PTC Inc. — Q3 FY2020 Form 10-Q
Reporting period: Fiscal third quarter ended June 27, 2020; comparisons are with the quarter ended June 29, 2019. Year-to-date figures cover nine months. Amounts are in U.S. dollars unless stated otherwise.
Business context and financial performance
PTC sells industrial software and related services, including CAD, PLM, IoT, augmented reality and Onshape products. The company reported that COVID-19 was weighing on new business sales and services delivery, while recurring revenue and renewals supported results.
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Total revenue | $351.7m (+19%) | $295.5m | $1,067.4m (+16%) | $920.6m |
| Recurring revenue | $310.6m (+27%) | $244.2m | $931.9m (+27%) | $734.8m |
| Professional services revenue | $34.3m (-18%) | $42.1m | $111.6m (-10%) | $124.5m |
| Gross margin | $272.5m; 77% | $212.8m; 72% | $817.8m; 77% | $680.7m; 74% |
| Operating income | $63.4m; 18.0% margin | $9.3m; 3.1% margin | $143.9m; 13.5% margin | $16.5m; 1.8% margin |
| Net income (loss) | $34.7m; $0.30 diluted EPS | $(14.8)m; $(0.13) diluted EPS | $77.3m; $0.67 diluted EPS | $(37.3)m; $(0.32) diluted EPS |
| Non-GAAP diluted EPS | $0.62 | $0.23 | $1.78 | $1.01 |
Q3 GAAP operating margin and EPS improved substantially year over year. Management attributed this to revenue growth, spending discipline, and lower travel, event and variable-compensation costs. Non-GAAP measures exclude, among other items, stock compensation, acquired-intangible amortization, restructuring, acquisition costs and specified debt-redemption charges; they should be considered alongside GAAP results.
Cash flow, liquidity and debt
- Operating cash flow: $199.8m for nine months, down from $229.9m. Q3 operating cash flow was $104.5m versus $67.6m. Year-to-date cash flow was affected by higher restructuring and tax payments and the prior-year receipt of tenant reimbursements.
- Investing and financing: Nine-month cash used in investing was $497.0m, including $468.5m net cash paid for Onshape. Financing provided $408.5m, including issuance of $1.0bn of new notes and repayment/redemption of $500m of older notes.
- Cash and securities: At June 27, cash and cash equivalents were $377.4m; marketable securities were $57.8m. Total cash, restricted cash and marketable securities were about $435.7m.
- Debt: Total principal debt was $1.138bn: $500m of 4.0% notes due 2028, $500m of 3.625% notes due 2025 and $138m drawn on the revolver. Net debt carrying value was $1.125bn. The $500m of 6.0% notes due 2024 was redeemed at 103% of principal; the redemption generated a $15m premium and approximately $3m of debt-cost write-offs.
- Liquidity and covenants: The $1bn revolving facility had $845.5m undrawn, of which $597.3m was available for borrowing. PTC reported compliance with debt covenants; leverage was 2.97x against a 4.50x maximum, and interest coverage was 6.78x against a 3.00x minimum.
Material changes and unusual items
- Recurring revenue grew 27% in Q3, while management cited approximately 20% lower new license sales and modestly worse churn. Q3 subscription license revenue rose sharply in part because PTC discontinued annual cancellation rights on substantially all new multi-year contracts early in Q4 FY2019, allowing more on-premise subscription license revenue to be recognized upfront. Management cautioned that this accounting/timing effect would lessen in Q4 FY2020 and beyond.
- Onshape was acquired in November 2019 for approximately $469m net of cash acquired, funded through the credit facility. The acquisition added $364.9m of goodwill; the company said Onshape was not expected to be material to FY2020 results.
- Year-to-date restructuring and other charges were $32.3m, including $31.3m for a plan involving approximately 255 employees, associated with Onshape synergies and operational realignment. The prior-year comparable charge was $45.5m.
- PTC adopted the new lease accounting standard on October 1, 2019, recognizing an operating lease liability of $224.0m and a right-of-use asset of $167.9m at adoption. The Boston headquarters lease runs through June 2037.
- Management’s annual goodwill impairment test found estimated fair value significantly above carrying value for each reporting unit. No impairment was reported.
Outlook, commentary and risks
Management’s FY2020 outlook anticipated ARR growth of approximately 11%–12%, revenue growth of approximately 13%–14%, and an 800–900 basis-point increase in operating margin versus FY2019 (700–800 basis points on a non-GAAP basis). It expected new bookings to decline approximately 15% for the year and approximately 25% in the second half, with churn around 8% versus 7.4% in FY2019. The company expected operating-expense growth of roughly 3% and approximately $50m less operating cash flow than FY2019. It projected FY2020 capital expenditures of $22m and said available liquidity should cover expected needs for at least twelve months.
PTC suspended FY2020 share repurchases and expected to resume them in FY2021. It also cited risks of delayed or reduced customer purchases, subscription reductions or payment delays, longer sales cycles, difficulty implementing solutions requiring on-site work, and weaker services revenue. Management stated that pandemic-related assessments had not materially affected the quarter’s financial statements, but future effects could be material if the pandemic’s magnitude or duration differed from expectations.
Other items to monitor include the South Korean tax dispute: PTC paid an approximately $12m assessment and is appealing; it estimated potential additional exposure of approximately $16m if the tax authorities prevail, while stating it believes its position is sustainable. PTC reported $14.7m of unrecognized tax benefits and ongoing tax audits. For legal proceedings and claims, it estimated a possible range of $0.4m–$2.5m and had accrued $0.5m; it did not expect current matters to materially harm results, though outcomes are uncertain. PTC reported disclosure controls were effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether FY2020 ARR and revenue guidance, expected bookings decline and approximately 8% churn were achieved, and how much reported revenue reflected upfront recognition from the contract-cancellation policy change.
- Whether COVID-19 effects on new bookings, renewals, collections and implementation services developed as management expected, and the resulting impact on cash generation.
- Debt reduction capacity, covenant headroom, refinancing/interest costs and the planned timing of any return to share repurchases.
- Onshape integration, expected synergies and the assumptions supporting goodwill and acquired intangible-asset values.
- Resolution and potential financial impact of the South Korean tax appeal, other tax audits and legal contingencies.