Another quarter, and another slightly disappointing set of earnings from industrial software company PTC (PTC -0.80%). The results were in line with management's guidance, and the company remains on track in 2021. Still, investors were entitled to expect a bit more given the improving economy and the fact that PTC's partner , Rockwell Automation, updated sales guidance toward the high end of its previous range. Rockwell provides automation solutions and PTC offers complimentary internet of things (IoT) and augmented reality (AR) solutions. Is it time to buy the stock on a dip or walk away?
An unconvincing guidance raise
On a headline basis, the results were good, and there was even a guidance raise for investors. However, on closer inspection, it's clear that the guidance hike is largely down to favorable currency movements. Here's a look at the headline guidance. For reference, the annual run rate (ARR) is defined as the annualized value of active "subscription software, cloud, SaaS, and support contracts" at the end of the period. It's the key measure that management advises investors to follow.
Management increased guidance across the board, but it also disclosed that the ARR organic constant currency growth guidance remained at 10%-12%. In fact, the only change to the underlying guidance came from a positive shift in exchange rates.
|Management's Full-Year 2020 Guidance||Current||Previous|
|Annual run rate (ARR)||$1.453 million-$1.478 million||$1.445 million -$1.470 million|
|Revenue||$1.733 million-$1.763 million||$1.710 million-$1.740 million|
Growth product portfolio
In addition, revenue growth in PTC's growth product group came in a bit lower than management had hoped for. More on that in a moment.
The investment case for buying PTC stock rests on its core product group (computer-aided design, or CAD, and product lifecycle management, or PLM software) growing at a high-single-digit to low-double-digit percentage growth rate over the medium term. The company is offering is CAD and PLM solutions as a software-as-a-service option, and management believes this will drive growth in the future.
However, the fascinating part comes from the growth product group (IoT and AR software), which is forecast by management to grow at a 30%-plus rate over the medium term. IoT and AR lie at the heart of the fourth industrial revolution, whereby industrial companies will connect physical assets with the digital world to make them run more productively.
Unfortunately, the growth of PTC's growth product group (mainly IoT right now as it's a significantly larger business) was a bit disappointing. Organic ARR year-over-year growth at constant currency came in at 23% in the third quarter, following an increase of 27% in the previous quarter.
What management said
CEO Jim Heppelmann was asked about the matter on the earnings call and told investors it "related to hangovers from COVID." He noted that PTC was doing a lot of deals. Still, they were relatively smaller-sized deals, which he attributed to "conservatism around people doing IoT projects in factories and in general as they come back to speed following COVID."
That's fair enough, but it will still disappoint investors buying into the stock on the basis that there will be a wall of money ready to invest in IoT and AR solutions, particularly as the pandemic highlights the need for digital technology in the workplace.
A stock to buy?
On balance, I think the answer has to be "yes." PTC's growth is still robust; it just hasn't been at the level that many investors would have hoped for in 2021. No matter, the numbers are still within management's guidance, and it doesn't make sense to judge a long-term growth story on the back of a couple of slightly disappointing earnings reports.
That said, investors will be hoping for a relatively better report in the fourth quarter with some signs of accelerating demand in the growth product portfolio leading into the new fiscal year. Indeed, Heppelmann believes that PTC's IoT business will end the fiscal year on a "strong note." If he's right, then the recent dip will prove an excellent buying opportunity.