PTC Inc. — Q3 FY2023 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted. PTC provides CAD and PLM software, subscriptions, support and cloud services, and professional services.
Business context and key financial metrics
PTC acquired cloud-based field service management software provider ServiceMax on January 3, 2023. ServiceMax is included in PLM; it contributed $46.6 million of Q3 revenue and $91.7 million for the nine-month period, with immaterial earnings. In Q3, PTC also changed from two operating segments to one reportable segment.
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Total revenue | $542.3 | $462.5 | $1,550.4 | $1,425.4 |
| GAAP gross margin | $426.5; 79% | $360.5; 78% | $1,225.3; 79% | $1,135.0; 80% |
| Operating income | $109.9 | $80.0 | $337.3 | $301.3 |
| Net income | $61.4 | $70.5 | $199.9 | $206.2 |
| Diluted EPS | $0.51 | $0.60 | $1.68 | $1.75 |
| Non-GAAP diluted EPS | $0.99 | $0.97 | $3.14 | $3.31 |
| Operating cash flow | $169.2 | $116.8 | $561.1 | $396.8 |
| Free cash flow | $164.1 | $112.3 | $543.1 | $386.8 |
Q3 revenue grew 17% reported and 21% at constant currency; nine-month revenue grew 9% and 14%, respectively. ARR was $1.93 billion, up 25% year over year; organic ARR was $1.76 billion, up 14%. Q3 recurring revenue increased 20% reported, while professional services revenue declined 9%. Non-GAAP measures exclude items including stock-based compensation, acquired-intangible amortization and acquisition-related charges; they supplement, not replace, GAAP results.
Liquidity, debt and financial position
- Cash and cash equivalents were $281.5 million at June 30, 2023, compared with $272.2 million at September 30, 2022; cash, cash equivalents and restricted cash totaled $282.2 million.
- Gross debt was $1.745 billion, including $1.0 billion of senior notes, $500 million term loan and $245 million drawn on the revolving facility. The balance sheet reports $1.738 billion of long-term debt net of senior-note issuance costs.
- PTC also recorded a $620 million deferred acquisition payment liability for the $650 million ServiceMax installment due October 2, 2023; the balance includes $30 million of imputed interest. The company reported $1.005 billion of unused credit commitments, while a liquidity table separately states $341.2 million available to borrow.
- The credit facility borrowing rate was 6.93% at June 30. PTC said it was in compliance with debt covenants. Nine-month interest expense was $93.7 million, versus $39.0 million in the prior-year period.
- Nine-month investing cash outflow was $866.1 million, primarily reflecting the $828.2 million ServiceMax closing payment. Financing cash inflow was $307.5 million, including borrowings and repayments.
Material changes versus prior periods
- ServiceMax and Codebeamer acquisitions supported PLM growth. Q3 PLM software revenue grew 35% reported (38% constant currency); CAD software revenue grew 1% (4% constant currency). Nine-month PLM revenue grew 22% reported, while CAD revenue declined 3% reported but rose 3% at constant currency.
- Q3 operating income increased 37%, and operating margin expanded to 20.3% from 17.3%. However, net income and GAAP diluted EPS fell, primarily as higher interest expense offset revenue and operating-income growth.
- Q3 support and cloud services revenue increased 26%; nine-month growth was 19%. Management cited acquired revenue and ongoing subscription/cloud business growth. Professional services revenue declined as PTC shifts delivery to partners and focuses on services-intensive work selectively.
- Operating cash flow and free cash flow increased substantially year over year. Management attributed the nine-month improvement to stronger collections, ServiceMax contributions and lower restructuring payments, partly offset by higher compensation, vendor and interest payments.
- Prior-year comparisons include unusual items: Q3 FY2022 included a $29.8 million gain on the sale of part of the PLM services business and a $3.0 million investment-sale gain; nine-month FY2022 also included a $34.8 million loss on an equity investment. Restructuring charges were also materially higher in the prior-year nine-month period.
Outlook, commentary and risks
PTC said existing cash, operating cash generation and credit availability should cover working capital and known capital needs for at least the next 12 months; expected Q4 FY2023 capital expenditures were approximately $2 million. It expects to use a substantial portion of cash generated during the remainder of FY2023 and FY2024 to repay revolving debt and make the ServiceMax deferred payment. Management expects no share repurchases for the remainder of FY2023 or FY2024 while it reduces debt. The filing does not provide a clear numerical revenue or earnings forecast.
Management cited macroeconomic and manufacturing uncertainty, inflation and interest rates, foreign-exchange volatility, tighter credit, geopolitical developments, slower customer adoption or delayed purchasing, competition, and execution and integration risks related to SaaS initiatives and ServiceMax. Approximately 45% of revenue and 35% of expenses are transacted in currencies other than the U.S. dollar. PTC also noted ongoing tax audits in several jurisdictions. Management concluded disclosure controls were effective; ServiceMax was excluded from the internal-control assessment because of its recent acquisition.
Important facts for investors to verify
- Whether ARR growth remains durable and how much comes from acquired businesses versus organic performance.
- ServiceMax integration, growth, profitability and the October 2023 deferred-payment funding and repayment plan.
- The difference between $1.005 billion of reported unused credit commitments and the separate $341.2 million figure for credit available to borrow, including applicable conditions and restrictions.
- Debt reduction progress, variable-rate interest costs, covenant headroom and management’s stated pause on share repurchases.
- GAAP-to-non-GAAP adjustments and the recurring nature of excluded costs, including stock-based compensation and intangible amortization.
- Foreign-exchange effects, professional-services contraction, and whether subscription and cloud growth supports margins and cash generation.