Parametric Technology: Revenue Growth Ahead of Projections

| About: PTC Inc. (PTC)

Parametric Technology (PMTC) specializes in developing product lifecycle management [PLM] software, which helps improve the process of developing physical and informational products. By acquiring CoCreate last November, PMTC expanded its portfolio of PLM software solutions and enhanced its reach beyond the U.S.

Europe is now its largest geographic market, responsible for 41.6% of revenues for the first half of fiscal 2008. North America generated 34.7%, the Pacific Rim produced 12.7%, and Japan was responsible for 11%.

The company’s software solutions center around two key products: Pro/ENGINEER and Windchill. The former is a line of three-dimensional product modeling solutions for the desktop. This line is used for sophisticated computer-aided design [CAD], computer-aided manufacturing [CAM], and computer-aided engineering [CAE] applications. The latter is a line of Web-based content and process management solutions that help manage complex data, relationships, processes, and publications for the enterprise market.

Other products include Mathcad, an engineering-calculation software product that is used with Pro/ENGINEER to design and predict model behavior; and Arbortext, an XML-based authoring tool that facilitates the sharing and publishing of data across multiple contributors.

These software solutions enable customers to create digital product designs and component-based documents. They also allow for collaboration on product development and communication of relevant product information.

In addition, customers can use PMTC’s software products to control content and automate processes over the lifecycle of a product. These solutions help customers reduce development costs, speed time to market, and improve product quality.

Revenues come from licensing, maintenance, consulting, and training. During the first half of fiscal 2008, 28.1% of revenues came from the sale of product licenses, which give customers the right to use PMTC’s software products.

However, 47.1% of revenues came from maintenance services, which consist of software updates and technical support. The remaining 24.8% were derived from consulting and training services.

Despite weakness in the U.S., fiscal Q2 2008 revenues climbed 13% year-over-year to $257.8 million. The gain was due to strong demand for Windchill, general strength overseas, and contributions from CoCreate. On an adjusted basis, service revenues jumped 19% to $186.6 million.

The adjusted operating profit margin improved 627 basis points to 21%. Adjusted net income climbed 26.7% to $35.7 million or 30 cents per share. PMTC added 25,500 new Windchill seats during the quarter. It also added 5,000 Pro/ENGINEER seats.

A weak U.S. economy could result in reduced IT spending by domestic customers, which would have a negative impact on PMTC’s business. In addition, better or more cost effective products by rivals would also prove detrimental.

Yet PMTC’s revenue growth in services is trending ahead of initial projections and should get a boost from operational improvements in the consulting business. Windchill 9.0 was well-received by customers and the acquisition of CoCreate enhances PMTC’s competitive position by increasing its customer base by more than 10% to 50,000 companies. Even after accounting for the soft American economy, PMTC is projecting 16-20% revenue growth for fiscal Q3.