PTC Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020; the filing also reports fourth-quarter results. Filed November 20, 2020. PTC sells industrial software and services, including CAD, PLM, IoT, augmented reality and application lifecycle management products, primarily through subscriptions.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change or context |
|---|---|---|---|
| Total revenue | $1,458.4 million | $1,255.6 million | Up 16% reported; up 17% constant currency |
| Recurring revenue | $1,281.9 million | $1,017.4 million | Up 26%; filing notes ASC 606 and business-policy effects |
| GAAP gross margin | $1,124.1 million; 77% | $930.3 million; 74% | Gross margin dollars up 21% |
| GAAP operating income | $210.9 million; 14.5% margin | $63.0 million; 5.0% margin | Up substantially; FY2020 includes $32.7 million of restructuring and other charges |
| Non-GAAP operating income | $423.4 million; 29.0% margin | $255.3 million; 20.3% margin | Non-GAAP excludes, among other items, stock compensation, acquired-intangible amortization and restructuring |
| Net income (loss) | $130.7 million | $(27.5) million | Returned to GAAP profitability |
| Diluted EPS | $1.12 | $(0.23) | Non-GAAP diluted EPS was $2.57 vs. $1.64 |
| Cash from operations | $233.8 million | $285.1 million | Down, primarily reflecting higher interest and restructuring payments |
| Free cash flow | $213.6 million | $220.7 million | Cash from operations less capital expenditures |
FY2020 revenue growth was led by software, with total software revenue up 21%. License revenue rose 57%, while support and cloud services increased 5%; professional services revenue declined 14%. Growth-product software revenue (IoT, AR and Onshape) rose 31%, Core product software revenue rose 24%, and FSG software revenue declined 1%. Annual recurring run rate (ARR) reached $1.270 billion, up 14% reported and 11% constant currency. Churn increased to 8.6% from 7.4%.
Fourth-quarter revenue was $391.0 million, operating income $67.0 million, net income $53.4 million and diluted EPS $0.46. Management said longer-than-forecast contract durations and more conversions increased upfront subscription revenue recognized in Q4.
At September 30, 2020, cash, cash equivalents and marketable securities totaled $335.1 million; current assets were $833.4 million and current liabilities $680.8 million. Total debt was $1.018 billion: $500 million of 3.625% senior notes due 2025, $500 million of 4.000% notes due 2028, and $18 million drawn on the revolving credit facility. The $18 million revolver balance was repaid in October 2020. PTC reported compliance with debt covenants at year-end and $956.5 million available to borrow under the facility. Management expected liquidity to cover working capital, capital expenditures and known requirements; FY2021 capital expenditures were expected to be about $25 million.
Material changes and notable items
- Subscription license revenue increased 88%. Revenue comparisons were affected by ASC 606 and the discontinuation of cancellation rights on substantially all new multi-year subscription contracts; on-premises license revenue may be recognized upfront while support and cloud revenue is generally recognized over time. Management said the cancellation-right change should have less effect in FY2021, and expanding SaaS offerings will increase ratable revenue recognition.
- In November 2019 PTC acquired Onshape for approximately $469 million net of acquired cash, largely funded with debt. Onshape added no material FY2020 revenue; the allocation included $364.9 million of goodwill. The acquisition was intended to support SaaS CAD/PLM growth.
- PTC issued $1.0 billion of new senior notes in February 2020 and redeemed its $500 million 6.000% notes due 2024, recording a $15 million early-redemption penalty and approximately $3 million of debt-issuance-cost write-offs.
- The effective GAAP tax rate was 3%, versus 235% in FY2019. The change included benefits from reductions in the U.S. valuation allowance, among other factors; PTC continued to maintain a full valuation allowance against U.S. net deferred tax assets.
- PTC recorded $32.7 million of restructuring and other charges, including a restructuring plan involving approximately 250 employees and costs related to exited facilities. Stock-based compensation increased to $115.1 million from $86.4 million.
Outlook, risks and contingencies
The filing provides no specific FY2021 revenue, earnings or ARR growth guidance. Management described continued focus on ARR growth, customer success, SaaS expansion and free-cash-flow growth. It reported a third consecutive year of double-digit ARR growth despite macroeconomic volatility.
- COVID-19 and customers: Remote work did not materially disrupt PTC’s own daily operations, but customer plant closures, economic uncertainty and limits on in-person sales and implementation activity affected demand and professional services. Management warned that further disruption could delay purchases, weaken renewals, increase payment delays and harm cash flow.
- Competition and transition: PTC faces competition across IIoT, AR, CAD and PLM, including from larger companies. Its subscription transition and SaaS development require continued investment and successful renewals, customer adoption and delivery.
- Debt and liquidity: Leverage, covenant compliance, refinancing and variable-rate borrowing are risks. Management said it expected sufficient liquidity, but cautioned that weaker cash flows or covenant issues could constrain borrowing and debt service.
- Tax matter: PTC is contesting a South Korean tax assessment of approximately $12 million already paid; it estimated potential additional exposure through FY2020 of about $17 million if the authorities prevail and had not recorded a reserve for the matter.
- Legal matter: A putative ERISA class action filed in September 2020 concerns oversight of the company’s 401(k) plan. PTC said it would defend the case and could not reasonably estimate the outcome’s effect. It stated that current legal proceedings and claims were not expected to have a material adverse impact, while noting outcomes are uncertain.
- Other risks: Cybersecurity incidents, foreign exchange exposure, tax audits, acquisition integration, partner relationships and reliance on manufacturing customers could affect results. A $1 billion share-repurchase authorization through September 30, 2023 was approved after year-end.
Investor verification points
- Assess how much reported revenue growth and margin improvement reflects recurring customer demand versus ASC 606, upfront subscription recognition and contract-policy changes.
- Track ARR, churn, renewal rates and the performance of Growth products and FSG, including the effects of COVID-19 on renewals and customer spending.
- Review Onshape’s contribution to SaaS adoption and growth against the acquisition’s cost, goodwill and integration expectations.
- Monitor operating cash flow, free cash flow, debt levels, covenant headroom and the potential use of the new repurchase authorization.
- Follow resolution of the South Korean tax dispute and the ERISA litigation, along with any changes to valuation allowances or other tax exposures.