PTC (PTC)

Engineering and design software provider PTC (NASDAQ:PTC) reported Q1 CY2025 results exceeding the market’s revenue expectations, with sales up 5.5% year on year to $636.4 million. Revenue guidance for the full year exceeded analysts’ estimates, but next quarter’s guidance of $580 million was less impressive, coming in 5.5% below expectations. Its GAAP profit of $1.35 per share was 48.4% above analysts’ consensus estimates.

Company Overview

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 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).

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, PTC’s sales grew at a weak 7.7% compounded annual growth rate over the last three years. This fell short of our benchmark for the software sector and is a poor baseline for our analysis.

This quarter, PTC reported year-on-year revenue growth of 5.5%, and its $636.4 million of revenue exceeded Wall Street’s estimates by 5%. Company management is currently guiding for a 11.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 11.5% over the next 12 months, an acceleration versus the last three years. This projection is above the sector average and indicates its newer products and services will spur better top-line performance.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

PTC’s ARR punched in at $2.29 billion in Q1, and over the last four quarters, its growth slightly outpaced the sector as it averaged 10.3% year-on-year increases. This alternate topline metric grew faster than total sales, which likely means that the recurring portions of the business are growing faster than less predictable, choppier ones such as implementation fees. That could be a good sign for future revenue growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

PTC’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.

For software companies like PTC, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

PTC’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an excellent 81.1% gross margin over the last year. Said differently, roughly $81.13 was left to spend on selling, marketing, and R&D for every $100 in revenue.

PTC produced a 83.3% gross profit margin in Q1, up 1.6 percentage points year on year. PTC’s full-year margin has also been trending up over the past 12 months, increasing by 1.3 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

PTC has been a well-oiled machine over the last year. It demonstrated elite profitability for a software business, boasting an average operating margin of 26.8%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, PTC’s operating margin rose by 3.2 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, PTC generated an operating profit margin of 35.1%, up 5.3 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

PTC has shown terrific cash profitability, driven by its lucrative business model that enables it to reinvest, return capital to investors, and stay ahead of the competition while maintaining an ample cushion. The company’s free cash flow margin was among the best in the software sector, averaging an eye-popping 34.9% over the last year.

PTC’s free cash flow clocked in at $278.5 million in Q1, equivalent to a 43.8% margin. This result was good as its margin was 2.8 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

Over the next year, analysts’ consensus estimates show they’re expecting PTC’s free cash flow margin of 34.9% for the last 12 months to remain the same.

PTC reported $235.2 million of cash and $1.57 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $957 million of EBITDA over the last 12 months, we view PTC’s 1.4× net-debt-to-EBITDA ratio as safe. We also see its $71.88 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing PTC beat analysts’ revenue and adjusted operating income expectations this quarter. We were also glad its full-year revenue guidance slightly exceeded Wall Street’s estimates. Overall, this quarter was decent. The stock traded up 2.1% to $158 immediately following the results.

Updated: May 16, 2025 at 10:25 PM EDT

Are you wondering whether to buy PTC or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

PTC has a few positive attributes, but it doesn’t top our wishlist. Although its revenue growth was weak over the last three years, its growth over the next 12 months is expected to be higher. And while PTC’s customer acquisition is less efficient than many comparable companies, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

PTC’s price-to-sales ratio based on the next 12 months is 8x. Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $185.62 on the company (compared to the current share price of $180).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist. We typically have quarterly earnings results analyzed within seconds of the data being released, giving investors the chance to react before the market has fully absorbed the information. This is especially true for companies reporting pre-market.