Engineering and design software provider PTC (NASDAQ:PTC) reported results ahead of analysts' expectations in Q1 FY2024, with revenue up 18.1% year on year to $550.2 million. The company expects next quarter's revenue to be around $575 million, in line with analysts' estimates. It made a GAAP profit of $0.55 per share, down from its profit of $0.99 per share in the same quarter last year.
PTC (PTC) Q1 FY2024 Highlights:
- Market Capitalization: $21.98 billion
- Revenue: $550.2 million vs analyst estimates of $538 million (2.3% beat)
- EPS: $0.55 vs analyst estimates of $0.44 (25.8% beat)
- Revenue Guidance for Q2 2024 is $575 million at the midpoint, roughly in line with what analysts were expecting
- The company reconfirmed its revenue guidance for the full year of $2.32 billion at the midpoint
- Free Cash Flow of $182.8 million, up from $43.99 million in the previous quarter
- Gross Margin (GAAP): 80%, 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.
Design Software
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 unremarkable over the last two years, growing from $457.7 million in Q1 FY2022 to $550.2 million this quarter.
This quarter, PTC's quarterly revenue was up 18.1% year on year, above the company's historical trend. However, its growth did slow down a little compared to last quarter as the company increased revenue by $3.59 million in Q1 compared to $4.28 million in Q4 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 6.1% year on year to $575 million, slowing down from the 7.3% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 9.4% over the next 12 months before the earnings results announcement.
Profitability
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 80% in Q1.
That means that for every $1 in revenue the company had $0.80 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, PTC's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
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 $182.8 million in Q1, up 6.4% year on year.
PTC has generated $598.1 million in free cash flow over the last 12 months, an eye-popping 27.4% 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 Q1 Results
It was good to see PTC beat analysts' revenue expectations this quarter. We were also glad its gross margin improved. On the other hand, its full-year revenue guidance missed analysts' expectations. Overall, this was a mixed quarter for PTC. The stock is flat after reporting and currently trades at $180.65 per share.
Is Now The Time?
When considering an investment in PTC, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
We cheer for everyone who's making the lives of others easier through technology, but in case of PTC, we'll be cheering from the sidelines. Its revenue growth has been weak over the last two years, and analysts expect growth to deteriorate from here.
Given its price-to-sales ratio based on the next 12 months is 9.1x, PTC is priced with expectations of a long-term growth, and there's no doubt it's a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.
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