PTC Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended December 31, 2022. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context and performance
PTC provides software for product design, product lifecycle management, and related services. Its offerings include on-premises, cloud, and hybrid delivery. The company reports Software Products and Professional Services segments.
- ARR, a company-defined operating measure, was $1.663 billion, up 11% year over year, or 15% in constant currency; organic constant-currency growth was 14%. Growth included Codebeamer, acquired in Q3 FY2022.
- Management reported new bookings below expectations and signs of a softening economy, while ARR growth reflected new bookings and improved churn.
Financial results and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 | Change or context |
|---|---|---|---|
| Total revenue | $465.9 | $457.7 | Up 2% reported; up 9% constant currency |
| Recurring revenue | $417.1 | $405.1 | Up 3% reported; up 10% constant currency |
| Professional services revenue | $35.6 | $44.1 | Down 19% reported |
| Gross margin | $370.1; 79% | $362.6; 79% | Margin percentage unchanged |
| Operating income | $104.9; 22.5% margin | $62.2; 13.6% margin | Up 69%; prior period included $34.0 of restructuring charges |
| Net income | $75.0 | $46.1 | Up 63% |
| Diluted EPS | $0.63 | $0.39 | Non-GAAP diluted EPS was $0.99 and $0.95, respectively |
| Cash from operations | $180.9 | $137.7 | Up $43.2 |
| Free cash flow | $171.7 | $134.4 | Cash from operations less capital expenditures |
Software revenue grew 4% reported (11% constant currency). PLM revenue increased 8% reported and CAD revenue declined 1%; both grew in constant currency. Professional services revenue and its gross margin percentage declined, consistent with PTC’s strategy to rely more on partners to deliver services.
Operating expenses were $265.2, down 12%, largely because Q1 FY2022 included restructuring charges. Research and development expense increased 9%. Interest and debt premium expense rose to $16.4 from $13.0; the average borrowing rate was 4.2% versus 3.2%. The effective tax rate was 13%, compared with 17%.
At December 31, 2022, cash and cash equivalents were $387.6, current assets were $1,126.8, and current liabilities were $786.7. Debt was $1,359.0 gross ($1,351.2 net of note issuance costs), comprising $1.0 billion of senior notes and $359.0 drawn on the prior revolver. PTC reported compliance with debt covenants and $625.3 available to borrow under that facility.
Material changes and subsequent events
- Operating cash flow increased, primarily due to higher collections associated with ARR growth and lower salary-related payments. Free cash flow also increased; capital expenditures were $9.2 versus $3.4.
- Foreign currency was a headwind to reported year-over-year results. Currency effects also contributed to a $60.0 million increase in goodwill during the quarter, principally from translation.
- On January 3, 2023, after quarter-end, PTC acquired ServiceMax for a preliminary purchase price of $1.478 billion net of cash acquired. It paid $835 million at closing; a further $650 million is due October 2, 2023, without interest and not subject to contingencies.
- PTC replaced its prior credit agreement with a $1.25 billion revolving facility and a $500 million term loan. It borrowed $630 million on the new revolver and $500 million under the term loan; total outstanding debt after these transactions was approximately $2.13 billion.
Outlook, risks, and unusual items
- Management expected FY2023 capital expenditures of approximately $20 million and considered cash, operating cash flow, and credit availability sufficient for known requirements over at least the next 12 months.
- PTC expected to reduce new revolver borrowings to approximately $450 million by the end of Q2 FY2023, use a substantial portion of FY2023 and FY2024 operating cash flow to repay debt, and not repurchase shares during those periods. Management also expected interest expense to rise due to acquisition-related debt and variable rates.
- Management expects professional services revenue to trend down over time as the company expands its partner-delivery model. Revenue comparisons can vary with contract mix, duration, and the timing of license recognition.
- Risks identified include macroeconomic deterioration, inflation and higher rates, foreign-exchange volatility, customer purchase delays or reduced subscriptions, slower SaaS adoption, and challenges realizing or integrating ServiceMax and other strategic investments.
- The prior-year comparison included a $9.8 million gain on an equity investment and $34.0 million of restructuring charges; Q1 FY2023 included a $0.3 million net restructuring credit. The 401(k) class-action settlement received final court approval, and the insurer funded the settlement.
Important facts for investors to verify
- Whether bookings and ARR growth recover or weaken amid the economic conditions flagged by management.
- ServiceMax integration, cash-generation contribution, and payment of the $650 million installment, alongside progress on the stated debt-reduction plan.
- Actual borrowing costs, debt balances, liquidity, and covenant headroom under the new credit agreement.
- Constant-currency and organic ARR trends, especially by product group and region, and the ongoing decline in professional services revenue.
- The impact of foreign exchange and changing subscription contract mix on reported revenue, margins, and cash flow.