EUR 850.00 For Business Accounts Only

Morningstar | PTC Subscription Shift Rolls Ahead; Long-Term Strategy Remains Sound; Shares Trading Near Fair Value

PTC reported a solid end to the fiscal year with the firm’s subscription business model transformation continuing full steam ahead. The firm expects to have a subscription business model mix of approximately 95% in fiscal 2021 and a recurring software revenue rate of roughly 98%, illustrating the firm’s wholesale shift to subscription. We view the move as value add as it is expected to improve the lifetime value of PTC’s customers over the long term. As such, we believe in PTC’s current strategy and think the firm’s fiscal 2021 and fiscal 2023 targets are within reasonable bounds. From a competitive standpoint, we continue to see the firm holding a strong position in the discrete manufacturing space and retain our narrow economic moat rating on the firm.

After accounting for a time value of money adjustment and a modestly improved long-term margin outlook, we raise PTC’s fair value estimate to $79 from $70. Although shares have fallen considerably in recent trading, we only view the firm as fairly valued and would suggest a wider margin of safety before investing new capital in the name.

For the quarter, in both reported and constant currency terms, total GAAP revenue rose 2% year over year to $313 million (increased 5% to $322 million on a non-GAAP basis). In constant currency, solutions software revenue grew 4% year over year to $250 million. The solutions result was supported by solid CAD and PLM sales, and we expect the solutions software growth rate to accelerate as the company’s subscription model matures and starts to compound. Internet of Things software revenue, while a significantly smaller business relative to solutions software, grew 27% to $32 million in non-GAAP terms. We continue to expect strong year over year growth for the Internet of Things business and think PTC’s positioning in this market remains unique relative to large technology and industrial competitors. We believe PTC’s Internet of Things platform, ThingWorx, will appeal to manufacturing clients and create a stronger virtuous circle for PTC’s software ecosystem, thus strengthening its switching costs over time.

On the margin front, PTC’s GAAP operating margin was below expectations at 4% as the firm accounted for the settlement of a customer dispute which was related to a professional services engagement. However, on a non-GAAP basis, the company’s operating margin was in line with expectations and rose 360 basis points to 21.3%. The strong margin expansion is reflective of the leverage of the subscription business model shift, and we expect significant operating margin uplift in the near term as the subscription model matures.