What happened
Shares in industrial software company PTC (PTC -0.14%) rose 11% in January, according to data provided by S&P Global Market Intelligence. The move comes in response to a strong set of results and guidance from the company on Jan. 22.
Despite a weakening industrial environment, PTC raised its full-year 2020 guidance for average recurring revenue (ARR), adjusted free cash flow, revenue, and EPS in its first-quarter earnings presentation.
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According to the company, its ARR is "the annualized value of our portfolio of recurring customer arrangements as of the end of the reporting period, including subscription software, cloud, and support contracts" and is a better measure of the growth of a company shifting toward a subscription model.
Whichever way you look at it, PTC's growth was impressive, with an 11% increase in ARR in the first quarter and guidance for 14% to 16% for the full year. It's all the more impressive in an environment where a clutch of industrially focused companies, such as paint and coating company PPG, railroad Union Pacific, and industrial supply company MSC Industrial have given disappointing end-market outlooks.
So what
PTC's expertise is in the product life-cycle management (PLM) software market. It's an exciting market to be in because the increasing penetration of automation and robotics in manufacturing and the use of web-enabled devices are creating new possibilities for asset owners to improve the operation of their physical assets.
PTC's computer-aided design software can be used to design, develop, and simulate the performance of physical assets. In addition, its Internet of Things solutions help connect a company's physical assets with the digital world and enable its PLM software to better monitor and analyze the data produced.
As more and more manufacturers are adopting digitization and creating smart factories, PTC will have a growth opportunity. The big question is: Will growth in digitization offset pressure on manufacturing companies to cut spending in the face of weak end markets?
Fortunately, the answer from PTC's first-quarter earnings seems to be yes.
Now what
The industrial sector is hoping for a pickup in growth, and if PTC is raising guidance in a weak first half, there could be potential for a boost to growth in the back half of the year. That would go a long way in persuading the market that PTC is on track to deliver on its aim to grow free cash flow to some $850 million in 2024 from an adjusted free cash flow figure of $245 million in its fiscal 2019.
