PTC Inc. — Q2 FY2018 Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 31, 2018; comparable periods ended April 1, 2017. PTC provides CAD, PLM, SLM, IoT and augmented-reality software, related support, and professional services. Results are unaudited.
Financial performance
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $307.9m | $280.0m | $614.5m | $566.4m |
| GAAP gross margin | $224.3m; 73% | $198.2m; 71% | $447.9m; 73% | $402.4m; 71% |
| Operating income | $22.4m | $7.5m | $39.8m | $12.1m |
| Operating margin | 7.3% | 2.7% | 6.5% | 2.1% |
| Net income (loss) | $7.9m | $(1.1)m | $21.8m | $(10.2)m |
| Diluted EPS | $0.07 | $(0.01) | $0.19 | $(0.09) |
| Non-GAAP operating margin | 17.6% | 16.0% | 17.1% | 15.7% |
| Non-GAAP diluted EPS | $0.34 | $0.30 | $0.64 | $0.56 |
Revenue grew 10% in the quarter and 9% for the six months (5% and 4% at constant currency, respectively). Subscription revenue rose 72% in Q2 to $112.9m, while support revenue fell 11% to $126.7m and perpetual-license revenue fell 17% to $22.8m. Recurring revenue increased 15% to $239.6m and represented approximately 91% of software revenue. Professional-services revenue was nearly flat in Q2 at $45.4m and declined 5% for the six months.
Six-month cash provided by operating activities was $136.3m, versus $28.6m a year earlier. Investing activities used $22.7m and financing activities used $99.6m; cash and equivalents increased $19.8m to $299.8m. Cash, equivalents and marketable securities totaled $355.0m at quarter-end. Current assets of $649.2m were below current liabilities of $689.3m.
At March 31, total debt was $648.1m ($642.8m net of senior-note issuance costs), including $500m of 6% senior notes due 2024 and $148.1m drawn on the revolving facility, which matures September 2019. The facility had approximately $430m of remaining borrowing capacity; PTC reported compliance with its covenants.
Material changes and management commentary
- Growth reflects the subscription transition and prior bookings; higher subscription revenue more than offset declines in support and perpetual licenses. Subscription mix rose, and management described the recurring-revenue model as producing a compounding benefit.
- License and subscription bookings were $99m in Q2, up 4% year over year (relatively flat at constant currency), with few large deals and timing affecting the comparison. Six-month bookings were $203m, up 10%. Subscription ACV increased 15% to $38.5m; subscription mix was 78% of bookings. ARR was approximately $961m, up 15% year over year.
- Billed and unbilled deferred revenue totaled $1.263bn, up 43% year over year, including $765m of unbilled deferred revenue. These measures vary with contract size, duration and billing timing and are not equivalent to recognized revenue.
- Management expects continued operating-margin expansion in FY2018 and further expansion in 2019 and beyond; expected FY2018 capital expenditures are approximately $40m. PTC cautions that the subscription transition can temporarily weigh on revenue, margins and EPS.
- Effective January 1, 2018, new core and ThingWorx software licenses were subscription-only in the Americas and Western Europe. PTC planned to extend subscription-only availability to most countries by December 31, 2018, with Kepware excluded from that broader change.
Outlook, risks and unusual items
- Revenue standard adoption is planned for FY2019 using the modified-retrospective method. PTC expects some subscription-license revenue to be recognized upon delivery rather than ratably, potentially shifting revenue toward the start of contract periods. The company expects a material deferred-revenue-related adjustment to retained earnings at adoption and is assessing the impact of capitalizing sales commissions.
- Tax reform produced an estimated $14.1m deferred tax benefit in the first six months; a $7.1m state tax amount was recorded for deemed repatriation. PTC said estimates remained subject to finalization and it could not yet reasonably estimate certain future provisions, including GILTI. A full valuation allowance remained against U.S. net deferred tax assets.
- A disputed customer receivable could result in a write-down of $0–$17.3m, including possible professional-services revenue impact. PTC intends to pursue collection. A Korean tax assessment of approximately $12m is under appeal; PTC has not recorded a reserve and had paid the assessment in 2017.
- PTC is seeking to exit or sublease its current headquarters before moving in 2019. Failure to cover existing rent obligations could create a charge. The current lease runs through November 2022; the new lease rent begins July 2020, creating potential overlapping obligations.
- Other exposures include foreign-exchange movements, subscription conversion and customer demand, covenant limits, and legal matters. PTC estimated $1.2m–$3.4m of possible legal claims and had accrued $1.2m.
- After quarter-end, PTC borrowed $150m and repaid $50m under its facility. It entered a $100m accelerated share-repurchase agreement on April 20, initially receiving 951,814 shares for $80m; final settlement was expected by June 26, 2018.
Key investor verification points
- Track whether subscription bookings and ARR growth translate into recognized revenue, cash generation and sustained GAAP margin improvement.
- Assess the timing and scale of the FY2019 revenue-standard adoption adjustment and its effect on reported revenue, deferred revenue and retained earnings.
- Monitor leverage, the September 2019 revolver maturity, covenant headroom and the financing of share repurchases.
- Follow resolution of the disputed receivable, Korean tax appeal, tax-reform estimates and headquarters lease exposure.
- Reconcile non-GAAP performance with GAAP results; non-GAAP measures exclude recurring items including stock compensation and acquired-intangible amortization.