PTC Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2018; comparisons are to the periods ended July 1, 2017. Amounts are in U.S. dollars unless noted.
Business context
PTC sells industrial software and related services, including CAD, PLM, SLM, IoT and augmented-reality solutions. The company is shifting from perpetual licenses toward subscriptions. New core and ThingWorx licenses were subscription-only in the Americas and Western Europe from January 1, 2018; the company planned to make these offerings subscription-only globally beginning January 1, 2019, while Kepware would remain available under perpetual licensing.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Revenue | $314.8 million | $291.3 million | $929.3 million | $857.7 million |
| Operating income | $21.7 million | $11.3 million | $61.5 million | $23.3 million |
| Operating margin | 6.9% | 3.9% | 6.6% | 2.7% |
| Net income (loss) | $17.0 million | $(1.0) million | $38.8 million | $(11.2) million |
| Diluted EPS | $0.14 | $(0.01) | $0.33 | $(0.10) |
- Q3 revenue grew 8% reported (5% constant currency). Subscription revenue rose 69% to $126.7 million, while support revenue fell 14% to $121.1 million and perpetual license revenue fell 20% to $25.8 million. Professional services revenue decreased 6% to $41.2 million.
- Recurring revenue was $247.8 million, up 15%; it represented about 91% of software revenue, versus 87% a year earlier. Q3 gross margin was $233.2 million, or 74% of revenue, compared with $209.0 million, or 72%.
- Q3 non-GAAP operating margin was 17.9%, versus 15.4%; non-GAAP diluted EPS was $0.36, versus $0.28. These measures exclude specified items, including stock compensation, acquired-intangible amortization and restructuring or relocation charges.
- Operating cash flow for the first nine months was $185.3 million, compared with $102.5 million. The increase reflected higher receivable collections, lower restructuring payments and the prior-year Korean tax-assessment payment.
- At June 30, cash and cash equivalents were $266.6 million and marketable securities were $54.2 million, totaling $320.7 million. Gross debt was $698.1 million; balance-sheet debt, net of issuance costs, was $693.1 million. The $600 million revolving facility had $198.1 million drawn and about $384 million of borrowing capacity. Its maturity is September 15, 2019.
Material changes and management commentary
- Subscription transition continued to shift revenue mix: subscription growth more than offset declining support and perpetual-license revenue. License and subscription bookings increased 26% in Q3 to $113 million; subscription ACV rose 54% to $44 million. ARR was approximately $994 million, up 15% year over year.
- Billed and unbilled deferred revenue totaled $1.210 billion, up 33% year over year. Unbilled deferred revenue rose 64% to $726 million.
- Management attributed improved operating performance to revenue growth and the developing subscription model, while reporting higher sales and marketing and R&D spending. It expects continued operating-margin expansion in 2018 and further expansion in 2019 and beyond. The filing refers to fiscal 2018 targets but does not provide a clear numerical value for those targets in the supplied text.
- Management expects 2018 capital expenditures of about $40 million and believes available cash, operating cash flow and credit-facility access will cover working capital and capital needs for at least the next 12 months.
- After quarter-end, Rockwell Automation invested $1.0 billion for 10,582,010 PTC shares at $94.50 per share and joined PTC’s board. PTC entered a separate $1.0 billion accelerated share repurchase agreement, funded with the investment proceeds; 8,244,873 shares, valued at $800 million, were initially delivered, with final settlement expected 7.5 to 10 months after execution.
Outlook, risks and unusual items
- Adoption of the new revenue-recognition standard in fiscal 2019 is expected to accelerate recognition of some subscription license revenue upon delivery. PTC anticipates a material adjustment of deferred revenue to retained earnings at adoption, without restating historical revenue, and expects more revenue to fall in the quarter a contract begins. The company also expects to capitalize and amortize qualifying sales commissions.
- The subscription transition may weigh on revenue, margins and EPS until the customer base transition is complete and the model matures. Results are also exposed to foreign-exchange movements; roughly two-thirds of revenue and half of expenses are transacted in currencies other than the U.S. dollar.
- The Q3 tax benefit included a $5.4 million reduction in estimated state taxes related to U.S. tax reform. The nine-month tax provision also reflected a $14.1 million deferred tax benefit estimate under the Tax Act. Effective tax rates were unusually negative: (70)% for Q3 and (39)% for the first nine months. Tax estimates remain subject to change, and the company said it could not yet reasonably estimate certain future Tax Act effects.
- PTC is seeking to exit or sublease its current headquarters ahead of its 2019 move. Failure to sublease on favorable terms could lead to overlapping rent and additional charges; management noted this risk could arise as it ceases use of the current space, likely in fiscal Q2 2019. The filing describes aggregate annual current-site rent obligations of about $12 million.
- A customer disputes a receivable under a multi-year contract. If collection efforts fail, a write-down could range from $0 to $17.3 million, potentially affecting receivables and professional-services revenue. Separately, PTC is appealing a Korean tax assessment of approximately $12 million; it has paid the amount and recorded it in other assets, but has not accrued a tax reserve.
- PTC estimated legal proceedings and claims at $1.1 million to $3.1 million and had accrued $1.0 million. It stated that other pending legal matters were not expected to have a material adverse impact, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether bookings and subscription growth convert into recognized revenue and cash generation as the licensing transition progresses.
- The fiscal 2019 revenue-recognition adoption impact, including the retained-earnings adjustment and resulting quarterly revenue pattern.
- Final settlement and share count under the $1.0 billion Rockwell-funded ASR, and the effects of the investment and repurchase on shares outstanding and capital allocation.
- Resolution of the disputed receivable, Korean tax appeal, and current-headquarters lease exposure.
- Debt maturity, borrowing capacity and covenant compliance, particularly as the revolving facility approaches its September 2019 maturity.