Business context and reporting period
PTC Inc. develops software and related services for product design, product lifecycle management and service lifecycle management. This unaudited Form 10-Q covers the fiscal second quarter and six months ended March 30, 2013; comparisons are with the periods ended March 31, 2012. Amounts below are in U.S. dollars.
PTC acquired Servigistics in October 2012 for $222.4 million net of cash acquired. Servigistics contributed $20.2 million of second-quarter revenue and $45.5 million for the six-month period.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $313.9 million | $301.1 million | $633.7 million | $619.4 million |
| Gross margin | $220.7 million; 70% | $207.9 million; 69% | $443.4 million; 70% | $428.0 million; 69% |
| Operating income (margin) | $21.2 million (6.8%) | $6.9 million (2.3%) | $35.1 million (5.5%) | $39.4 million (6.4%) |
| Net income | $17.0 million | $3.6 million | $52.8 million | $25.7 million |
| Diluted EPS | $0.14 | $0.03 | $0.44 | $0.21 |
| Operating cash flow | $82.8 million | $96.5 million | $96.4 million | $133.0 million |
Second-quarter revenue rose 4% year over year (6% at constant currency), but was down 2% organically excluding Servigistics. License revenue increased 7% for the quarter, while service revenue declined 4% and support revenue rose 7%. For the six months, revenue increased 2%, while operating income declined 11%.
Q2 non-GAAP operating margin was 20.0%, versus 16.8%; non-GAAP diluted EPS was $0.41, versus $0.30. These non-GAAP measures exclude, among other items, stock-based compensation, acquired-intangible amortization, acquisition costs and restructuring charges; they should be considered alongside GAAP results.
Balance sheet, liquidity and cash flow
At March 30, 2013, cash and cash equivalents were $240.8 million, down from $489.5 million at September 30, 2012. Current assets were $645.2 million and current liabilities $499.1 million. Total debt was approximately $308.1 million: $146 million under the term loan and $162 million under the revolving facility. The company reported $138 million of revolving capacity available.
Six-month operating cash flow was $96.4 million. Investing activities used $234.8 million, principally the $222.4 million Servigistics acquisition; financing activities used $106.7 million, including $61.9 million of net debt repayments and $34.9 million of share repurchases. PTC reported compliance with credit-facility covenants: leverage ratio 1.2 against a maximum 2.5, and fixed-charge coverage 21.4 against a minimum 3.5.
Material changes and management commentary
- SLM revenue more than doubled year over year in Q2 to $37.8 million, reflecting Servigistics and organic growth. CAD and Extended PLM revenue declined 3% and 2%, respectively.
- Management cited soft global manufacturing conditions, delayed or smaller customer purchases, and fewer large license deals—particularly in Europe—as headwinds. Service revenue also weakened with lower license-related demand and greater use of third-party service partners.
- PTC recorded $31.2 million of restructuring charges in the first six months, including actions affecting 288 employees. It expects approximately $30 million of related cash expenditures in 2013 and approximately $9 million of quarterly cost savings once fully realized, beginning in Q3.
- Cash flow from operations fell year over year, partly due to restructuring payments, Servigistics-related compensation liabilities and acquisition costs. Gross margin improved, including higher six-month service margins, while the revenue mix included a lower share of high-margin license revenue.
Outlook, risks and unusual items
Management lowered its fiscal 2013 revenue-growth goal to 4%–5%, including Servigistics, from a prior 7%–9% plan, but maintained earnings targets. Targets were license revenue growth of 0%–3%, support growth of about 6%, service growth of about 3%, non-GAAP operating margin of approximately 21.5% and non-GAAP EPS of $1.70–$1.80 (GAAP EPS of $1.03–$1.13). The plan assumed exchange rates of $1.31 per euro and 100 yen per U.S. dollar. Management expected $120 million of credit-facility repayments, $55–$75 million of share repurchases and approximately $28 million of capital expenditures in fiscal 2013.
Six-month GAAP net income included a $32.6 million non-cash tax benefit from reducing a deferred-tax valuation allowance following the Servigistics acquisition. Q2 also included tax benefits of $2.7 million for U.S. R&D credits and $3.2 million from resolution of tax matters. These items make reported earnings and the effective tax rate less representative of underlying operations.
PTC was cooperating with the SEC and Department of Justice regarding questions about payments and expenses involving certain China business partners and employees, potentially implicating the Foreign Corrupt Practices Act. Discussions about possible resolution had begun; PTC could not estimate timing or potential fines and had recorded no liability. China historically generated 6%–7% of revenue, and related personnel and partner terminations could affect sales. Other risks include macroeconomic and foreign-exchange uncertainty, large-deal volatility, execution of restructuring savings, and credit-facility restrictions.
Important facts for investors to verify
- Whether the revised fiscal 2013 revenue and earnings targets were achieved, and how much growth was organic versus attributable to Servigistics.
- Whether restructuring savings materialized as expected and whether further restructuring or cost actions were required.
- The outcome and financial or commercial consequences of the China investigation, including any fines, penalties or sales disruption.
- Cash generation, debt repayments, planned repurchases and covenant headroom, given the lower cash balance and acquisition-related borrowing.
- The sustainability of operating performance after excluding restructuring, acquisition, amortization, stock-compensation and discrete tax items.