PTC Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 29, 2012; comparisons are with the three months ended December 31, 2011 unless otherwise noted. Amounts are in U.S. dollars.
Business context and period
PTC develops software and provides related services for product design and development, product lifecycle management, supply chain management, and after-market services. The quarter included Servigistics, acquired October 2, 2012, which expanded PTC’s service lifecycle management (SLM) offerings.
Financial performance and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Revenue | $319.8 million | $318.3 million |
| Gross profit / margin | $222.7 million / 69.7% | $220.1 million / 69.2% |
| Operating income / margin | $13.9 million / 4.3% | $32.5 million / 10.2% |
| Net income | $35.8 million | $22.1 million |
| Diluted EPS | $0.29 | $0.18 |
| Cash from operations | $13.6 million | $36.5 million |
- Revenue was essentially flat year over year on a GAAP basis and up 2% on a constant-currency basis. Non-GAAP revenue was $321.3 million, including the adjustment for acquired deferred support revenue.
- License revenue declined 11% to $79.2 million; services revenue increased 1% to $76.8 million; support revenue increased 7% to $163.8 million.
- GAAP net income included a $32.6 million non-cash tax benefit related to Servigistics purchase accounting and a valuation-allowance release. The effective tax rate was a 197% benefit, versus a 26% provision in the prior-year quarter.
- Non-GAAP operating income was $58.6 million and non-GAAP operating margin was 18.2%, compared with $58.8 million and 18.4%. Non-GAAP diluted EPS was $0.36 versus $0.35. These measures exclude specified items, including stock compensation, acquired-intangible amortization, acquisition and restructuring costs, and certain tax items.
- Cash and cash equivalents were $248.4 million at quarter end, down from $489.5 million at September 30, 2012, primarily reflecting the $222.4 million Servigistics acquisition, share repurchases, and other cash uses. Operating cash flow was lower year over year, including due to restructuring payments and acquisition-related payments.
- Total debt outstanding under the credit facility was approximately $368.1 million; the balance sheet showed $5.6 million current and $362.5 million long-term. The company reported $80 million available under its revolving facility. It was in compliance with covenants; leverage was 1.5x against a 2.50x maximum, and fixed-charge coverage was 21.9x against a 3.50x minimum.
Material changes versus the prior period
- Servigistics contributed $25.3 million of GAAP revenue and $21.6 million of costs and expenses. Excluding Servigistics, revenue declined 7% year over year, or 6% on a constant-currency basis; organic license revenue fell 22%.
- SLM revenue increased 122% to $45.4 million, reflecting Servigistics and organic growth. CAD revenue fell 9% to $132.0 million, and Extended PLM revenue fell 7% to $142.4 million.
- Europe was the principal area of weakness: revenue declined 10% (6% constant currency), with organic license revenue down 44%. Americas revenue increased 13%; Pacific Rim increased 4%; Japan declined 5%.
- Operating income and GAAP margin fell substantially, primarily because of $15.4 million in restructuring charges and higher acquisition-related costs. Service gross margin improved to 10.6% from 5.5%, which management attributed partly to delivery efficiencies and increased use of service partners.
- Cash used in investing activities was $229.8 million, compared with $8.5 million, mainly due to the acquisition. Goodwill rose to $755.1 million from $610.3 million.
Guidance, management commentary, and risks
- For fiscal 2013, management targeted revenue growth of 7%–9%, license revenue growth of 3%–9%, support growth of approximately 7%, and consulting and training services growth of 8%–12%. The revenue target was reduced from the prior 8%–10% goal.
- Management maintained targets for non-GAAP operating margin of approximately 21.5% and diluted EPS of $1.70–$1.80, citing expected services-margin improvement and restructuring savings.
- Management expected about $30 million of 2013 cash restructuring costs in total, including approximately $15 million of additional charges in Q2. Estimated savings were approximately $9 million per quarter beginning in Q3, with a partial benefit in Q2.
- Management expected sufficient cash and operating cash flow for working capital and capital needs over at least 12 months, including repayment of $120 million of facility borrowings and $55–$75 million of share repurchases during 2013. Planned capital expenditures were approximately $28 million.
- Outlook was subject to uncertain global economic and manufacturing conditions, volatility in large transactions and customer purchasing decisions, foreign-exchange movements, and execution of planned services-margin improvements. The plan assumed $1.33 per euro and 90 yen per U.S. dollar.
- PTC was investigating payments and expenses involving certain China employees and business partners for potential compliance issues, including under the Foreign Corrupt Practices Act. The company had disclosed its investigation to the DOJ and SEC; possible fines or sanctions could not be estimated. China historically accounted for 6%–7% of revenue, and terminations could affect local sales.
- Other contingencies include ordinary-course legal matters and indemnification obligations. The company reported a $0.5 million accrual for legal proceedings and claims and stated it did not expect ordinary-course matters to materially affect its financial condition, results, or cash flows.
Important facts for investors to verify
- Whether organic license demand and large-deal activity recover, particularly in Europe and Japan, and whether SLM growth can be sustained.
- Whether the $32.6 million tax benefit is clearly distinguished from recurring earnings when assessing GAAP net income and EPS.
- Servigistics integration, purchase-price allocation finalization, and the acquisition’s contribution to revenue, margins, cash flow, and debt service.
- Delivery of the fiscal 2013 revenue, margin, and EPS targets, including realization and timing of restructuring savings and costs.
- Progress and potential financial or operating consequences of the China investigation, including any fines, sanctions, or sales disruption.
- Cash generation, scheduled debt repayment, share repurchases, and continued compliance with credit-facility covenants.