Business context and reporting period
PTC Inc. develops software and related services for product design, lifecycle management, and service operations. This unaudited Form 10-Q covers the quarter ended June 29, 2013, and the first nine months of fiscal 2013, compared with the corresponding 2012 periods. PTC acquired Servigistics in October 2012; its results are included from the acquisition date.
Financial performance
| Metric | Q3 2013 | Q3 2012 | First 9 months 2013 | First 9 months 2012 |
|---|---|---|---|---|
| Revenue | $315.0 million | $311.0 million | $948.7 million | $930.4 million |
| GAAP gross margin | $223.8 million; 71% | $218.1 million; 70% | $667.2 million; 70% | $646.1 million; 69% |
| Operating income | $43.2 million | $31.1 million | $78.3 million | $70.5 million |
| Operating margin | 13.7% | 10.0% | 8.3% | 7.6% |
| Net income | $34.5 million | $22.9 million | $87.3 million | $48.6 million |
| Diluted EPS | $0.29 | $0.19 | $0.72 | $0.40 |
| Cash from operations | $84.6 million | $64.0 million | $181.0 million | $197.0 million |
Q3 support revenue rose 7% to $162.6 million, while license revenue fell 5% to $79.9 million and service revenue fell 3% to $72.5 million. Servigistics contributed $22.5 million of Q3 revenue and $68.0 million year to date. Organic Q3 revenue, excluding Servigistics, declined 6% year over year (4% at constant currency). Non-GAAP diluted EPS was $0.45 for Q3 and $1.22 year to date; these non-GAAP measures exclude specified items, including restructuring, acquisition costs, stock compensation and acquired-intangible amortization.
Liquidity, debt and capital allocation
Cash and equivalents were $257.0 million at June 29, 2013, down from $489.5 million at September 30, 2012. The nine-month cash decline primarily reflected the $220.8 million Servigistics acquisition, $101.9 million of debt repayments, $54.9 million of share repurchases, and other uses, partly offset by operating cash flow. Total credit-facility borrowings were $268.1 million; $176 million remained available under the revolving facility. The annual borrowing rate was 1.6875% at quarter-end. PTC reported compliance with covenants, with a 0.99:1 leverage ratio against a maximum of 2.50:1 and a 19.62:1 fixed-charge coverage ratio against a minimum of 3.50:1. The company expected existing cash and operating cash flow to cover working-capital, capital-expenditure and known longer-term needs for at least 12 months.
Material changes, outlook and commentary
- Management said revenue was at the low end of expectations and earnings at the high end. It cited weak global manufacturing conditions, especially in Europe and China, and unfavorable currency movements as revenue headwinds. Q3 revenue grew 1% reported and 4% at constant currency; reported organic revenue declined.
- Revenue mix shifted toward recurring support: support was 52% of revenue versus 49% a year earlier, while license was 25% versus 27%. Americas revenue increased 15% in Q3; Europe declined 4% and Pacific Rim declined 17%. SLM revenue rose substantially, principally reflecting the Servigistics acquisition.
- PTC reduced its fiscal 2013 revenue growth outlook from the previously announced 4%–5% to 2%–3%, including approximately $90 million from Servigistics. Its targets were support growth of about 7%, license revenue down 1%–4%, and service revenue down about 1%. Fiscal 2013 targets remained non-GAAP operating margin of approximately 21.5% (GAAP approximately 11%) and non-GAAP diluted EPS of $1.72–$1.77 (GAAP $1.04–$1.09). Targets assumed exchange rates of $1.30 per euro and 100 yen per U.S. dollar. Management expected fourth-quarter growth in Europe, despite recent weakness.
- Restructuring charges were $34.3 million year to date, associated with approximately 351 employees notified of termination and facility actions. PTC expected approximately $32 million of 2013 cash restructuring payments and about $10 million of quarterly savings when fully realized; approximately $1 million of additional restructuring charges was expected in Q4.
- Reported nine-month net income included a $32.6 million tax benefit from a partial release of the U.S. deferred-tax valuation allowance, alongside other tax benefits. Q3 other income included a $5.1 million legal-settlement gain. These items make reported earnings less directly comparable with underlying operating performance.
Risks and contingencies
PTC was cooperating with the SEC and Department of Justice concerning China-related payments and expenses that raised questions under laws including the Foreign Corrupt Practices Act. Discussions about possible resolution had begun, but PTC could not estimate timing or potential fines and had accrued no liability. China historically represented 6%–7% of revenue; PTC said employee and partner terminations could affect sales there. Other risks cited include macroeconomic and foreign-exchange uncertainty, dependence on large and potentially volatile customer transactions, execution of restructuring and service-margin plans, tax audits, and ordinary-course legal claims. The company reported no material change in market-risk exposure and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether fiscal 2013 revenue and GAAP/non-GAAP earnings targets were achieved, and how results compared with the revised outlook.
- Organic license and service trends by region, particularly Europe, China and the Pacific Rim, and the contribution from large transactions.
- Cash generation, cash balances, debt repayments, variable-rate exposure, and continuing compliance with credit-facility covenants.
- Realized savings and cash costs from restructuring, alongside any effects on revenue, service delivery and staffing.
- Any resolution, penalties or business consequences from the China investigation, and developments in deferred-tax assets, valuation allowances and tax audits.