PTC Inc. (Parametric Technology Corporation) — Q3 FY2010 Form 10-Q
Reporting period: Quarter ended July 3, 2010; year-to-date figures cover the nine months ended July 3, 2010. Comparatives are the quarter and nine months ended July 4, 2009. Amounts below are U.S. dollars unless stated otherwise.
Business context and performance
PTC develops and supports product-development software and related services, including product lifecycle management (PLM) and computer-aided design (CAx) solutions. Revenue comes from software licenses, maintenance, consulting and training. Management sees large-enterprise PLM as its strongest growth opportunity; enterprise deals can have long sales cycles and make quarterly results volatile.
Key financial metrics
| Metric | Q3 FY2010 | Q3 FY2009 | Nine months FY2010 | Nine months FY2009 |
|---|---|---|---|---|
| Total revenue | $243.0 million | $226.2 million | $742.0 million | $691.8 million |
| License revenue | $67.5 million | $49.5 million | $207.0 million | $142.0 million |
| Service revenue | $175.5 million | $176.7 million | $535.0 million | $549.8 million |
| Operating income | $12.0 million | $2.0 million | $45.8 million | $4.1 million |
| GAAP operating margin | 4.9% | 0.9% | 6.2% | 0.6% |
| Net income | $10.7 million | $3.8 million | $37.6 million | $15.6 million |
| Diluted EPS | $0.09 | $0.03 | $0.31 | $0.13 |
For the first nine months, non-GAAP operating income was $109.8 million versus $75.7 million, non-GAAP operating margin was 14.8% versus 10.9%, and non-GAAP diluted EPS was $0.68 versus $0.50. These measures exclude specified items, including stock-based compensation and acquired-intangible amortization; management cautions they are not substitutes for GAAP results.
- Cash flow and liquidity: Operating cash flow was $141.1 million for the first nine months, versus $64.2 million a year earlier. Cash and equivalents were $219.0 million at July 3, down from $235.1 million at September 30, 2009. Current assets were $534.2 million and current liabilities $439.0 million.
- Debt: No amount was outstanding under the $230 million revolving credit facility at July 3; the company reported the full facility available. It repaid $50.8 million of borrowings during the nine-month period. The facility was due to expire February 20, 2011, and management expected to arrange a new facility in Q4 FY2010.
- Cash uses: The company repurchased $60.0 million of stock, paid $20.3 million in withholding taxes on vested awards, and spent $21.7 million on property and equipment during the first nine months. $20.5 million remained under the repurchase authorization.
- Other metrics: License revenue was 28% of total revenue in the quarter, compared with 22% a year earlier. Days sales outstanding improved to 56 from 62 at September 30, 2009. One customer accounted for approximately 10% of current and noncurrent receivables.
Material changes versus prior periods
- Quarterly revenue rose 7%; license revenue rose 37%, led by 63% growth in Enterprise license revenue, principally Windchill sales to large customers. Desktop revenue declined 1% in the quarter.
- For the first nine months, revenue rose 7% and license revenue rose 46%; Enterprise revenue increased 21%, while Desktop revenue declined 2%.
- Service revenue was nearly flat in the quarter but down 3% year to date. Management attributed continued weakness in consulting, training and maintenance partly to weak 2009 license sales.
- Operating income improved substantially, reflecting higher license revenue and the absence of the prior-year restructuring and in-process R&D charges. Costs and expenses increased 3% in the quarter and 1% year to date; R&D, sales and marketing, and G&A costs increased year to date.
- Year-to-date reported results benefited from currency translation overall: at prior-year exchange rates, revenue would have been about $20.4 million lower and expenses about $15.8 million lower, reducing operating income by approximately $4.6 million.
- The effective tax rate was 8% for the quarter and 15% year to date, versus tax benefits in the comparable 2009 periods. The prior-year nine-month comparison included a $7.6 million one-time tax benefit related to foreign litigation.
Outlook, commentary and risks
- Management expected FY2010 license revenue growth of 35%–40%, primarily from large direct customers; small- and medium-sized customer growth was expected to lag. Maintenance and services revenue were expected to decline modestly from FY2009.
- PTC described global economic conditions and customer spending as uncertain. Slower recovery could delay or reduce technology purchases, lengthen sales cycles, slow adoption and increase price competition. Management planned modest increases in sales, R&D and services investments, but said weaker-than-expected revenue could lead to delaying investments or reducing costs; the investments may not produce expected results.
- Large enterprise transactions, foreign-exchange movements and the concentration of service engagements among fewer customers add volatility. The company reported no goodwill impairment from its annual review as of July 3, 2010.
- GE Japan litigation: A Japanese lawsuit concerning transactions involving Toshiba sought approximately $66 million plus interest and costs. The trial process concluded in July 2010, with a judgment expected as early as late summer or fall 2010. PTC had deferred $53.1 million of previously recognized revenue as customer advances and accrued no additional liability because any further amount was not estimable. A judgment could materially affect cash and, if above the deferred amount, earnings.
- Tax uncertainty: Unrecognized tax benefits were $18.2 million; the company said certain audit settlements within 12 months could reduce that balance by up to $5 million. Management also noted that continued U.S. losses could affect its assessment of deferred tax asset realizability.
- Management believed cash, cash generated from operations and available borrowing capacity would meet working-capital and capital-expenditure needs for at least the next 12 months, excluding possible significant acquisitions or litigation payments. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether FY2010 license growth reaches management’s 35%–40% expectation, and whether service and maintenance trends stabilize.
- The outcome and financial impact of the GE Japan case, including whether any payment exceeds the $53.1 million customer-advance liability.
- Terms and availability of the replacement credit facility before the existing facility’s February 2011 expiration.
- How much reported growth and profitability depend on Enterprise license deals, currency movements and large-customer spending.
- Future U.S. taxable results, deferred tax asset assessments and developments in tax audits and unrecognized tax benefits.