Parametric Tech Engineering The New, "New PTC"
4/19/0 13:18 (New York)
Parametric Tech
PMTC M E R R I L L L Y N C H Research Comment
Design Automation Software Reference Number 20111059
United States Apr/19/2000 13:18
Jay Vleeschhouwer (1) 212 449-7292
NEUTRAL*
Long Term
BUY
Reason for Report: Quarterly earnings
Price: $9 1/4
Estimates (Sep) 1999A 2000E 2001E
EPS: $0.61# $0.04# $0.32#
P/E: 15.2x Nmf 28.9x
EPS Change (YoY): -93.5% Nmf
Q3 EPS (Jun): $0.16 $0.00
Cash Flow/Share: $1.00 $0.55 $1.00
Price/Cash Flow: 9.2x 16.8x 9,2x
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: C-3-1-9
Mkt. Value / Shares Outstanding (mn): $2,544 / 275.1
Book Value/Share (Mar-2000): $2.18
Price/Book Ratio: 4.2X
ROE 2000E Average: 2.0%
LT Liability % of Capital: 0.0%
Est. 5 Year EPS Growth: 15.0%
Stock Data
52-Week Range: $35 15/16-$7 3/4
Symbol / Exchange: PMTC / OTC
Options: Phila
Institutional Ownership-Spectrum: 74.4%
Brokers Covering (First Call): 7
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: Underweight (07-Mar-1995)
Growth: Overweight (07-Mar-1995)
Income & Growth: Overweight (07-Mar-1995)
Capital Appreciation: Overweight (28-May-1993)
Market Analysis; Technical Rating: Above Average (28-Mar-2000)
*Intermediate term opinion last changed on 03-Apr-2000.
**The views expressed are those of the macro department and do not necessarily
coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes.
Investment Highlights:
o PTC reported 2Q00 results consistent with its pre-announcement of April
3(**rd).
o The main news to come out of the conference call was a new corporate
structure, a cost reduction to be implemented in 3Q00, and sharply lower
outlook for the rest of FY00 and FY01. We are further reducing our recently
FY00 and FY01 estimates.
o We are maintaining our intermediate Neutral rating.
Fundamental Highlights:
o PTC reported $227 million and a loss of $0.02 a share vs. our revised
estimate of $228 million and breakeven results.
o For the year, we are now assuming $920 million and $0.04 a share,
including amortization, compared with a prior $998 million and $0.18 a share.
For FY00, we expect a 23% decline in the MDA business, a notably poor
performance even taking into account a highly competitive market.
o For FY01, we have reduced our estimate to $1.02 billion and $0.40 a share
before amortization, from a prior $1.275 billion and $0.63 a share.
PTC reported 2Q00 results more or less consistent with its April 3rd pre-
announcement, with revenues and a small loss of $227 million and ($0.02) a
share. We had a revised estimate of $228 million and breakeven results.
The main news to come out of the conference call was a new corporate structure,
a cost reduction to be implemented in 3Q00, and sharply lower outlook for the
rest of FY00 and FY01.
PTC will implement new business units for each of Windchill (and related web-
based collaborative solutions), the mechanical design business (Pro/Engineer
and other related applications in the i-series), and "net markets", a wholly
new effort aimed at technology and partnerships for B2B marketplaces. With
respect to the latter, we should expect to see a much greater emphasis on
partners and outside relationships (including perhaps more indirect
distribution), something that PTC has not pursued much before, but which is
essential to its new business environment and opportunity. The idea is to
enable especially those exchanges having to do with direct materials or
engineered parts and components. In addition to offering a lighter version of
Windchill for this initiative, PTC may benefit too from being able to offer the
technology having to do with product structure and configuration.
The company noted that it will be reducing its cost structure through lower
total employment and it is in the process of reviewing where that will occur.
The goal will be to reduce quarterly expenses by as much as $10 million, or
about 5% of current operating expenses. These cuts should allow the company to
remain at least modestly profitable through the next several quarters of
impaired revenue growth.
In terms of outlook, the company issued guidance well below even our recently
revised expectations for the rest of this year and next, taking down both the
MDA and Windchill revenue forecasts. Clearly, the new CEO is taking advantage
of the opportunity to radically reset expectations to more realistic
objectives. The opportunity and pipeline for Windchill especially remains
strong but sales execution and deal timing are where there is the most need of
improvement, and that will take time.
For 3Q00, we are revising our estimate to revenues of $223 million and
breakeven results including amortization, from a recently revised estimate of
$245 million and $0.03 a share. In addition, we have reduced 4Q00E to $230
million and $0.02 a share with amortization from a prior $285 million and $0.11
a share. A substantial portion of the cuts for both quarters is in Windchill;
one of the factors behind the more conservative view is that the company no
longer wishes to be as dependent - or monitored - on one or two large deals
having to close, as has been the case for each of the past few quarters, e.g.,
Airbus and others.
