PTC Inc. (Parametric Technology Corporation) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2012; comparisons are with the three and six months ended April 2, 2011. Amounts are U.S. dollars. Financial statements are unaudited.
Business context and key financial metrics
PTC develops and sells software for product lifecycle management, computer-aided design, application lifecycle management, supply chain management and service lifecycle management. Revenue comes from software licenses, maintenance, and consulting and training. The company reports Software Products and Services segments.
| Metric | Three months ended March 31, 2012 | Six months ended March 31, 2012 |
|---|---|---|
| Revenue | $301.1 million, up 12% | $619.4 million, up 16% reported (15% constant currency) |
| Gross margin | $207.9 million; 69% of revenue | $428.0 million; 69% of revenue |
| Operating income / margin | $6.9 million; 2% | $39.4 million; 6% |
| Net income | $3.6 million | $25.7 million |
| Diluted GAAP EPS | $0.03 | $0.21 |
| Non-GAAP operating income / margin | $50.6 million; 17% | $109.4 million; 18% |
| Non-GAAP diluted EPS | $0.30 | $0.65 |
Non-GAAP measures exclude specified items, including stock-based compensation, acquired-intangible amortization, acquisition-related costs, restructuring charges and certain tax or other items. They are supplemental measures and are not substitutes for GAAP results.
- Quarterly license revenue was $74.8 million, up 1%; service revenue was $226.3 million, up 16%. Maintenance revenue grew 14% and consulting and training revenue 20%.
- For the six months, license revenue rose 9%, service revenue 18%, maintenance 15%, and consulting and training 23%.
- Cash from operations was $96.5 million in the quarter and $133.0 million for the six months. Six-month cash flow a year earlier was $30.2 million, including a $52.1 million litigation settlement payment.
- Cash and cash equivalents were $224.1 million at March 31, versus $167.9 million at September 30, 2011. Total assets were $1.66 billion; current liabilities were $506.5 million, including $327.3 million of deferred revenue.
- Revolving credit borrowings were $160 million, down from $200 million at September 30, 2011; $140 million of the $300 million facility was available. The facility matures September 30, 2016. PTC reported compliance with covenants; leverage was 0.65x and fixed-charge coverage 2.82x.
Material changes versus the prior comparable periods
- GAAP quarterly operating income declined to $6.9 million from $24.2 million and net income to $3.6 million from $19.0 million. The principal unusual expense was $20.8 million of restructuring charges; non-GAAP quarterly operating income rose to $50.6 million from $42.3 million.
- Revenue growth included contributions from MKS and 4CS, acquired in 2011: $22.3 million for the quarter and $40.7 million for the six months. Excluding those businesses, quarterly revenue grew 4%, while organic license revenue fell 10%.
- Enterprise revenue growth, including acquired businesses, contrasted with weaker Desktop revenue. Quarterly Desktop revenue was down 5%, while Enterprise revenue rose 34%.
- Restructuring charges covered severance and facility costs; 168 employees were notified of termination. PTC said it expected approximately $5 million of quarterly operating-expense savings and had realized about half in the quarter.
- Cash generation improved, but the year-over-year comparison is affected by the prior-year litigation payment. PTC repaid $40 million of debt and repurchased 570,657 shares for approximately $15.0 million during the six months.
Outlook, commentary and risks
- For fiscal 2012, management targeted GAAP and non-GAAP revenue growth of 8%–10%, a reduction from its prior target following weaker-than-expected second-quarter license revenue. It expected license growth of about 5%, maintenance growth of about 9%, consulting and training growth of about 14%, and approximately $90 million of revenue from MKS and 4CS combined. The plan assumed $1.30 per euro.
- Management targeted 2012 non-GAAP operating margin of approximately 19%, versus approximately 18% in 2011, and GAAP operating margin of approximately 10%. It cited operating leverage, restructuring savings and improving services margins.
- PTC expected about $14 million of capital expenditures for the rest of 2012, an additional $30 million debt repayment and $40 million of share repurchases, subject to cash generation and other needs. Management said available cash and expected operating cash flow should cover working capital and capital requirements for at least 12 months.
- License results are exposed to the timing of large customer transactions and economic conditions. Management cited a European deal that did not close and lower-than-expected North American sales; large direct-customer transactions may make results volatile.
- PTC was investigating payments by certain China business partners and expenses by certain employees for possible legal or policy violations, including potential Foreign Corrupt Practices Act issues. It had disclosed its findings and remediation to the DOJ and SEC and was cooperating. Outcomes, including fines or sanctions, were uncertain; China historically represented 6%–7% of revenue, and China revenue declined 10% in the quarter.
- Tax estimates and the effective tax rate remain uncertain. PTC said an expected foreign-subsidiary R&D cost-sharing prepayment, if not made during the year, could improve the tax rate by up to $7.5 million. It also disclosed $17.4 million of unrecognized tax benefits and ongoing tax examinations.
- Subsequent event: Executive Chairman C. Richard Harrison resigned from the Board effective June 30, 2012. The agreement provided for vesting of his unvested RSUs at termination and a lump-sum payment of remaining contract-period salary, subject to a release.
Important facts for investors to verify
- Whether license sales recover and management achieves its lowered fiscal-year revenue targets, particularly given dependence on large customer deals.
- Whether the China investigation results in fines, sanctions, operating disruption or further revenue declines.
- Whether restructuring delivers the expected recurring savings and whether associated charges and cash payments remain within expectations.
- Whether planned debt repayments and share repurchases proceed while preserving liquidity and covenant compliance.
- Whether tax assumptions—including the possible R&D cost-sharing prepayment and resolution of tax audits—affect the reported effective tax rate.
- How acquisition contributions, purchase-accounting adjustments and the exclusions used in non-GAAP reporting affect underlying growth and profitability.