PTC INC. quarterly report, Q1 FY2015

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PTC Inc. 10-Q Summary

Reporting period: Fiscal first quarter ended January 3, 2015; comparative quarter ended December 28, 2013. Dollar amounts are in U.S. dollars. Results are unaudited.

Business context and performance

PTC develops software and related services for CAD, product lifecycle management, service lifecycle management, application lifecycle management, and the Internet of Things (IoT). The quarter reflected the launch of subscription pricing for most products, recent acquisitions, and significant foreign-exchange headwinds. PTC reported revenue by license and subscription solutions (L&SS), support, and professional services under a revised presentation.

  • Total revenue was $325.4 million, essentially flat year over year; management cited 4% growth on a constant-currency basis and a $12.3 million unfavorable currency impact.
  • Support revenue rose 7% to $181.6 million; L&SS revenue fell 5% to $79.0 million; professional services revenue fell 10% to $64.8 million. Approximately 60% of revenue came from recurring support and subscription streams, versus approximately 53% a year earlier.
  • GAAP gross margin was $232.5 million, or 71.4% of revenue, essentially unchanged. GAAP operating income declined 31% to $37.6 million; operating margin fell to 11.6% from 16.9%.
  • Net income was $30.3 million versus $39.7 million; diluted EPS was $0.26 versus $0.33. The effective tax rate was 12%, compared with 25%.
  • Non-GAAP operating income was $69.8 million and non-GAAP operating margin was 21.4%, versus $82.3 million and 25.3%. Non-GAAP diluted EPS was $0.50 in both periods. These measures exclude specified items; refer to the filing’s reconciliation.
  • Operating cash flow was $13.6 million, down from $36.2 million. Investing activities used $8.8 million and financing activities used $27.8 million. Cash and cash equivalents ended the quarter at $261.1 million, down from $293.7 million at September 30, 2014.
  • At quarter end, debt under the credit facility was $605.6 million, including a $493.7 million term loan and $111.9 million revolving loan. PTC reported $456 million available under the revolver, subject to covenants. The leverage ratio was 1.74x; the fixed-charge coverage ratio was 12.83x, and PTC was in covenant compliance.

Material changes and notable items

  • Subscription-based solutions represented 19% of L&SS bookings, above management’s 15% expectation. Subscription revenue is recognized over the contract term, so a higher subscription mix weighed on near-term reported revenue and EPS relative to perpetual-license sales. PTC uses a defined “L&SS bookings” measure to assess new business.
  • Acquisitions of Axeda, Atego, and ThingWorx collectively contributed $14.2 million of revenue in the quarter. Reported revenue also benefited from six additional days in the quarter compared with the prior-year period.
  • The lower tax rate included an approximately $4 million benefit from a 2014 business realignment involving foreign intellectual property and a $2.1 million research-credit benefit, offset by a corresponding increase in the U.S. valuation allowance.
  • PTC recorded a $0.3 million restructuring credit; $8.5 million remained accrued at quarter end. Acquisition-related and U.S. pension termination-related costs were among the items excluded from non-GAAP results.
  • PTC completed settlement of a $125 million accelerated share repurchase in December 2014, receiving approximately 1.1 million additional shares. The company said it expected to repurchase $125 million of stock and repay $100 million of borrowings during fiscal 2015.

Outlook, risks, and contingencies

  • For fiscal 2015, management lowered its revenue outlook to a 1%–3% decline year over year, from its earlier expectation of 0%–2% growth. The outlook included L&SS revenue ranging from a 3% decline to 5% growth, flat support revenue, and an approximately 10% decline in professional services.
  • Management forecast non-GAAP operating margin of 24%–25%, GAAP operating margin of 14%–15%, non-GAAP diluted EPS of $2.20–$2.35, and GAAP diluted EPS of $1.32–$1.47. Targets assumed exchange rates of $1.14 per euro and 118 yen per U.S. dollar. PTC cautioned that further economic or currency deterioration and a higher-than-expected subscription mix could adversely affect results.
  • Management’s longer-term objective was a 28%–30% non-GAAP operating margin by 2018. It also expected SLM and IoT to achieve double-digit growth over time, while noting longer SLM sales cycles and that IoT was still a small part of the business.
  • Fiscal 2015 targets excluded losses from termination of the U.S. pension plan. PTC estimated pre-tax settlement losses of approximately $65 million, subject to timing, regulatory approvals, and plan measurements; it expected to contribute approximately $25 million to complete funding. It also expected $20 million of fiscal 2015 contributions to a non-U.S. pension plan, including $10 million already contributed.
  • PTC was cooperating with the SEC and Department of Justice regarding a China investigation involving payments and expenses by certain business partners and/or employees that raised potential Foreign Corrupt Practices Act concerns. The company could not estimate possible fines or penalties and had recorded no liability; a substantial resolution could materially affect results and business operations.
  • Other risks include foreign-exchange movements, uncertain manufacturing conditions, reliance on large customer transactions, execution of subscription and IoT strategies, and tax audits and uncertainties. PTC stated that existing cash, operating cash flow, and credit availability should cover its expected requirements for at least the next twelve months.

Important facts for investors to verify

  • Whether subscription bookings convert into recognized revenue and recurring growth as expected, and how PTC’s bookings measure compares with reported revenue.
  • Actual performance against the revised fiscal 2015 revenue, margin, and EPS outlook, including the effect of exchange rates and regional demand.
  • The timing and financial outcome of the China investigation; no loss estimate or liability was recorded.
  • The timing and amount of pension settlement losses and required contributions; the estimated $65 million pre-tax loss was excluded from guidance.
  • Debt repayment, planned repurchases, cash generation, and continued compliance with credit-facility covenants.
  • The contribution and profitability of acquired businesses, and whether planned professional-services and operating-margin improvements are achieved.