Morningstar | PTC Reports Solid 3Q; Partnerships Strengthen Position; Shares at a Premium
PTC reported solid third-quarter results with both the solutions and Internet of Things businesses performing admirably. Revenue was at the high end of management's guidance for the quarter, while EPS surpassed expectations. In terms of more mature markets, PTC's CAD business continues to outpace the overall market growth rate with the company noting double-digit CAD bookings growth for the year to date. We believe PTC's CAD offering Creo remains a top choice for those wanting tooling and expertise in the discrete manufacturing space. Also, notably we were positively surprised by PTC's announcement during the quarter that has signed a new strategic partnership with Ansys. In this partnership, PTC will incorporate Ansys' real-time simulation product Discovery Live within Creo. We think this partnership will strengthen PTC's CAD offering by allowing users access to Ansys' gold-standard simulation software under one roof, reinforcing switching costs. PTC's other notable partnership with Rockwell Automation is expected to benefit the firm's credibility and go-to-market ability in smart, connected operations. With our long-term rosy view remaining unchanged after PTC's solid quarter, we reiterate our $70 fair value estimate and narrow economic moat rating. With shares trading at a premium, we'd seek a wider margin of safety before investing new capital in the name.For the quarter, revenue rose 8% year over year to $315 million (increased 5% in constant currency). The result was helped by 10% growth in software revenue, although professional services declined 6%. Revenue was at the high end of expectations due to perpetual license sales outperforming in APAC where the company still sells perpetual licenses. However, PTC announced that it would be ending the sale of perpetual licenses globally as of Jan. 1, 2019, except for Kepware. This move follows the firm's prior subscription model shift in the Americas and Europe and we believe makes sense as the company looks to leverage the greater lifetime value of a customer that comes with the shift.
In terms of margin, PTC's GAAP operating margin expanded to 7% from 4% in the prior year period, while its non-GAAP operating margin rose to 18% from 15%. The margin performance was attributable to the firm's better-than-expected perpetual license sales performance and a steady cost profile. Long term, we expect significant margin expansion as the company's subscription model matures and the firm reaps the leverage that comes with the subscription-based sales model.
PTC is a software and services company. The company's products and services include: 3D Modeling, which enables users to create designs, analyze designs, perform engineering calculations and utilize the information created downstream using 2D, 3D, parametric and direct modeling; Lifecycle Management, which enables product data management, as well as communication and collaboration across the enterprise, including product development, manufacturing and the supply chain; Data Orchestration, which delivers tools, technologies, and solutions that enable companies to develop and deploy industrial IoT applications; and Experience Creation, which provides a way to capture, create, and deliver content.
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