PTC (NASDAQ:PTC) Exceeds Q3 Expectations But Quarterly Guidance Underwhelms

Full Report / July 26, 2023

Engineering and design software provider PTC (NASDAQ:PTC) announced better-than-expected results in Q3 FY2023, with revenue up 17.3% year on year to $542.3 million. However, next quarter's revenue guidance of $555 million was less impressive, coming in 3.57% below analysts' estimates. PTC made a GAAP profit of $61.4 million, down from its profit of $70.5 million in the same quarter last year.

PTC (PTC) Q3 FY2023 Highlights:

  • Revenue: $542.3 million vs analyst estimates of $524.5 million (3.41% beat)
  • EPS: $0.51 vs analyst expectations of $0.51 (small miss)
  • Revenue guidance for Q4 2023 is $555 million at the midpoint, below analyst estimates of $575.6 million
  • Free cash flow of $164.1 million, down 20.8% from the previous quarter
  • Gross Margin (GAAP): 78.6%, in line with the same quarter last year

Used to design the Airbus A380 and Boeing 787 Dreamliner commercial airplanes, PTC’s (NASDAQ:PTC) software-as-service platform helps engineers and designers create and test products before manufacturing.

The company’s software specializes in computer-aided design (CAD) and product lifecycle management (PLM). CAD provides tools to render designs digitally that results in time saved and better accuracy versus hand drawings. PLM is used to collect data during different phases of design/testing and manage the overall process.

PTC’s customers range from small startups to large multinational corporations across industries such as aerospace, automotive, consumer products, and healthcare. By using the company's products, engineers and designers can reduce the time and cost required to bring new products to market and improve product quality. For example, these engineers can digitally simulate a product’s performance at high temperatures and recognize suboptimal responses that can be corrected with some design changes. This means time and resources are saved by avoiding actually manufacturing the product and finding the defect after that.

PTC generates revenue primarily through the sale of software licenses, mostly based on the number of users in a customer’s organization. There is additional revenue from support, consulting, and training services to ensure customer success.

The demand for rich, interactive 2D, 3D, VR and AR experiences is growing, and while the ubiquitous metaverse might still be more of a buzzword than a real thing, what is real is the demand for the tools to create these experiences, whether they are games, 3D tours or interactive movies.

Competitors in engineering and design software include Autodesk (NASDAQ:ADSK), Dassault Systèmes (ENXTPA:DSY), and Cadence Design Systems (NASDAQ:CDNS).

Sales Growth

As you can see below, PTC's revenue growth has been over the last two years, growing from $435.7 million in Q3 FY2021 to $542.3 million this quarter.

PTC Total Revenue

This quarter, PTC's quarterly revenue was up 17.3% year on year, above the company's historical trend. However, its growth did slow down compared to last quarter as the company's revenue increased by just $161 thousand in Q3 compared to $76.3 million in Q2 2023. While we'd like to see revenue increase by a greater amount each quarter, a one-off fluctuation is usually not concerning.

Next quarter's guidance suggests that PTC is expecting revenue to grow 9.27% year on year to $555 million, improving on the 5.67% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 13.1% over the next 12 months.


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. PTC's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 78.6% in Q3.

PTC Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.79 left to spend on developing new products, sales and marketing, and general administrative overhead. PTC's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that PTC is controlling its costs and not under pressure from its competitors to lower prices.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. PTC's free cash flow came in at $164.1 million in Q3, up 46.2% year on year.

PTC Free Cash Flow

PTC has generated $572 million in free cash flow over the last 12 months, an eye-popping 27.8% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from PTC's Q3 Results

With a market capitalization of $17.1 billion, a $281.5 million cash balance, and positive free cash flow over the last 12 months, we're confident that PTC has the resources needed to pursue a high-growth business strategy.

It was good to see PTC beat analysts' revenue expectations this quarter. That really stood out as a positive in these results. On the other hand, its underwhelming revenue and non-GAAP EPS guidance for next quarter was disappointing. Similarly, its full-year revenue and non-GAAP EPS guidance missed Wall Street's expectations. Overall, the results could have been better. The stock is flat after reporting and currently trades at $144.19 per share.

Is Now The Time?

PTC may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think PTC is a solid business. However, its revenue growth has been very weak, and analysts believe that rate will remain roughly steady. But on a positive note, its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its impressive gross margins are indicative of excellent business economics.

The market is certainly expecting long term growth from PTC given its price to sales ratio based on the next twelve months is 7.4x. There are definitely things to like about PTC and looking at the tech landscape right now, it seems that the company trades at a pretty interesting price point.

The Wall St analysts covering the company had a one year price target of $155.4 per share right before these results, implying that they saw upside in buying PTC even in the short term.

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