PTC Inc. — Q2 FY2019 Form 10-Q
Reporting period: Second quarter ended March 30, 2019; six-month results are for the period then ended. Unless noted, amounts are in U.S. dollars. PTC provides industrial software and related services, including CAD, PLM, IoT and augmented-reality solutions.
Financial performance
| Metric | Q2 FY2019 | Six months FY2019 |
|---|---|---|
| Revenue, GAAP / ASC 606 | $290.5 million | $625.1 million |
| Revenue, management’s ASC 605 comparison | $315.5 million; +2% reported, +6% constant currency year over year | $654.3 million; +6% reported, +9% constant currency year over year |
| GAAP gross margin | $210.5 million; 72% of revenue | $467.9 million; 75% of revenue |
| GAAP operating income (loss) | $(22.9) million; margin (7.9)% | $7.2 million; margin 1.1% |
| GAAP net income (loss) / diluted EPS | $(43.5) million / $(0.37) | $(22.5) million / $(0.19) |
| Non-GAAP operating margin / diluted EPS | 15.3% / $0.22 | 21.7% / $0.78 |
| Cash from operations | Quarterly figure in MD&A: $141.1 million | $162.3 million |
Reported revenue and earnings are affected by adoption of ASC 606, which moved a portion of subscription-license revenue to recognition at delivery and left prior-year results unadjusted. On management’s ASC 605 comparison, Q2 subscription revenue increased 44% and total recurring revenue increased 11%; perpetual support fell 18% and professional-services revenue fell 15%. IoT revenue grew 29% in Q2 on the reported ASC 606 basis.
At March 30, 2019, cash and cash equivalents were $294.3 million, marketable securities were $56.4 million and restricted cash was $1.1 million. Total debt was $743.1 million gross ($738.7 million net of senior-note issuance costs), comprising $500 million of 6% notes due 2024 and $243.1 million drawn on the revolver. Revolver availability was approximately $441.4 million. Operating cash flow rose from $136.6 million in the prior-year six-month period to $162.3 million. Investing cash use was $128.3 million and financing cash use was $1.9 million.
Changes and significant items
- Compared with Q2 FY2018, GAAP revenue declined to $290.5 million from $307.9 million and GAAP net income of $7.9 million became a loss of $43.5 million. Comparisons are materially affected by ASC 606; management’s ASC 605 comparison shows revenue growth.
- Q2 restructuring and other charges were $27.0 million, primarily a $26.7 million charge for the vacated Needham headquarters lease. Six-month charges were $45.5 million, including approximately $16 million for workforce realignment affecting about 240 employees. Management said the workforce realignment was not expected to generate significant cost savings.
- ASC 606 adoption increased equity through a $367.4 million net-of-tax cumulative adjustment to accumulated deficit; it also materially reduced deferred revenue. Separately, adoption of intra-entity tax-transfer guidance reduced accumulated deficit by $72.3 million. These transition entries are not current-period operating revenue.
- PTC acquired Frustum for $69.5 million in November 2018, financed with revolver borrowings. In April 2019, after quarter-end, it acquired an industrial-IoT services company for approximately $8 million.
- PTC repurchased $65.0 million of stock in the first six months. Its $1.5 billion repurchase authorization runs through September 30, 2020.
Outlook, risks and contingencies
- Management’s FY2019 priorities are sustainable growth, subscription expansion and margin improvement. It expected subscription mix to reach 94% by year-end, approximately 1,000 basis points above FY2018, and expected continued operating-margin expansion. New core and ThingWorx licenses became subscription-only worldwide on January 1, 2019; Kepware remains available perpetually.
- Management said second-half bookings growth was expected to approximate first-half performance. Q2 license and subscription bookings were $112 million, up 13% year over year (18% constant currency); six-month bookings were $213 million, up 5% (9% constant currency). Subscription ACV was $51 million versus $38.5 million a year earlier. ASC 605 ARR was approximately $1.065 billion, up 11% (15% constant currency).
- Management expected FY2019 capital expenditures of approximately $40 million, net of expected landlord funding, and intended to continue material share repurchases. It believed cash, operating cash flow and credit availability would cover working capital, capital expenditures and planned repurchases for at least 12 months.
- Risks include macroeconomic and manufacturing conditions, trade tensions and tariffs, foreign-exchange movements, variable timing of large customer deals, subscription-transition execution, and uncertainty that IoT/AR investments and partner channels will produce expected growth. ASC 606 increases reported revenue volatility because some subscription-license revenue is recognized upfront.
- The vacated headquarters had not yet been subleased; management cautioned that restructuring charges and cash outflows could rise if subleasing assumptions are not achieved. The credit facility carries variable interest rates; PTC was in covenant compliance at quarter-end and disclosed leverage, senior-secured leverage and interest-coverage ratios of 2.14x, 0.73x and 8.64x, respectively.
- PTC was appealing an approximately $12 million South Korean tax assessment, which it had paid and recorded as an asset; it had not recorded a tax reserve. Estimated legal claims ranged from $0.5 million to $4.2 million, with $0.4 million accrued. The filing also notes tax audits and $10.3 million of unrecognized tax benefits.
Investor verification points
- Separate ASC 606 reported results from ASC 605 comparison figures when assessing revenue trends and margins.
- Track subscription bookings, ARR and recurring-revenue growth alongside GAAP revenue, and verify whether subscription conversion supports the stated 94% mix target.
- Assess whether operating cash flow can support planned buybacks, capital spending and debt service as the company invests and transitions its licensing model.
- Monitor the headquarters sublease, related cash costs, and the treatment of transition and restructuring charges in non-GAAP measures.
- Follow the South Korean tax appeal, other tax audits, and covenant headroom as variable-rate debt and share repurchases affect liquidity.