PTC Inc. — Q3 FY2022 Form 10-Q
Reporting period: Fiscal third quarter ended June 30, 2022; comparisons are with the quarter ended June 30, 2021. Financial statement amounts below are in millions of U.S. dollars, except per-share data.
Business context and results
PTC sells industrial software and related services across CAD, PLM, IIoT and augmented reality. Its revenue includes subscription and support, cloud services, perpetual licenses, and professional services. Management emphasized recurring revenue and continued transition toward SaaS.
| Metric | Q3 FY2022 | Q3 FY2021 | Change / context |
|---|---|---|---|
| Total revenue | $462.5 | $435.7 | Up 6% reported; 12% constant currency |
| Recurring revenue | $415.2 | $387.2 | Up 7% reported; 13% constant currency |
| GAAP gross margin | $360.5; 78% | $340.6; 78% | Dollar margin up 6% |
| GAAP operating income / margin | $80.0 / 17.3% | $73.6 / 16.9% | Operating income up 9% |
| Non-GAAP operating income / margin | $155.7 / 33.7% | $132.9 / 30.5% | Up 17% in dollars |
| Net income | $70.5 | $51.2 | GAAP diluted EPS: $0.60 vs. $0.43 |
| Non-GAAP diluted EPS | $0.97 | $0.83 | Up from prior year |
| Cash from operations / free cash flow | $116.8 / $112.3 | $88.0 / $84.6 | Quarterly amounts |
For the first nine months of FY2022, revenue was $1,425.4 million, up 7% reported and 11% constant currency. GAAP operating income was $301.3 million, net income $206.2 million, and diluted EPS $1.75. Cash from operations was $396.8 million and free cash flow $386.8 million, versus $323.5 million and $311.8 million, respectively, in the prior-year period.
Financial position and liquidity
- At June 30, 2022, cash and cash equivalents were $322.3 million (plus $0.7 million restricted cash); total current assets were $948.4 million and current liabilities $769.7 million.
- Total debt was $1,434.0 million gross and $1,425.1 million net of note issuance costs, including $934.0 million under the revolving credit facility and $1,000 million of senior notes due 2025 and 2028. The revolver had $550.8 million available to borrow.
- PTC reported compliance with debt covenants. Total leverage was 1.97x, senior secured leverage 0.61x, and interest coverage 13.74x. The average rate on borrowings was 3.4% in Q3; management expected rates to rise during the remainder of FY2022 because of variable-rate debt.
- For the first nine months, investing cash outflow was $192.9 million and financing cash outflow was $193.2 million. Cash declined by $4.0 million from the beginning of the fiscal year, including the effect of exchange rates.
Material changes, unusual items, and management commentary
- Q3 ARR was $1.544 billion, up 9% reported and 16% constant currency. Codebeamer contributed $15 million to ending ARR; discontinuing Russian operations reduced ARR by $4 million. Management noted that Q3 ARR would have been $81 million higher using beginning-of-year exchange rates.
- Software revenue grew 7% in Q3; support and cloud services rose 8%, while professional services declined 5% reported. Digital Thread revenue grew 5%; Velocity grew 62%, primarily reflecting Arena and Onshape growth and the Arena acquisition comparison.
- Q3 net income benefited from a $29.8 million gain on the sale of part of the PLM services business to ITC Infotech and a $3.0 million gain on sale of an investment. The divestiture consideration was approximately $60.4 million, including $32.5 million cash and $28.0 million in services; up to $20 million of additional contingent consideration may be received if milestones are met.
- For the first nine months, results included a $34.8 million recognized loss on a publicly traded equity investment. The investment was sold during Q2; PTC reported an overall realized gain of $34.0 million on the original investment. These investment and divestiture items make GAAP period comparisons less indicative of recurring operations.
- PTC acquired Intland Software, maker of Codebeamer, on April 29, 2022, for a preliminary purchase price of $277.2 million. The acquisition was funded with cash and $264 million borrowed under the credit facility. The purchase price allocation is preliminary; $240.0 million of goodwill was recorded.
- FY2022 restructuring charges were $36.9 million for the first nine months, mainly tied to a plan affecting approximately 330 employees and SaaS transformation costs. Management anticipated total charges of about $37 million and no significant additional charges; expected remaining-year payments were $2–$7 million.
- Q3 effective tax rate was 30% versus 12% a year earlier, including $15.5 million of tax expense related to the PLM services divestiture. The nine-month effective rate was 21% versus 17%.
- Management said cash, operating cash flow and available credit should cover working capital and capital needs for at least the next 12 months; FY2022 capital expenditures were expected to be about $20 million. It anticipated foreign-exchange headwinds for the rest of FY2022 and did not provide a clear full-year revenue or EPS forecast in the supplied filing text.
Risks, contingencies, and items to verify
- Management cited macroeconomic uncertainty, inflation, COVID-19 and the Russia/Ukraine conflict as potential factors affecting customer spending, subscriptions, collections and cash flow. Currency movements remain a reported-results headwind.
- Other risks include slower-than-expected SaaS adoption, execution of the Codebeamer acquisition and ITC Infotech transaction, restructuring and SaaS investment outcomes, employee retention, and higher variable borrowing costs.
- A proposed $1.725 million settlement of a 401(k) plan class action had preliminary court approval; a fairness hearing was scheduled for September 14, 2022. The company said the outcome was not expected to be material. Other legal matters were assessed as immaterial, though outcomes cannot be predicted with certainty.
- Investors should verify: ARR growth on a constant-currency basis and its definition; the sustainability of recurring-revenue growth and SaaS margins; cash conversion after restructuring and acquisition-related payments; the final Intland purchase accounting and integration results; the net effect of divestiture and investment items on comparable earnings; debt costs and covenant headroom; and the realization of any contingent sale consideration.