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Morningstar | PTC Subscription Shift Continues Positive Momentum; Go-to-Market Issues Linger, Shares Overvalued

PTC reported a decent second-quarter result with the firm seeing particularly strong demand for its emerging "Internet of Things" business. Significantly, management noted that Internet of Things bookings surpassed both CAD and PLM bookings in the quarter and signifies PTC’s healthy positioning in the Internet of Things market. We believe PTC has a differentiated offering in the Internet of Things. Despite some short-term hiring and sales issues as noted by management in the quarter, we think the company’s foray into the Internet of Things will support a stronger virtuous circle for its software portfolio over the long term and underlies our positive moat trend rating. With the company only selling new software licenses globally on a subscription basis at the start of the calendar year (excluding Kepware), perpetual license revenue sunk to only $11 million from $42 million in the prior quarter. As a result, subscription bookings mix is now over 90%. We believe the firm will capture better life time value from their customers as PTC’s subscription base matures. While the firm modestly adjusted its full-year guidance (notably, slightly lowered its booking guidance), the impact is negligible to our model, and we reiterate our $79 fair value estimate. With shares falling around 9% in after-hours trade, we still see the firm as overvalued and would seek a wider margin of safety before investing new capital in the name.

For the quarter, ASC 605 revenue rose 2% year over year to $315 million. The expected decline in the perpetual business weighed on the quarterly performance but supports the successful long-term customer transition to subscription. To that end, license and subscription bookings increased 18% year over year in constant currency to $112 million. Meanwhile, recurring software revenue increased 14% to $266 million, and annualized recurring revenue, or ARR, grew 15% and totaled $1.065 billion.

In terms of margin, GAAP operating margin declined to 0% from 7% year over year but was affected by restructuring charges related to PTC’s relocation of its headquarters. On a non-GAAP basis, operating margin improved to 21% from 18% year over year. Non-GAAP margins were supported by tighter spending controls and the firm maintained its full-year operating margin outlook due to continued focus on operating expenditure control.