For the year, therefore, we are now assuming revenues and earnings of $920
million and $0.04 a share, including amortization, compared with a prior $998
million and $0.18 a share (the company incurs about $0.08 a share a year in
amortization). For the year, we expect a 23% decline in the MCAD business, a
notably poor performance even taking into account a highly competitive
market.
For FY01, we have reduced our estimate to $1.02 billion and $0.40 a share
before amortization, from a prior $1.275 billion and $0.63 a share. Our new
estimate takes into account the planned effects of the cost reductions, which
could lead, for instance, to flat to lower sales and marketing spending next
year. Our new estimate is nevertheless somewhat below the $0.50 a share the
company cited on its conference call in terms of its own expectations.
Review of 2Q00
Parametric reported 2Q00 revenues and earnings of $227 million, down 14%, and a
net operating loss of $0.02 a share, vs. our revised estimate of $228 million
and breakeven results.
License revenues of $87.8 million included about $19 million in Windchill
sales, compared with $23 million in the preceding quarter. Total Windchill
revenues were $39.4 million, compared with $38.3 million in 1Q00 and $12
million a year ago.
The Windchill business is being driven by discrete manufacturing customers'
interest in adopting new integrated methods of product development and related
processes. The concept embodies the objective of extending the use of the data
flow through - and around - an "enterprise" and of increasing the value of the
data model that emanates from the design and engineering process by enabling
improved productivity, competitiveness, and customer and partner interaction.
PTC shipped only 5,017 units of product development (MCAD) software, a decline
of 42% from a year ago and the lowest unit level since 1Q96 - when PTC had far
fewer salesmen than it does today. Total MDA revenues of $188 million declined
by 25%. The poor performance in the MCAD segment - unit generation here has
been the largest business risk factor and may remain so - seems to be still
largely attributable to the ongoing effects of sales force transformation and
diminished productivity. The reps in the major account and full-product line
groups have been especially focused on the Windchill deals (where the pipeline
is large and growing, albeit the deal yield is less manageable than the core
business used to be).
In terms of the sales force transition, the headcount now stands at about 650.
The additional goal now will be to refocus on the MDA business with an
"overlay" of additional reps - some of whom will be transferred from other
categories - so as to enhance revenue production. The net effect of the
intended changes will not necessarily be an increase in sales headcount so much
as to recoup revenues through better productivity (indeed, theoretical revenue
capacity may even decline to the extent that FPL or named account reps go into
a lower Pro/E-only category). This shift will involve up to 50 people in the
sales organization. Also, the product line quotas the company established
earlier - while not having had as much effect yet as hoped - will remain in
place.
The ASP for the MDA product line, consisting of Pro/Engineer and associated
modules, was $13,800, down 11% but flat sequentially. We expect ASPs to remain
at about $13,000-14,000 during FY00, depending on the contribution from Rand,
PTC's distributor to smaller accounts, and PTC's own mix of deals (Rand was
said to have had a better quarter, but given the terms of the deal the revenue
impact to PTC is still only modest).
Externally, of course, the market remains highly competitive - PTC noted it
sees little differentiation among the top tier vendors, leading to a growing
reliance on existing accounts, which in PTC's case accounted for 83% of
revenues - but we continue to be of the opinion that the technical
competitiveness of Pro/E is improving and that over time Windchill itself could
help to "facilitate" the MCAD business based on the adoption of the
"engineering to order" or "customer-driven design" concepts (see our industry
comment, "The Future of Engineering Software", November 30, 1999). That
combination of capabilities is both of strategic value long term and a
differentiator over and above raw feature and function performance; in the
meantime, however, making the Pro/E numbers has clearly been a challenge.
Services revenue of $139 million increased by 14%. The cost of services
revenues increased to 43%, compared with 39.0% a year earlier and 41.8% in the
preceding quarter, an increase reflecting the ongoing investments in service
and support for Windchill. We should also expect to see the development of, or
investment, in more industry or "domain" expertise.
Our thesis on PTC had been that it was (and is) seeing the early benefits of a
substantial revenue opportunity for its Windchill information management system
and that its core MDA business can see renewed growth - delayed, it would
appear, until well into FY01 - based on improving sales execution, technology
(e.g., behavioral modeling), and replacement and upgrade demand, including 2D
to 3D migration.
While there is little doubt that the MCAD market is crowded, tough and
competitive, there are some signs of growth elsewhere. Solid Works, for
instance, seems to have had a good quarter, partly as a result of having
focused on its US channel, which in turn raises some interesting implications
about the role of sales and distribution focus by PTC. We may even see this
quarter or next Solid Works' units exceed Pro/E for the first time.
Over the past few quarters, we have written a series of reports entitled
"Engineering The New PTC" to describe both the changes underway at the company
and the strategic opportunity facing it. While we have legitimate concerns
over execution and visibility, we still expect Windchill can become a market
leader and we believe there is a prospect - albeit not imminent - of an MCAD
recovery over time. In the meantime, however, we are maintaining our
intermediate Neutral rating. |
