PTC Inc. — Form 10-Q Summary
Business context and reporting period. PTC develops software and related services for product design, lifecycle management, supply chains, service management and Internet of Things (IoT) applications. This unaudited report covers the quarter ended March 29, 2014, and the six months then ended; the comparable periods ended March 30, 2013. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended March 29, 2014 | Six months ended March 29, 2014 | Prior-year comparable |
|---|---|---|---|
| Revenue | $328.7 million, up about 5% | $653.6 million, up 3% | $313.9 million; $633.7 million |
| Gross margin | $234.9 million; 71.5% of revenue | $466.9 million; 71.4% | $220.7 million; 70.3%; $443.4 million; 70.0% |
| Operating income and margin | $51.2 million; 15.6% | $106.1 million; 16.2% | $21.2 million; 6.8%; $35.1 million; 5.5% |
| Net income | $43.8 million | $83.4 million | $17.0 million; $52.8 million |
| Diluted EPS | $0.36 | $0.69 | $0.14; $0.44 |
| Operating cash flow | $110.7 million | $147.0 million | $82.8 million; $96.4 million |
For the quarter, non-GAAP operating margin was 24.4% versus 20.0%, and non-GAAP diluted EPS was $0.48 versus $0.41. For the six months, non-GAAP operating margin was 24.8% versus 19.1%, and non-GAAP diluted EPS was $0.98 versus $0.77. The company’s non-GAAP measures exclude specified items, including stock-based compensation, acquired-intangible amortization, acquisition costs, restructuring charges and certain tax items; they are supplemental, not substitutes for GAAP results.
Revenue growth was led by license revenue, up 7% in the quarter, and support revenue, up 3%; service revenue grew 6%. Software Products segment revenue was $245.4 million for the quarter, while Services revenue was $83.3 million. Geographic results were mixed: quarterly revenue rose 14% in the Americas and 8% in Europe, but declined 7% in the Pacific Rim and 21% in Japan.
Balance sheet, liquidity and capital
- Cash and cash equivalents were $270.5 million at March 29, 2014, compared with $241.9 million at September 30, 2013. Six-month operating cash flow was $147.0 million.
- Total debt under the new credit facility was $318.1 million: a $250 million term loan and $68.1 million drawn on the revolving facility. The $750 million revolving commitment left $681.9 million available. The facility matures January 30, 2019; the reported annual interest rate was 1.625%.
- PTC reported leverage of 0.98 to 1.00 and fixed-charge coverage of 22.20 to 1.00, and said it complied with facility covenants.
- Six-month investing cash use was $121.9 million, including $111.5 million net cash paid for ThingWorx. Financing activities included $40.0 million of share repurchases. The company had authorized up to $100 million of repurchases through September 30, 2014.
Material changes and unusual items
- PTC acquired ThingWorx, an IoT application platform developer, on December 30, 2013, for $111.5 million net cash plus contingent consideration initially valued at $13.0 million. ThingWorx’s post-acquisition revenue and earnings were not material. The acquisition added $102.2 million of goodwill; contingent consideration was valued at $13.5 million at quarter-end.
- GAAP operating income increased substantially year over year, in part because restructuring charges fell to zero in the quarter from $15.8 million; six-month charges were $1.1 million versus $31.2 million. The company said the 2013 restructuring was expected to reduce quarterly operating expenses by about $16 million.
- The quarterly tax provision included an $8.9 million non-cash benefit related to the ThingWorx acquisition and a reduction in the valuation allowance. PTC stated that a full valuation allowance remained necessary against U.S. net deferred tax assets. The prior-year six-month comparison included a $32.6 million acquisition-related tax benefit, among other tax items.
- PTC began terminating its U.S. defined-benefit pension plan. It contributed $7.5 million on April 1, 2014, expected additional contributions of about $22 million, and estimated that roughly $70 million of actuarial losses could be recognized as liabilities are settled, expected in late 2015 and early 2016.
Outlook, management commentary and risks
Management’s fiscal 2014 goals were revenue growth of 3%–4% (license growth 3%–7%, support about 3%, and services about 2%), non-GAAP operating margin of approximately 25% and GAAP operating margin of approximately 18%, and non-GAAP diluted EPS of $2.05–$2.15 and GAAP diluted EPS of $1.40–$1.50. The EPS ranges were raised by $0.02 per share from the prior expectation. PTC targeted fiscal-year GAAP services margin of at least 13% (15% non-GAAP) and anticipated about $29 million of capital expenditures. It expected to generate sufficient operating cash flow to repay approximately $100 million of facility borrowings and repurchase about $75 million of shares during fiscal 2014.
Management cited cost control, improved sales productivity and service-margin improvement as drivers of expected margin expansion. It also noted uncertainty in global manufacturing conditions, foreign-exchange movements and the timing and conversion of large transactions, which can cause quarter-to-quarter volatility. Its currency assumptions for the targets were $1.38 per euro and 103 yen per U.S. dollar.
A continuing U.S. SEC and Department of Justice investigation concerns payments and expenses involving certain China business partners and/or employees, raising potential Foreign Corrupt Practices Act compliance questions. PTC could not predict the outcome or estimate potential fines, recorded no liability, and said a material penalty or other resolution could affect results and business operations; terminated China employees and partners may also affect sales. China historically represented 5%–7% of revenue. PTC also noted ordinary-course legal matters and customer indemnification obligations, for which potential indemnity payments may be unlimited, although historical costs were minimal.
Important facts for investors to verify
- Progress and potential financial, operating and reputational effects of the China investigation, including any eventual penalties or business restrictions.
- Whether fiscal 2014 revenue, margin and EPS targets are achieved, and how much reported earnings growth reflects recurring operations versus restructuring and tax effects.
- ThingWorx performance, acquisition integration, contingent-consideration estimates and the expected contribution of acquired businesses.
- Cash needs and financing effects of the pension-plan termination, debt repayment, share repurchases and any further acquisitions.