PTC sees benefits of restructuring despite economic risks (NASDAQ:PTC)

Quick Tour of PTC

CTP (NASDAQ:PTC) released its FQ3 2022 financial results on July 27, 2022, missing expected revenue and EPS estimates.

The company offers a range of software for product design and lifecycle management.

Given macroeconomic the uncertainties and potentially rich valuation of the stock currently, I’m on hold for PTC in the short term.

Introducing PTC

PTC, based in Boston, Massachusetts, was founded in 1985 and has developed a family of CAD/CAM and product lifecycle management software for organizations around the world.

The company is led by President and CEO Jim Heppelmann, who was previously co-founder of Windchill Technology, which was acquired by PTC in 1998 and was previously CTO of Metaphase Technology.

The company’s main offering applications include:

• CAD/CAM/CAE software

• Augmented reality

• PLM

• Industrial IoT

The company acquires customers through its direct sales and marketing efforts, as well as through partner referrals.

PTC Market and Competition

According to a 2022 market research report by Grand View Research, the global product lifecycle management market [PLM] was estimated at $26.9 billion in 2021 and is expected to reach $56.4 billion by 2030.

This represents a projected CAGR of 8.6% from 2022 to 2030.

The main drivers of this expected growth are growing demand for cloud-based PLM solutions in a secure IT infrastructure and increased customer focus on developing “smart” products and factories.

In addition, the history of the US PLM market and projected future growth trajectory are presented below:

Major competitors or other industry participants include:

• Aras Corporation

• Arena Solutions

• Oracle Corporation (ORCL)

• SAP SE (SAP)

• Autodesk (ADSK)

• Siemens AG (OTCPK: SIEGY)

The company also offers offerings in the CAD/CAM and Industrial Internet of Things markets, both of which are large and growing global markets.

Recent Financial Performance of PTC

• The total turnover per quarter increased according to the following graph:

• Gross margin by quarter followed approximately the same trajectory as total revenue:

• Selling, G&A expenses as a percentage of total revenue per quarter have slightly decreased in recent quarters, as shown in the chart below:

• Operating profit by quarter followed the trajectory shown below:

• Earnings per share (diluted) fluctuated significantly:

(All data in the graphs above are in accordance with GAAP)

Over the past 12 months, PTC’s stock price has fallen 10.4% compared to the US S&P 500 Index’s decline of around 15.9%, as shown in the chart below :

Valuation and other measures for PTC

Below is a table of relevant capitalization and valuation figures for the company:

Measure [TTM]	Rising
Enterprise Value / Sales	7.29
Revenue growth rate	11.0%
Net profit margin	26.2%
% EBITDA GAAP	25.8%
Market capitalization	$12,590,000,000
Enterprise value	$13,890,000,000
Operating cash flow	$442,150,000
Earnings per share (fully diluted)	$4.21

Click to enlarge

(Source – Alpha Research)

Below is an estimated DCF (Discounted Cash Flow) analysis of the company’s projected growth and earnings:

Assuming conservative DCF metrics, the company’s stock would be valued at around $90.35 from the current price of $107.90, indicating that it is potentially overvalued currently, with the assumptions for earnings, DCF growth and discount rate data.

For reference, a relevant partial public comparable would be Autodesk; Below is a comparison of their main evaluation metrics:

Metric	Autodesk	CTP	Variance
Enterprise Value / Sales	9.00	7.29	-19.0%
Revenue growth rate	17.4%	11.0%	-37.0%
Net profit margin	11.8%	26.2%	122.7%
Operating cash flow	$1,680,000,000	$442,150,000	-73.7%

Click to enlarge

(Source – Alpha Research)

A full comparison of the two companies’ performance metrics can be viewed here.

The Rule of 40 is a software industry rule of thumb that states that as long as the combined revenue growth rate and EBITDA percentage rate are equal to or greater than 40%, the company is on a trajectory acceptable growth/EBITDA.

PTC’s most recent GAAP Rule of 40 calculation was 36.7% in the second quarter of 2022, so the company performed quite well in this regard, according to the table below:

Rule of 40 – GAAP	Calculation
Recent Rev. Growth %	11.0%
GAAP EBITDA %	25.8%
Total	36.7%

Click to enlarge

(Source – Alpha Research)

Comment on PTC

In its latest earnings call (Source – Seeking Alpha), covering FQ32022 results, management highlighted the growth in the company’s annual recurring revenue, which grew 15% in constant currency terms.

Management believes that the company’s cost structure is “in very good shape”, with “most of the pain… behind us”, following the restructuring of the previous year and a “prompt [to] a more aggressive and efficient SaaS strategy.’

Notably, the firm said bookings increased by 20% in Europe, less than in other regions. The company recently left Russia.

In terms of its financial results, total revenue grew 6.2% year-over-year, with “broad” strength across its product lines.

Management didn’t disclose any information on the company’s retention rate, but said it was “the lowest turnover the company has seen in many quarters.”

PTC’s Rule of 40 results have been reasonably strong, especially for a company of this size.

Revenue growth would have been 12% had the company not faced significant foreign exchange headwinds due to the strong dollar, particularly against European currencies.

Gross profit decreased, in part due to the implementation of ASC 606, a revised accounting standard on revenue recognition currently in effect.

On the balance sheet, the company ended the quarter with cash and cash equivalents of $322 million and gross debt of $1.43 billion at an all-in interest rate of 3.5%.

In the past twelve months, free cash flow was $419.1 million, including $23.0 million in capital expenditures.

Going forward, the company aims to return half of its free cash flow to shareholders through share buybacks, assuming its debt-to-EBITDA ratio is below 3x.

On the valuation side, the market values ​​PTC at an EV/Sell multiple of around 7.3x.

The SaaS Capital Index of publicly held SaaS software companies had an EV/Average Revenue multiple of approximately 6.9x as of September 30, 2022, as shown in the chart below:

So, by comparison, PTC is currently priced by the market at a slight premium to the broader SaaS Capital Index, at least as of September 30, 2022.

The main risk to the company’s outlook is an increasingly likely macroeconomic slowdown or recession, which could slow sales cycles and reduce its revenue growth trajectory.

Another risk is a continued rise in the value of the US dollar against other major currencies, which would negatively impact its earnings as a result.

A potential upside catalyst would include a “short and shallow” economic slowdown or a pause in US interest rate hikes, reducing upward pressure on the dollar and likely increasing the valuation multiple of the dollar. ‘company.

So, given the macro uncertainties and potentially rich valuation of the stock, I’m holding onto PTC stock in the near term.