Execution Stumble and CFO Retirement

Update3 years ago
The design software platform's secular growth continues, but execution mishaps and management changes could muddy the waters in 2019.
PTC, the leading industrial design software platform, reported mixed fiscal Q1 results. Sales were mixed (strong secular growth, offset by team execution issues) while profits were strong (disciplined cost control).
But the silver linings from Q1 were overshadowed by a mixed 2019 outlook from management. An announcement that the CFO will retire added to the uncertainty. The stock fell -6% after-hours on the news.
Q1 Takeaways
Software sales were decent on a subscription basis (i.e. pay $X per year to use PTC's connected device software), but "bookings" which represent future sales, fell -13% vs. last year (excluding currency impact).
Software sales were weak on a perpetual basis (i.e. one-time licenses to use the software for Y years). The culprit: "larger US government deals slipped into Q2 due to the shutdown."
Instead of blaming the Q1 softness on the "macro", PTC's management owned up and believes the likely cause was their go-to-market realignment during the quarter, which impacted their sales team's ability to get a fast-enough start to the new year. "We ran out of time."
On the upside, profit margins and earnings per share were strong, driven by disciplined expense management.
Putting it together, it was a mixed quarter for PTC -- results were okay, but execution was messy compared to Wall Street's high expectations in our view.
Irrespective of Q1 results, we know stocks are worth the sum of their discounted future cash flows, so let's pivot to what the future could look like. This is where things become messy.
Management Commentary on 2019
"We are more cautious about the macroeconomic environment."
"Bookings slipped from Q1 into our Q2 forecast...due to the [government] shutdown...however, we do not believe it would be prudent to assume we 'catch up' fully for the deals that slipped out of Q1."
Given the large software deals "slipping" into Q2 and the conservative macro stance, PTC's management is forecasting slightly slower growth in 2019 for both sales and earnings.
Additionally, the company's CFO will be retiring this year. He spent the past four years with PTC and played an integral role in its transition to a subscription software company. With that transition mostly complete, however, we understand he feels it's time to move on. A successor search is now underway.
The Path Forward
We think PTC's sales team needs to re-align faster and address its execution issues immediately. While the government shutdown and macro backdrop are out of its control, we'll be watching closely for signposts that management is addressing its "controllables" head on.
The stock deserved to be down on these results, in our view. The results simply missed the high near-term bar implicit in the stock's lofty valuation (49x P/E on Wall Street's 2019 estimated earnings per Sentieo).
What It Means for Our Thesis
It was a messy quarter, but we don't believe PTC's business is falling off a cliff. The secular shift toward automation and connectivity in industrial devices cannot be stopped, in our view. The shift will be lumpy, but we wouldn't bet against this technology transformation taking hold of every industrial enterprise. PTC remains a market leader within that wave.
As of this writing, PTC was a portfolio holding of Titan. This security may cease to be a portfolio holding at some point in the future.

Become a Titan investor today.

Titan Global Capital Management USA, Inc ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). By using this website, you accept our Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities. Past performance is no guarantee of future results. Any historical returns, expected returns [or probability projections] are hypothetical in nature and may not reflect actual future performance. Account holdings are for illustrative purposes only and are not investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.
Refer to Titan's Program Brochure for more information. Certain investments are not suitable for all investors. Before investing, consider your investment objectives and Titan’s fees. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested. Brokerage services are provided to Titan Clients by Apex Clearing, an SEC registered broker-dealer and member FINRA/SIPC. For more information, see our disclosures. Contact: 110 Greene Street, Suite 910, New York, NY 10012. Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.
© Copyright 2021 Titan Global Capital Management USA, Inc. All Rights Reserved.