PTC Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended April 1, 2017; comparisons are to periods ended April 2, 2016. Amounts are in U.S. dollars unless noted.
Business context and reporting period
PTC sells CAD, PLM and SLM software and related services, alongside IoT, analytics and augmented-reality products. The company continued shifting from perpetual licenses toward subscriptions. Management said subscription adoption was driving growth in recurring revenue but continued to weigh on near-term revenue, operating margin and earnings.
Financial performance and liquidity
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Revenue | $280.0m | $272.6m | $566.4m | $563.6m |
| Gross margin | $198.2m; 71% | $192.4m; 71% | $402.4m; 71% | $403.3m; 72% |
| Operating income (loss) | $7.5m | $1.8m | $12.1m | $(11.5)m |
| Net loss | $(1.1)m | $(5.2)m | $(10.2)m | $(29.1)m |
| GAAP diluted loss per share | $(0.01) | $(0.05) | $(0.09) | $(0.25) |
| Non-GAAP diluted EPS | $0.30 | $0.23 | $0.56 | $0.74 |
| Cash provided by operating activities | $76.4m | $48.9m | $28.4m | $110.1m |
Q2 operating margin was 2.7%, versus 0.6%; six-month operating margin was 2.1%, versus negative 2.0%. Q2 revenue rose 3% year over year, while first-half revenue was approximately flat (up 1% on a constant-currency basis). Subscription revenue increased 178% in Q2 and 162% for the first half; support revenue declined 12% and perpetual-license revenue declined 31% in Q2. Professional-services revenue fell 7% in both periods.
At April 1, cash and cash equivalents were $243.3m and marketable securities were $48.2m, for total cash and investments of $291.5m. Total debt was $718.1m, including $500m of 6% senior notes due 2024 and $218.1m outstanding on the revolving credit facility. The facility’s commitment was reduced to $600m in March 2017, and the permitted total leverage ratio was raised to 4.50:1.00. PTC reported a 3.25:1.00 total leverage ratio and compliance with its covenants. Six-month cash declined by $34.6m.
Deferred revenue was $492m and unbilled deferred revenue was $389m, totaling $881m, up 34% year over year. The company reported $718m of total debt in its overview; balance-sheet debt net of issuance costs was $712.0m.
Material changes versus the prior comparable period
- Subscription bookings were 71% of total bookings in Q2, compared with 54% a year earlier; for the first half, they were 68%, compared with 42%. License and subscription bookings rose 11% in Q2 and 20% in the first half.
- Recurring revenue represented approximately 88% of Q2 subscription, support and license revenue, up from 82% a year earlier. Management said Q2 was the first year-over-year revenue increase since the subscription transition began and characterized the company as exiting the “subscription trough.”
- Q2 IoT Group revenue increased 23% to $23.5m; Solutions Group revenue increased 1% to $256.5m. First-half Solutions Group revenue fell 2%, while IoT Group revenue rose 38%.
- Interest expense increased to $11.7m in Q2 and $22.0m for the first half, largely reflecting the 6% senior notes issued in 2016. First-half operating cash flow fell to $28.4m from $110.1m, with management citing lower receivable collections, higher bonus and commission payments, bond interest and the Korean tax assessment payment.
- Restructuring charges declined to $0.5m in Q2 and $6.7m for the first half, from $4.6m and $41.7m, respectively, in 2016. The restructuring plan was substantially complete.
Outlook, management commentary and risks
- Management expected the subscription transition’s headwind to revenue and earnings to ease in the second half of FY2017, while noting the transition would continue to affect results until customer conversion is complete. No clear numerical full-year guidance is provided in the supplied filing text.
- Beginning January 1, 2018, new licenses for core Solutions and ThingWorx were to be subscription-only in the Americas and Western Europe. Management cautioned this could cause customers to accelerate or delay purchases ahead of the change.
- PTC expected approximately $3m of additional restructuring charges in Q3 FY2017 and did not expect net operating-expense reductions in 2017, as savings were expected to be offset by planned spending and investment.
- Management cited continued uncertainty in global manufacturing conditions and potential adverse effects from foreign-exchange movements. Approximately two-thirds of revenue and half of expenses are transacted in currencies other than the U.S. dollar.
- A customer disputed an invoiced receivable; if collection efforts fail, the potential write-down could range from $0 to $17.3m, with a possible impact on receivables and professional-services revenue.
- PTC paid a roughly $12m Korean tax assessment while appealing it and recorded the payment in other assets pending resolution; it had not recorded a tax reserve. A shareholder class action relating to disclosures about the China investigation had a proposed settlement described as not material, pending final court approval.
- Management said existing cash, operating cash flows and available credit were expected to meet working-capital and capital needs for at least 12 months. A significant portion of cash was held outside the U.S.; repatriation could involve significant taxes.
- PTC resumed share repurchases in Q3; it had repurchased $19m through May 10, 2017.
Important facts for investors to verify
- Whether subscription bookings, deferred revenue and recurring-revenue growth continue to translate into recognized revenue, margins and cash generation.
- The actual borrowing capacity under the credit facility: the filing gives differing figures for available capacity ($280m in one discussion and $260m in another), despite citing $382m undrawn commitment.
- Collection outcome and accounting impact of the disputed $17.3m receivable, and the resolution of the Korean tax appeal and shareholder settlement.
- Execution of the subscription-only licensing change, the expected timing of the subscription-trough recovery, and the effects of currency movements and global manufacturing demand.
- Cash requirements for debt service, restructuring, share repurchases and other strategic uses, in light of reduced first-half operating cash flow and covenant-limited borrowing capacity.