PTC Inc. — Q2 FY2020 Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 28, 2020. Unaudited results; comparisons are with the periods ended March 30, 2019. PTC provides software and services for product design, lifecycle management, IoT, augmented reality, and related solutions.
Financial performance and position
| Metric | Q2 FY2020 | Prior-year Q2 |
|---|---|---|
| Revenue | $359.6 million | $290.5 million |
| Recurring revenue | $315.9 million; up 32% (34% constant currency) | $239.2 million |
| GAAP gross margin | $276.6 million; 77% | $210.5 million; 72% |
| GAAP operating income (loss) | $50.0 million; 13.9% margin | $(22.9) million; (7.9)% margin |
| GAAP net income (loss) | $7.2 million; diluted EPS $0.06 | $(43.5) million; diluted EPS $(0.37) |
| Non-GAAP diluted EPS | $0.59 | $0.22 |
| Cash from operations | $87.8 million | $141.1 million |
For the six months, revenue was $715.7 million, up 14% (16% constant currency); GAAP net income was $42.6 million versus a $22.5 million loss. Operating cash flow was $95.3 million, down from $162.3 million.
At March 28, 2020, cash and cash equivalents were $826.8 million and marketable securities were $56.9 million. Total debt was $1.648 billion ($1.631 billion net of note issuance costs); the revolving credit facility had $148.1 million drawn. The reported cash balance included $530 million intended for redemption of the 2024 notes. The company reported covenant compliance.
Material changes and drivers
- Growth was led by recurring and subscription revenue, including strong Core Products growth. Subscription license revenue rose 132% in Q2; total recurring revenue grew 32%.
- Professional services revenue fell 13% to $35.5 million; its Q2 gross margin declined to 2% from 17%, partly due to an extended fixed-price project and higher compensation costs.
- Q2 new license bookings were down mid-teens year over year, with pressure emerging in the final weeks as COVID-19 disruptions spread. Renewals were essentially unaffected during the quarter.
- Operating cash flow declined year over year, reflecting lower receivable collections and higher restructuring payments. Six-month investing cash use included $468.5 million for Onshape.
- In February, PTC issued $500 million of 3.625% notes due 2025 and $500 million of 4.0% notes due 2028. It recorded a $15 million early-redemption charge for the 6.0% notes due 2024, which it planned to redeem in May 2020.
Outlook, risks, and unusual items
- Management forecast FY2020 ARR growth of approximately 11%, revenue growth of approximately 12%, and operating-margin improvement of 30 basis points on a GAAP basis and 90 basis points on a non-GAAP basis.
- Management expected second-half FY2020 bookings to decline approximately 30% year over year and FY2020 churn to reach approximately 8%. It forecast operating expense growth of roughly 2%, versus its prior 9% projection, and cash from operations approximately $60 million below FY2019.
- COVID-19 could further delay or reduce purchases, renewals, customer payments, and implementation work; management cited uncertainty around macroeconomic conditions and the duration of disruption. It expected available cash, operating cash flow, and credit capacity to cover working-capital and capital needs for at least 12 months.
- Other notable items: $32.3 million of restructuring and other charges for the first six months, including a program tied to Onshape-related efficiencies; adoption of lease accounting added operating lease assets and liabilities; and the Onshape acquisition added $364.9 million of goodwill.
- Tax uncertainties include ongoing audits, a disputed South Korean assessment of approximately $12 million (with potential additional exposure of approximately $13 million through 2019), and a newly identified non-U.S. withholding-tax interpretation whose financial impact was not estimable.
Important facts for investors to verify
- Whether COVID-19-related bookings declines and churn develop in line with management’s forecasts, and whether the FY2020 ARR, revenue, and margin outlook remains achievable.
- Whether cash collections and operating cash flow recover, and the liquidity impact of the planned 2024-note redemption and elevated debt.
- How recurring-revenue growth, subscription conversions, and professional-services margin trends progress.
- Potential changes from tax audits and the new withholding-tax matter, as well as restructuring and lease-related costs.
- Non-GAAP results exclude recurring categories of costs, including stock-based compensation, amortization, restructuring, acquisition-related charges, and the debt redemption premium; assess them alongside GAAP results.