PTC Inc. — Q3 FY2019 Form 10-Q
Reporting period: Third quarter ended June 29, 2019; nine-month results are for the period ended the same date. PTC sells software and related services, including CAD/PLM, IoT and augmented-reality solutions. Unless stated otherwise, amounts are U.S. dollars.
Financial performance
PTC adopted ASC 606 on October 1, 2018 using the modified retrospective method. Because prior-year results were not restated and the new standard accelerates recognition of some subscription license revenue, reported GAAP comparisons can be misleading. The filing also provides ASC 605 figures for selected comparisons; those are identified below.
| Metric | Q3 FY2019 | Prior comparable period |
|---|---|---|
| Revenue, reported ASC 606 | $295.5 million | $314.8 million, down 6% |
| Revenue, ASC 605 comparison | $322.4 million | $314.8 million, up 2% (6% constant currency) |
| GAAP gross margin | $212.8 million; 72% | $233.1 million; 74% |
| GAAP operating income and margin | $9.3 million; 3.1% | $21.5 million; 6.8% |
| GAAP net income (loss) and diluted EPS | $(14.8) million; $(0.13) | $17.0 million; $0.14 |
| Non-GAAP operating margin and diluted EPS | 12.8%; $0.23 | 17.9%; $0.36 |
On the ASC 605 comparison basis, Q3 subscription revenue grew 35% (39% constant currency), while perpetual license revenue fell 59% and perpetual support revenue fell 18%. Subscription ACV was $49 million, up from $44 million; license and subscription bookings were $109 million, down 3% (1% constant currency). ASC 605 ARR was approximately $1.088 billion, up 9% year over year.
For the first nine months, reported ASC 606 revenue was $920.6 million, versus $929.3 million in the prior period; ASC 605 comparison revenue was $976.7 million, up 5% (8% constant currency). Reported GAAP operating income was $16.5 million versus $61.1 million, and net loss was $37.3 million versus net income of $38.8 million. ASC 605 comparison operating income was $64.0 million versus $61.1 million. The 2019 period included $45.5 million of restructuring and other charges.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $229.9 million, compared with $185.8 million. Investing cash outflow was $147.6 million, including $86.7 million for acquisitions and $59.6 million for property and equipment; financing cash outflow was $76.6 million.
- At June 29, cash and cash equivalents were $267.9 million, restricted cash $1.1 million, and short- and long-term marketable securities $54.6 million; the filing reports total liquidity of $323.6 million.
- Total debt was $703.1 million: $500 million of 6.0% senior notes due 2024 and $203.1 million drawn under the revolving credit facility. The facility had a $700 million commitment, with approximately $481.8 million available to borrow. PTC reported compliance with its covenants and leverage ratios of 1.92x total leverage, 0.58x senior secured leverage and 8.95x interest coverage.
- Current assets were $752.7 million and current liabilities $601.2 million. Reported deferred revenue was $382.6 million; ASC 606 contract liabilities were $382.6 million, with total remaining performance obligations of $862.7 million, approximately 90% expected to be recognized within 24 months.
Material changes, outlook and risks
- Revenue accounting: ASC 606 allows PTC to recognize the license component of qualifying on-premise subscription contracts upfront, with support recognized over time. Adoption increased opening equity by $367.4 million net of tax and reduced deferred revenue. It also changes reported revenue timing and makes year-over-year comparisons less direct. At June 29, approximately $189 million of unbilled deferred revenue related to contracts with limited annual cancellation rights.
- Bookings and outlook: Management said Q3 bookings declined, citing fewer large support conversions, sales-resource shifts toward IoT and AR, and lower channel bookings in certain geographies after perpetual-license sales ended. Strong IoT and AR bookings partly offset these factors. The company said it reduced Q4 and full-year bookings and revenue guidance after the quarter, but the filing text does not provide clear revised guidance values. A new FY2024 cash-flow target superseded prior long-range targets; the target amount is not provided in the text.
- Strategy: PTC aims to grow IoT/AR and core CAD/PLM, expand subscription licensing and improve margins. New licenses for core solutions and ThingWorx were subscription-only worldwide from January 1, 2019; Kepware remained available under perpetual licensing. Management expects subscription growth to compound but cautioned that large transactions, customer conversions and macroeconomic conditions can make results volatile.
- Restructuring and facilities: Workforce realignment charges were approximately $16 million and affected about 240 employees; management said the realignment was not expected to generate significant cost savings. PTC recorded $27.1 million for obligations related to its former headquarters lease through November 2022 and had not yet subleased the space. Cash costs could rise if expected sublease income is not achieved.
- Tax and other contingencies: PTC maintained a full valuation allowance against U.S. net deferred tax assets, while noting a possible significant release within 12 months if profitability provides sufficient evidence; timing and amount are uncertain. The company is appealing a South Korean tax assessment of approximately $12 million, already paid and recorded in other assets, and has not recorded a reserve. Other legal claims were estimated at $0.1–$2.1 million, with $0.2 million accrued.
- Market and execution risks: The filing identifies potential effects from trade tensions, tariffs and geopolitical restrictions; foreign exchange; customer conversion and subscription adoption; partner and Rockwell alliance bookings; and the ability of IoT/AR investments to produce expected growth. PTC also noted that LIBOR’s expected phase-out could have a material impact, which it was evaluating.
Important facts for investors to verify
- Review the revised Q4 and FY2019 guidance from the July 24, 2019 earnings release; the numeric guidance is not clear in this filing text.
- Reconcile ASC 606 reported revenue, deferred revenue and earnings with ASC 605 comparison figures, and assess the effect of upfront subscription-license recognition.
- Track bookings, subscription ACV, ARR and cancellation-right exposure, including the approximately $189 million cancellable backlog disclosed at quarter-end.
- Monitor execution on IoT/AR growth, subscription conversions and margin expansion against declining perpetual-license and support revenue.
- Assess debt, buybacks and capital spending alongside the former-headquarters sublease outcome and any resulting restructuring cash costs.
- Follow the South Korean tax appeal, U.S. deferred-tax valuation allowance and potential tax effects of the Altera litigation developments.