PTC Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter ended March 31, 2021; comparisons are with the quarter ended March 28, 2020. PTC changed to calendar-month quarters in FY2021. Financial amounts below are in U.S. dollars; “Q2” refers to the three-month period.
Business context and operating performance
PTC sells industrial software and related services, including CAD, PLM, IoT, AR, ALM and SaaS offerings. Management highlighted strength in Growth and Core products and continued customer migration toward subscriptions. In January, PTC acquired Arena for approximately $715 million, net of cash acquired; Arena added about $54 million of ARR and an immaterial amount of Q2 revenue.
- ARR was $1.39 billion, up 18% year over year (15% constant currency); organic ARR growth was 14% (11% constant currency). ARR is a company-defined operating measure, not revenue or contracted future revenue.
- Q2 revenue was $461.8 million, up 28% (22% constant currency). Software revenue was $421.8 million, up 30%; recurring revenue was $414.8 million, up 31%. License revenue rose 55%, while professional services revenue rose 13%.
- Growth product ARR rose 64%, including Arena; organic Growth product ARR rose 29%. Core product ARR increased 13%; FSG ARR was flat year over year.
Financial results and liquidity
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $461.8m | $359.6m | $890.8m | $715.7m |
| Gross margin | $372.3m; 81% | $276.6m; 77% | $714.6m; 80% | $545.3m; 76% |
| Operating income; margin | $101.7m; 22.0% | $50.0m; 13.9% | $192.0m; 21.6% | $80.5m; 11.2% |
| Net income | $109.3m | $7.2m | $132.8m | $42.6m |
| Diluted EPS | $0.92 | $0.06 | $1.13 | $0.37 |
| Cash from operations | $121.7m | $87.8m | $235.5m | $95.3m |
| Free cash flow (company-defined) | $116.3m | $82.3m | $227.2m | $85.1m |
Q2 non-GAAP operating income was $172.0 million, non-GAAP operating margin 37.2%, and non-GAAP diluted EPS $1.08. These measures exclude specified items; they supplement, not replace, GAAP results.
- At March 31, cash and cash equivalents were $326.1 million (plus $0.5 million restricted cash); no marketable securities remained. Current assets were $901.8 million and current liabilities $766.8 million.
- Total debt was $1.52 billion ($1.508 billion net of senior-note issuance costs), including $520 million drawn on the revolving credit facility. Approximately $463.7 million remained available to borrow. PTC reported compliance with debt covenants.
- Operating cash flow for the first six months improved year over year, primarily reflecting increased collections, partly offset by higher compensation payments. Investing cash flow included $717.2 million for acquisitions, principally Arena.
Material changes, outlook and risks
- Q2 GAAP net income included a $42.3 million tax benefit from reducing the U.S. valuation allowance following the Arena acquisition. The six-month results also included a $36.1 million charge related to a South Korean tax matter. The company continues to appeal the assessment.
- Operating expenses increased, including higher stock-based compensation and Arena-related acquisition costs; lower restructuring expense and travel costs partly offset the increases. Stock-based compensation was $44.7 million in Q2 versus $20.5 million a year earlier.
- Management anticipated FY2021 growth in ARR, revenue and operating margin, and expected organic churn to improve slightly versus FY2020. It expected approximately $15 million of additional FY2021 capital expenditures, planned to use operating cash to repay revolver borrowings, and targeted leverage below 3x Debt/EBITDA. No specific numerical FY2021 revenue or earnings guidance is provided in the supplied filing text.
- Management cited COVID-19 and macroeconomic uncertainty, customer adoption and churn, foreign exchange, and the timing and size of large transactions as risks to results and cash flow. Subscription license revenue can vary with contract duration and start dates; greater SaaS adoption may shift more revenue to ratable recognition. Rockwell Alliance orders tied to minimum commitments may not convert to end-user subscriptions and could churn.
- A putative class action concerning oversight and fees in PTC’s 401(k) plan seeks unspecified damages; PTC said the effect, if any, could not then be reasonably estimated. The filing states other ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- How much reported ARR and Growth product growth reflects Arena versus organic performance, and how ARR is defined, including Rockwell minimum-commitment orders.
- The sustainability of revenue and margin growth, given up-front subscription license recognition, customer contract timing, and the expected shift toward ratable SaaS revenue.
- The underlying earnings picture excluding the $42.3 million acquisition-related tax benefit, the South Korean tax charge, elevated stock compensation, and other items excluded from non-GAAP measures.
- Debt repayment progress after the Arena acquisition, revolver availability, leverage and covenant headroom, and cash-generation trends.
- Developments in the South Korean tax appeal and the 401(k) litigation, as well as any material effects from COVID-19 or customer churn.