PTC Inc. (Parametric Technology Corporation) — Q3 2011 Form 10-Q
Reporting period: Fiscal quarter ended July 2, 2011; comparisons are with the quarter ended July 3, 2010. Year-to-date figures cover nine months. Amounts are in U.S. dollars unless noted.
Business context
PTC develops and supports product-development software, including product lifecycle management (PLM), computer-aided design (CAx), and related services. It reports Software Products and Services segments. On May 31, 2011, PTC acquired MKS Inc., adding application lifecycle management software to its portfolio.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $291.8 million | $243.0 million | $827.5 million | $742.0 million |
| License revenue | $81.4 million | $67.5 million | $231.1 million | $207.0 million |
| Service revenue | $210.4 million | $175.5 million | $596.4 million | $535.0 million |
| Operating income | $24.5 million | $12.0 million | $65.9 million | $45.8 million |
| GAAP operating margin | 8.4% | 4.9% | 8.0% | 6.2% |
| Net income | $15.5 million | $10.7 million | $47.8 million | $37.6 million |
| Diluted EPS | $0.13 | $0.09 | $0.39 | $0.31 |
| Operating cash flow | $48.4 million | $50.4 million | $78.7 million | $141.1 million |
Management-reported non-GAAP Q3 operating income was $51.4 million, with a 17.6% margin, and non-GAAP diluted EPS was $0.32; these measures exclude specified items including stock compensation, acquired-intangible amortization, acquisition costs and certain currency effects. For the first nine months, non-GAAP operating income was $129.1 million, margin 15.6%, and diluted EPS $0.79.
- Q3 revenue increased 20% as reported and 13% at constant currency; year-to-date growth was 12% and 9%, respectively. License, maintenance, and consulting/training revenue grew 21%, 17%, and 27% in Q3 as reported.
- Q3 Desktop revenue rose 21%; Enterprise revenue rose 19% as reported, although organic Enterprise license revenue declined 3%. PTC cited strong Desktop demand and maintenance/services growth, while noting a difficult comparison for Enterprise licenses.
- Q3 GAAP operating income more than doubled. Nine-month cash from operations declined substantially year over year, primarily reflecting a $52.1 million litigation settlement payment in Q1 2011 and other working-capital timing.
- Cash and cash equivalents were $260.8 million at July 2, 2011, versus $240.3 million at September 30, 2010. Total assets were $1.68 billion; stockholders’ equity was $802.1 million.
- PTC had $250 million outstanding on its revolving facility, leaving $50 million available under the $300 million facility. The borrowing rate was 2.1% at drawdown and was due to reset after three months. Cash exceeded facility borrowings by approximately $10.8 million. PTC reported covenant compliance, with a 1.14x leverage ratio against a 2.50x maximum and 1.86x fixed-charge coverage against a 1.25x minimum.
Material changes and unusual items
- The MKS acquisition’s net cash cost was approximately $265.2 million, financed with a $250 million credit-facility borrowing and cash on hand. MKS contributed $6.0 million to reported Q3 revenue. Acquisition-related costs were $6.0 million in the quarter; together with acquired-intangible amortization, the acquisition reduced Q3 GAAP operating income by approximately $7 million. Purchase-price allocation, including tax and goodwill amounts, remained preliminary.
- Goodwill rose to $623.6 million from $418.5 million at September 30, 2010, principally reflecting MKS. PTC reported no goodwill impairment in its annual review as of July 2, 2011.
- PTC recorded a $4.4 million foreign-currency loss related to hedging the MKS purchase price. Total Q3 net foreign-currency exposure losses were $6.1 million. Reported results were favorably affected by currency translation; constant-currency revenue growth was lower than reported growth.
- A strategic automotive services contract generated an estimated $5 million loss, recognized in Q1. PTC also recorded approximately $3 million of severance and related costs in Q2.
- PTC repurchased 1.8 million shares for $39.9 million during the first nine months and had $78.1 million remaining under its authorization, which expired September 30, 2011 unless extended or revoked.
Outlook, management commentary, and risks
- PTC expected fiscal 2011 revenue to increase 14%–15% versus 2010, with license growth of approximately 15%, maintenance growth of approximately 12%, and services growth of approximately 20%. It expected MKS to add approximately $18 million of Q4 revenue (about $20 million on its non-GAAP basis) and to be neutral to fiscal 2011 non-GAAP operating income.
- Management expected to add sales capacity over the next five quarters, particularly to address Enterprise demand, while warning that strategic investments may not deliver expected results. It cited large-deal timing, uncertain global economic recovery, foreign-currency movements, and customer purchasing decisions as sources of volatility.
- PTC expected existing cash and operating cash flow to meet working-capital and capital-expenditure needs for at least 12 months. For Q4 it expected to repay part of the facility balance, repurchase $15 million of shares, and spend approximately $8 million on capital expenditures.
- PTC was investigating certain payments by business partners in China that raised potential compliance concerns, including under the Foreign Corrupt Practices Act. It voluntarily disclosed the matter to the SEC and Department of Justice; potential penalties or sanctions could not be estimated. China historically represented 6%–7% of revenue.
- The European Commission was investigating alleged anticompetitive practices in CAD and related software markets; PTC said no charges or proceedings had been initiated against it. The company also noted ordinary-course legal matters and that adverse outcomes could affect a particular period.
- Management said recent Japan earthquake and tsunami events had not materially affected Q2 or Q3 results, but worsening disruption could affect sales and services. The filing also identifies tax-audit uncertainty and possible tax-rate changes as risks.
Most important facts for investors to verify
- Whether PTC meets its fiscal 2011 growth outlook and converts strong Desktop, maintenance, and services results into sustained organic Enterprise license growth.
- Whether MKS integration delivers expected revenue and strategic benefits, and how final purchase accounting affects goodwill, amortization, taxes, and reported earnings.
- Operating cash flow trends after the litigation settlement and the company’s capacity to reduce acquisition-related debt while continuing repurchases and investment.
- Developments and potential financial, operational, or regulatory consequences of the China investigation and European Commission inquiry.
- The durability of reported growth and margins after separating foreign-currency effects, acquisition contributions, and non-GAAP adjustments from GAAP results.