PTC Inc. (Parametric Technology Corporation) — Q2 FY2011 Form 10-Q
Reporting period: Three and six months ended April 2, 2011; comparisons are with the corresponding 2010 periods. Amounts are in U.S. dollars unless noted.
Business context and financial performance
PTC develops and supports product-development software, including product lifecycle management (PLM) and computer-aided design (CAx) products, plus maintenance, consulting and training services.
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Revenue | $269.2 million | $240.6 million | $535.7 million | $499.0 million |
| Operating income (GAAP) | $24.2 million | $11.5 million | $41.3 million | $33.9 million |
| Operating margin (GAAP) | 9.0% | 4.8% | 7.7% | 6.8% |
| Net income | $19.0 million | $9.0 million | $32.3 million | $26.9 million |
| Diluted EPS (GAAP) | $0.16 | $0.08 | $0.27 | $0.22 |
| Non-GAAP operating income | $42.3 million | $32.7 million | $77.6 million | $77.9 million |
| Non-GAAP diluted EPS | $0.26 | $0.20 | $0.48 | $0.47 |
Q2 revenue increased 12% (11% constant currency); six-month revenue rose 7%. For Q2, license revenue grew 15%, maintenance 7%, and consulting and training 19%. Desktop revenue increased 15% in Q2, including 40% growth in Desktop licenses; Enterprise revenue rose 8%, although Enterprise license revenue fell 15%. The six-month revenue increase was led by Desktop, up 11%, while Enterprise revenue rose 3%.
- Cash flow: Operating cash flow was $30.2 million for the six months, versus $90.7 million a year earlier. Management reported Q2 operating cash flow of $78.3 million, compared with $67.9 million in Q2 FY2010.
- Liquidity and debt: Cash and cash equivalents were $259.5 million at April 2, up from $240.3 million at September 30, 2010. No revolving-credit borrowings were outstanding. The $300 million facility matures in 2014; PTC reported covenant compliance.
- Balance sheet: Total assets were $1.347 billion and total liabilities $544.1 million. Current assets were $625.0 million and current liabilities $437.7 million. Deferred revenue totaled $300.3 million, including $294.4 million current.
Material changes versus the prior comparable period
- Q2 GAAP operating income more than doubled, reflecting revenue growth and higher operating contribution. Six-month non-GAAP operating income was essentially flat despite higher revenue.
- Six-month operating cash flow declined by $60.5 million, primarily reflecting the litigation settlement (a $52.1 million cash payment in the cash-flow statement), higher cash payments related to compensation accruals, and other working-capital movements. Management described the settlement as reducing cash by approximately $48 million.
- Q2 Desktop license growth contrasted with lower Enterprise licenses; management cited unusually large Windchill transactions in the 2010 comparison period.
- PTC recorded an estimated $5 million loss in Q1 on a strategic automotive services contract expected to cost more to complete than its revenue. The charge reduced first-half GAAP and non-GAAP operating income.
- PTC made no share repurchases in the first six months of FY2011, compared with $45.1 million of repurchases in the comparable 2010 period. A $200 million authorization had $118 million remaining.
Outlook, management commentary and risks
- Management expected FY2011 revenue growth of 11%–12%, license revenue growth of 15%–20%, and combined maintenance and services growth above 10%. The filing cautions that the economic recovery remained uncertain and results could fluctuate with large customer transactions.
- PTC planned product releases, including Creo in June 2011, and said it was modestly increasing strategic investment; it could reduce or delay investments or cut operating costs if revenue fell short.
- After quarter-end, PTC announced an agreement to acquire MKS Inc. for approximately CDN$292.5 million, subject to approvals and other customary conditions. PTC expected to fund the purchase with about $250 million borrowed under its credit facility and $54 million cash. Management expected the transaction to be neutral to FY2011 non-GAAP results and slightly accretive in FY2012; closing was expected in early June 2011.
- PTC entered into Canadian-dollar forward contracts with a notional amount of CDN$292 million to reduce currency exposure associated with the proposed MKS purchase. Currency movements also affect ordinary operations: roughly two-thirds of revenue and half of expenses were transacted in non-U.S. currencies.
- Management identified potential exposure to a prolonged or worsening disruption in Japan following the earthquake and tsunami, volatility from large deals, customer purchasing delays, foreign-exchange movements, product-launch execution, and the possibility that the MKS acquisition may not close or deliver expected results.
- The European Commission was investigating alleged anti-competitive practices in CAD and related software markets. PTC said it was cooperating; no charges or proceedings had been initiated against PTC. The Commission could impose significant fines if it finds violations.
- Unrecognized tax benefits were $17.6 million. PTC said some tax audits might be resolved within 12 months and could reduce those benefits by up to $5 million. Pending Japanese tax legislation could result in an estimated $3 million non-cash tax charge if enacted.
- Management stated disclosure controls were effective as of April 2, 2011 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the MKS acquisition closed on the expected terms and schedule, and the resulting borrowing, integration costs and financial contribution.
- Whether FY2011 revenue-growth expectations were achieved, particularly given the divergence between Desktop and Enterprise license trends and the dependence on large customer deals.
- Cash-flow normalization after the litigation payment and compensation-related outflows; reconcile the reported Q2 cash flow with the six-month cash-flow statement.
- Progress and profitability of the automotive services contract, and whether the estimated $5 million loss changes.
- Developments in the European Commission inquiry, tax audits and potential Japanese tax-law effects.