Wednesday, Jan 23rd 2019
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.
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.
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.
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).
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.
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