EUR 850.00 For Business Accounts Only

Morningstar | PTC Sees Some Go-To-Market Volatility; Makes Full Shift to Subscription; Shares at Fair Value

PTC’s first quarter of fiscal 2019 illustrated some growing pains associated with its wholesale business model transition to subscription. While PTC officially hit a significant milestone on Jan. 1, 2019 by only selling new software licenses globally on a subscription basis (excluding Kepware), it remains clear that the firm still needs to optimize its subscription business model. Notably, the firm saw $20 million of bookings (nine total deals) slip out of the first quarter with management candidly citing a suboptimal go-to-market strategy in the quarter. We believe the company’s go-to-market initiatives will be a key focus over the rest of the year and we think realignment activities will help. However, a total catchup of these delayed subscription deals is unlikely. We continue to like PTC’s positioning and despite some short-term volatility associated with its subscription model shift, we think it’ll provide better life time value to the firm and help solidify its narrow economic moat. With our long-term view unchanged after the quarter, we reiterate our $79 fair value estimate. With shares falling in afterhours trade to approximately our fair value, we would like to see a larger margin of safety before committing new capital to the name.

For the quarter, ASC 605 revenue grew 10% year over year to $339 million (rose 12% in constant currency). The firm’s base business, which includes channel and direct sales below $1 million, was solid growing midteens year over year. PTC also noted strong demand for computer aided design software which we continue to see as a strong suit for PTC over the long-term. Our favorable view of the Internet of Things business remains as we saw good ongoing demand for Internet of Things software in the quarter (up 31% in constant currency year over year).

From a total software growth perspective, we expect an acceleration due to the compounding or layer benefit from the subscription business model. Operating margins are expected to follow suit with significant leverage accounted for in our model over the midterm. We see particular spending leverage across PTC’s cost of revenue and sales and marketing expenses as a result of the subscription business model. Over this time, we think a high 30s non-GAAP operating margin is attainable.