PTC Inc. Form 10-Q Summary
Business context and reporting period
PTC develops software and related services for product design and lifecycle management, service management, and Internet of Things (IoT) applications. This report covers the fiscal second quarter and first six months ended April 2, 2016; comparatives are the periods ended April 4, 2015. The financial statements are unaudited.
Key financial results
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $272.6 million | $314.1 million | $563.6 million | $639.6 million |
| GAAP gross margin | $192.4 million; 70.6% | $228.1 million; 72.6% | $403.3 million; 71.6% | $460.6 million; 72.0% |
| GAAP operating income (loss) | $1.8 million | $4.0 million | $(11.5) million | $41.6 million |
| GAAP net income (loss) | $(5.2) million | $5.4 million | $(29.1) million | $35.7 million |
| Diluted EPS | $(0.05) | $0.05 | $(0.25) | $0.31 |
| Non-GAAP diluted EPS | $0.23 | $0.53 | $0.74 | $1.03 |
| Cash from operations | $48.9 million | $92.0 million | $110.1 million | $105.6 million |
Reported revenue fell 13% in Q2 and 12% in the first half; on a constant-currency basis, declines were 10% and 7%, respectively. Q2 GAAP operating margin was 0.6% (1.3% prior year); first-half margin was (2.0)% (6.5% prior year). Non-GAAP operating margin was 14.0% in Q2 and 17.8% for the first half, versus 23.4% and 22.4% a year earlier.
Subscription revenue increased 50% to $23.7 million in Q2 and 53% to $45.8 million for the first half. Perpetual license revenue declined 43% in Q2 and 35% in the first half. Support revenue declined 5% in both periods; professional services revenue declined 18% and 21%. Subscription bookings were 54% of license and subscription bookings in Q2 and 42% for the first half. Annualized recurring revenue was approximately $742 million, up about 3% year over year on a constant-currency basis.
At April 2, 2016, cash and cash equivalents were $368.5 million, compared with $273.4 million at September 30, 2015. Total debt was $838.1 million, all under the revolving credit facility, with a weighted-average annual interest rate of 2.1%. PTC reported a 3.12-to-1.00 total leverage ratio and an 8.70-to-1.00 fixed-charge coverage ratio, and stated that it was compliant with covenants. The facility had $161.9 million of unused commitments; approximately $108 million was available for borrowing under financial covenants. Deferred revenue totaled $446.6 million, including current deferred revenue of $431.9 million.
Material changes and management commentary
- Management attributed lower revenue and earnings chiefly to the shift from perpetual licenses to subscriptions, challenging manufacturing markets, foreign-exchange headwinds, and lower professional services revenue as more work shifts to partners. Q2 recurring revenue represented approximately 68% of total revenue, compared with 59% a year earlier.
- PTC acquired Vuforia in November 2015 and Kepware in January 2016. The acquisitions used $164.2 million of cash, net of cash acquired, in the first half; Kepware contributed $4.7 million of revenue in Q2. The company also cited growth in its Technology Platform business.
- A workforce and facility restructuring initiated in October 2015 is expected to cost up to $50 million. PTC recorded $41.7 million in the first half, with remaining charges expected predominantly in the second half; 481 employees were associated with termination-benefit charges. Headcount at quarter-end was 9% lower year over year.
- First-half operating cash flow was $110.1 million, including the effects of a $28.2 million payment to resolve the U.S. SEC and DOJ China investigation. Investing cash outflow was $173.1 million, largely reflecting acquisitions; financing cash inflow was $152.3 million, including $170 million of net credit-facility borrowings.
Outlook, risks and unusual items
- For 2016, PTC expected subscription bookings to be approximately 44% of license and subscription bookings, compared with 17% in 2015, and targeted a significant majority of bookings to be subscriptions by 2018. Management cautioned that faster-than-assumed conversion could reduce near-term revenue, operating margin, cash flow and EPS.
- Management expected macroeconomic pressure on manufacturing customers, particularly in the Americas and China, to persist through 2016. Foreign currency movements, customer purchasing patterns, and the mix and pace of subscription adoption were identified as uncertainties.
- PTC expected approximately $30 million of 2016 capital expenditures and $70 million of share repurchases, subject to liquidity and covenant compliance. It stated that available cash, operating cash flow and credit availability should meet requirements for at least the next 12 months.
- After quarter-end, PTC priced a planned $500 million senior-note offering due 2024 at a 6.000% coupon. It expected to use net proceeds to repay part of its revolving debt and warned that interest expense would increase. Completion of the offering was not yet certain when discussed in the filing.
- PTC paid $28.2 million to the SEC and DOJ to resolve the China FCPA investigation. A China Administration for Industry and Commerce investigation remained unresolved and could lead to material fines or sanctions. A shareholder securities lawsuit related to disclosures about the investigation sought unspecified damages; PTC said it would contest the action.
- Other notable items include $41.7 million of first-half restructuring charges, $38.0 million of first-half stock-based compensation, and a $9 million ThingWorx contingent earn-out paid on April 6, 2016. GAAP results were also affected by a full valuation allowance on U.S. net deferred tax assets.
Important facts for investors to verify
- Whether subscription bookings convert into recurring revenue and cash flow at the pace management expects, and whether the transition continues to weigh on near-term reported results.
- Progress on restoring revenue and margins amid manufacturing-market weakness, foreign-exchange exposure, and declining professional services revenue.
- Actual completion and use of proceeds from the $500 million note offering, subsequent debt levels, interest costs, and ongoing covenant headroom.
- Restructuring charges still to be recorded, realized cost savings, and whether savings are offset by planned investment and other cost increases.
- Outcomes and potential financial effects of the China AIC investigation and shareholder litigation, including any collateral business consequences.