PTC Earnings: Strong ARR Growth and Momentum Building; Valuation Raised to $138 from $125

Narrow-moat PTC PTC finished its fourth quarter of fiscal 2023 with results slightly below our estimates for both the top and bottom lines. However, more relevant is its solid annualized recurring revenue growth which we view as a better indicator of the firm’s business performance. PTC’s outlook for fiscal 2024 was above our expectations on the top line, and management raised its ARR guidance as PTC builds product momentum, particularly from its Windchill and Codebeamer offerings. Difficult macroenvironment and foreign exchange volatility figures are likely to persist throughout fiscal 2024, but we are encouraged by PTC’s ARR growth, customer retention, and interest in its software-as-a-service offering. When rolling our model forward and adjusting our fiscal 2024 assumptions, we are increasing our fair value estimate to $138 per share from $125 per share, leaving the stock as fairly valued.

Fourth-quarter revenue grew 8% year over year to $547 million, as reported, due to strength in CAD driven mostly by Creo, and PLM with strong performance from Windchill. ARR totaled $1.94 billion in constant currency, up 23% year over year despite slight contract timing headwinds. The firm’s ARR performance was a result of broad-based strength across geographies and product groups, with particular outperformance in Europe. We expect continued growth in its SLM segment thanks to ServiceMax which will begin to contribute to organic growth in the second quarter of fiscal 2024. Also driving growth is its PLM segment, particularly Windchill which should provide opportunities for expansion within organizations and customer acquisition next year.

Non-GAAP operating margin in the quarter was 37%, down 350 basis points year over year from a difficult macroenvironment and currency headwinds. We expect a bounceback due to a higher software mix and increased productivity throughout the business. This resulted in non-GAAP EPS of $1.20, compared with $1.27 in the year-ago period.