PTC Completes Deal For ServiceMax To Expand Addressable Market (NASDAQ:PTC)

A Quick Take On PTC

PTC (NASDAQ:PTC) reported its FQ1 2023 financial results on February 1, 2023, beating expected revenue while missing EPS estimates.

The company provides a range of software for product design and lifecycle management.

PTC recently completed the acquisition of ServiceMax, expanded its addressable market, and is seeking to align the new offering with its existing related products.

My outlook on PTC is a Buy at around $135 per share.

PTC Overview

Boston, Massachusetts-based PTC was founded in 1985 and has developed a family of CAD/CAM and product lifecycle management software for organizations worldwide.

The firm is headed by president and Chief Executive Officer Jim Heppelmann, who was previously cofounder at Windchill Technology, which was acquired by PTC in 1998, and prior to that was CTO at Metaphase Technologies.

The company’s primary offering applications include:

• CAD/CAM/CAE software

• Augmented reality

• PLM

• Industrial IoT

The firm acquires customers through its direct sales and marketing efforts as well as through partner referrals.

PTC’s Market & Competition

According to a 2022 market research report by Grand View Research, the global market for product lifecycle management [PLM] was an estimated $26.9 billion in 2021 and is forecast to reach $56.4 billion by 2030.

This represents a forecast CAGR of 8.6% from 2022 to 2030.

The main drivers for this expected growth are growing demand for cloud-based PLM solutions in a secure IT infrastructure and increased focus by customers on developing ‘smart’ products and factories.

Also, the U.S. PLM market history and projected future growth trajectory are shown below:

Major competitive or other industry participants include:

• Aras Corporation

• Arena Solutions

• Oracle Corporation (ORCL)

• SAP SE (SAP, OTCPK:SAPGF)

• Autodesk (ADSK)

• Siemens AG (OTCPK:SIEGY, OTCPK:SMAWF)

The company also has offerings in the CAD/CAM and Industrial Internet of Things markets, both of which are large and growing global markets.

PTC’s Recent Financial Performance

• Total revenue by quarter has produced the following trajectory:

• Gross profit margin by quarter has trended slightly higher in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter have trended lower more recently, as shown in the chart below:

• Operating income by quarter has moved higher in recent reporting periods:

• Earnings per share (Diluted) have risen per the chart below:

(All data in the above charts is GAAP)

In the past 12 months, PTC’s stock price has risen 17.4% vs. that of Autodesk’s drop of 7.0%, as the chart below indicates:

Valuation And Other Metrics For PTC

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Amount
Enterprise Value / Sales	8.6
Enterprise Value / EBITDA	29.1
Price / Sales	7.9
Revenue Growth Rate	5.8%
Net Income Margin	17.6%
GAAP EBITDA %	29.5%
Market Capitalization	$15,519,544,300
Enterprise Value	$16,683,044,900
Operating Cash Flow	$478,511,008
Earnings Per Share (Fully Diluted)	$2.89

Click to enlarge

(Source – Seeking Alpha)

As a reference, a relevant partial public comparable would be Autodesk; shown below is a comparison of their primary valuation metrics:

Metric [TTM]	Autodesk	PTC Inc.	Variance
Enterprise Value / Sales	9.9	8.6	-12.9%
Enterprise Value / EBITDA	46.7	29.1	-37.6%
Revenue Growth Rate	16.2%	5.8%	-64.5%
Net Income Margin	12.6%	17.6%	39.4%
Operating Cash Flow	$1,880,000,000	$478,511,008	-74.5%

Click to enlarge

(Source – Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

PTC’s most recent GAAP Rule of 40 calculation was 35.3% as of FQ1 2023, so the firm has performed moderately well in this regard, per the table below:

Rule of 40 – GAAP	Calculation
Recent Rev. Growth %	5.8%
GAAP EBITDA %	29.5%
Total	35.3%

Click to enlarge

(Source – Seeking Alpha)

Commentary On PTC

In its last earnings call (Source – Seeking Alpha), covering FQ1 2023’s results, management highlighted that its annual recurring revenue run rate came in higher than its previous guidance.

The firm saw demand ‘across all product groups and geographies.’

Additionally, free cash flow was ahead of guidance, with ‘little impact to free cash flow in Q1, but it is expected to be incrementally helpful as the year progresses,’ due to a generally softening US dollar against other major currencies.

Notably, after the quarter’s end, the company completed the acquisition of ServiceMax, which it seeks to integrate with its existing offerings to provide service lifecycle management capabilities to clients.

As to its financial results, revenue rose only 2% on an as-reported basis, but up 9% on a constant currency basis.

The company’s churn was ‘lower than planned’, although management did not provide specific details on what that amount was.

The firm’s Rule of 40 results have been moderately good, with a low revenue growth result improved upon by a strong operating result contributing to a pretty good figure for this metric.

SG&A expenses as a percentage of revenue have been trending lower while operating income, while uneven, has been growing, as have earnings per share.

For the balance sheet, the firm finished the quarter with cash, equivalents and short-term investments of $1.8 billion and $2.63 billion in total debt.

Over the trailing twelve months, free cash flow was $1.84 million, of which capital expenditures accounted for $38.0 million. The company paid a whopping $638.4 million in stock-based compensation in the last four quarters.

Looking ahead, management raised the lower end of ARR guidance but still was wary of the potential for ‘continued softening due to the macro environment.’

Regarding valuation, since its FQ3 2022 comparison with competitor Autodesk, PTC has closed the valuation gap somewhat, so the market appears to be favoring PTC over ADSK in certain respects.

The primary risk to the company’s outlook is the extent of ‘continued softening’ in new business as many expect a macroeconomic downturn in 2023.

Notably, PTC’s EV/Sales multiple [TTM] has risen by 7.08% in the past twelve months, as the Seeking Alpha chart shows here:

A potential upside catalyst to the stock could include a ‘short and shallow’ macroeconomic downturn leading to improved revenue growth as well as faster-than-expected integration of its ServiceMax acquisition.

In any event, the market has been favoring PTC over Autodesk and I can’t argue with that.

My outlook on PTC is a Buy at around $135 per share.