PTC Inc. Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended April 4, 2015; comparisons are with the periods ended March 29, 2014. PTC develops software and services for CAD, PLM, ALM, SLM and Internet of Things (IoT) applications.
Key financial results
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Total revenue | $314.1 million | $328.7 million | $639.6 million | $653.6 million |
| GAAP operating income | $4.0 million | $51.2 million | $41.6 million | $106.1 million |
| GAAP net income | $5.4 million | $43.8 million | $35.7 million | $83.4 million |
| GAAP diluted EPS | $0.05 | $0.36 | $0.31 | $0.69 |
| Operating cash flow | $92.0 million | $110.7 million | $105.6 million | $147.0 million |
- Q2 revenue declined 4% year over year as reported, but increased 3% at constant currency; software revenue was approximately flat as reported and up 8% at constant currency. Six-month revenue fell 2% as reported and rose 4% at constant currency.
- Q2 gross margin was $228.1 million, or 72.6% of revenue, versus $234.9 million, or 71.5%, a year earlier. Six-month gross margin was $460.6 million, or 72.0%, versus $466.9 million, or 71.4%.
- Q2 non-GAAP operating income was $73.8 million and non-GAAP operating margin was 23.4%; non-GAAP diluted EPS was $0.53. These company-defined measures exclude specified items, including restructuring, stock compensation and acquired-intangible amortization.
- Cash and cash equivalents were $267.8 million at April 4, 2015, down from $293.7 million at September 30, 2014. Six-month capital expenditures were $14.1 million.
- Debt outstanding under the credit facility was $530.6 million, including a $487.5 million term loan and $43.1 million revolving borrowing. PTC reported $405 million of revolving capacity available, was in compliance with covenants, and reported leverage and fixed-charge coverage ratios of 1.73x and 9.85x, respectively.
Material changes and management commentary
- Professional services revenue declined 20% in Q2 and 15% in the first six months; management cited greater use of service partners and a strategy for services revenue to trend flat-to-down. Support revenue grew 1% in Q2 and 4% in the first six months as reported.
- License and subscription solutions revenue declined 3% in Q2 and 4% in the first six months as reported. Management attributed pressure to currency, fewer large deals, and a higher subscription mix, which defers revenue recognition. Subscription solutions were 14% of Q2 L&SS bookings versus 4% a year earlier; recurring subscription and support revenue represented about 59% of Q2 revenue versus 52%.
- Foreign exchange was a significant headwind: management estimated that, at prior-year exchange rates, Q2 revenue would have been $25.6 million higher and operating income $8.9 million higher. Currency movements reduced Q2 GAAP EPS by approximately $0.08.
- Q2 GAAP operating income and EPS included a $38.5 million restructuring charge, associated with 415 employees. The plan is expected to cost up to $45 million and deliver approximately $30 million in annualized expense reductions; most costs are expected to be paid in 2015.
- The Q2 tax benefit was $5.0 million on $0.4 million of pretax income; the resulting unusually high effective tax-benefit rate reflects the small pretax-income base and discrete tax benefits. Six-month tax benefit was $0.9 million on $34.8 million of pretax income.
Outlook, risks and unusual items
- Management expected FY2015 revenue below its previous guidance because of further currency deterioration and macroeconomic uncertainty, while expecting FY2015 non-GAAP earnings to remain consistent with guidance provided in Q2. The filing text does not provide a clear numerical value for that guidance.
- Management cited economic weakness or uncertainty, foreign exchange, subscription adoption and timing of large transactions as risks to revenue, margins, cash flow and EPS. CAD license revenue was expected to be lower in 2015 than in 2014 as a product cycle matured.
- PTC is cooperating with the SEC and Department of Justice in an investigation concerning China business-partner expenditures that apparently benefited employees of state-owned-enterprise customers. Negotiations with the SEC had begun; a resolution was expected to include fines or penalties, but PTC could not estimate a reasonably possible loss and had recorded no liability. Management warned that any liability could be material.
- PTC expected approximately $65 million of pretax settlement losses from terminating its U.S. pension plan, excluded from its 2015 targets, and estimated a further $25 million contribution to fund the plan. It expected to complete termination by September 30, 2015.
- After quarter-end, PTC acquired ColdLight for approximately $100 million in cash, with up to $5 million of additional contingent consideration. PTC borrowed $100 million under its credit facility on May 6; by May 8 debt was approximately $631 million and available revolver capacity approximately $290 million.
- Management stated that existing cash, operating cash flow and available credit were expected to meet requirements for at least the next twelve months. It intended to resume repurchases in Q3 2015 and could repurchase up to $100 million during the remainder of the year, consistent with a longer-term goal of returning 40% of free cash flow to shareholders.
Most important facts for investors to verify
- Updated revenue and non-GAAP earnings guidance, including the assumptions for exchange rates and subscription mix.
- Progress on the China investigation, potential settlement exposure and any collateral business effects.
- Actual restructuring charges, cash payments and realized cost savings versus the stated $30 million annualized target.
- Results of the U.S. pension-plan termination, including settlement losses and required contributions.
- Post-acquisition debt, revolving-credit availability and continued compliance with facility covenants.
- Whether improving recurring revenue and IoT traction translate into growth and whether the decline in professional services affects overall profitability.