer base of approximately 28,000 global manufacturers, which supports its sustainable and profitable long-term position in the industry. With Internet of Things providing a new and exciting high-growth opportunity for the firm, we are bullish on PTC’s ability to further entrench itself within its customers. As a result, we think switching costs are strengthening for this narrow-moat firm. With a grounding in CAD and PLM, which are highly complementary fields to IoT, PTC can extend its embeddedness within manufacturing clients by providing another extension to the design, production, and management ecosystem, in our opinion. While the infancy of the IoT market is a concern, we think PTC can carve out a niche position in the manufacturing space, given its differentiated industry and software expertise.In addition to its IoT shift, the company is also progressing through a subscription model shift, whereby traditional users are being migrated away from a perpetual license and support model toward subscription. With PTC announcing the subscription model plan in 2015 and completely discontinuing sales of perpetual licenses in the Americas and Western Europe as of Jan. 1, 2018, we expect the vast majority of the business to be recurring by fiscal 2021.While the shift to subscription has an impact on short-term results and may upset dogged perpetual license users, we think that over the long term, it will have tangible value for the company and lead to better financial performance. To that end, on average, PTC customers that are converting to subscription contracts are paying 25%-50% more than under the historical support contract method. PTC's billed and unbilled deferred revenue, which combined stands at over $1.1 billion and is growing rapidly, highlights the success the firm is having at converting its users over to the new model.