PTC Inc. — Q1 Fiscal 2018 Form 10-Q
Reporting period: Three months ended December 30, 2017; comparisons are with the three months ended December 31, 2016. Amounts are in U.S. dollars.
Business context
PTC provides industrial software and related services, including CAD, PLM, IoT and augmented reality products. Effective this quarter, it combined its former Solutions and IoT segments into Software Products; Professional Services remains a separate segment. The company is transitioning toward subscription licensing, with new core and ThingWorx licenses offered only by subscription in the Americas and Western Europe from January 1, 2018.
Financial performance and liquidity
| Metric | Q1 FY2018 | Prior-year quarter | Change or context |
|---|---|---|---|
| Revenue | $306.6 million | $286.3 million | Up 7% reported; 4% constant currency |
| Subscription revenue | $100.0 million | $54.4 million | Up 84% reported |
| Support revenue | $131.2 million | $151.5 million | Down 13% |
| Perpetual license revenue | $34.0 million | $34.4 million | Down 1% |
| Professional services revenue | $41.5 million | $46.1 million | Down 10% |
| Gross margin | $223.7 million; 73% of revenue | $204.2 million; 71% | Up 10% in dollars |
| Operating income and margin | $17.5 million; 5.7% | $4.6 million; 1.6% | Margin increased 410 basis points |
| Non-GAAP operating margin | 16.5% | 15.4% | Non-GAAP measure |
| Net income (loss) | $13.9 million | $(9.1) million | GAAP diluted EPS: $0.12 vs. $(0.08) |
| Non-GAAP diluted EPS | $0.31 | $0.26 | Up 17% |
| Operating cash flow | $25.1 million | $(47.9) million | Improved year over year |
Cash and cash equivalents were $291.7 million at quarter-end; marketable securities were $50.6 million, for combined liquidity of $342.2 million. Current assets were $619.5 million and current liabilities $604.3 million. Total debt was $748.1 million gross ($742.6 million net of stated issuance costs), including $500 million of 6% senior notes due 2024 and $248.1 million drawn on the revolving facility. The company reported $332 million of remaining facility borrowing capacity and compliance with its covenants.
Material changes and management commentary
- License and subscription bookings were $104 million, up 16% year over year (11% constant currency); subscription ACV increased 18% to $34 million. ARR was approximately $928 million, up 13%. These are company-defined operating measures, not GAAP revenue or forecasts.
- Total billed and unbilled deferred revenue was $1.169 billion, up 42% year over year. Unbilled deferred revenue was $738 million, up 64%.
- Management attributed improved operating results partly to higher revenue and restructuring charges that were $6.2 million lower than a year earlier. Sales and marketing and R&D expenses each rose 10% as compensation, headcount and other investment increased.
- Operating cash flow benefited from higher receivables collections and lower restructuring payments, and from not repeating the prior-year $12 million Korean tax assessment payment. The prior-year quarter also included $15.8 million in restructuring payments.
- The subscription transition continues to shift revenue from support and perpetual licenses into subscriptions. Management said the transition remains a near-term headwind to revenue, margin and EPS, while expecting long-term recurring revenue and earnings benefits as the model matures.
Outlook, risks and unusual items
- Management expected continued operating-margin expansion in fiscal 2018 and further expansion in 2019 and beyond. It expected fiscal 2018 capital expenditures of approximately $40 million and stated that available liquidity should meet working-capital and capital needs for at least the next twelve months.
- New software licenses for core and ThingWorx products became subscription-only in the Americas and Western Europe on January 1, 2018. Outside those regions, the company planned to continue offering both license types through December 31, 2018, with subscription-only availability for most solutions thereafter, excluding Kepware.
- Adoption of the new revenue standard was planned for fiscal 2019 using the modified retrospective method. PTC expected some subscription license revenue to be recognized upon delivery rather than ratably, potentially shifting revenue toward the beginning of contract periods and producing a potentially material retained-earnings adjustment. It also expected to capitalize certain contract acquisition costs, such as commissions.
- The Tax Cuts and Jobs Act produced a reported tax benefit; PTC recorded a $14.2 million deferred tax benefit from estimated U.S. deferred-tax impacts and estimated $7.1 million of state tax payable related to deemed repatriation. The company said estimates remained subject to change and retained a full valuation allowance against U.S. net deferred tax assets. GAAP income therefore should be read in light of the tax effects; non-GAAP results exclude an approximately $7 million Tax Act benefit.
- A disputed customer receivable could result in a write-down and professional-services revenue impact ranging from zero to $17.3 million if collection is unsuccessful. PTC intends to pursue collection.
- PTC is appealing an approximately $12 million Korean tax assessment, which it paid in the first quarter of fiscal 2017. It believes its position will prevail and has not recorded a tax reserve. Other legal claims were estimated at $0.3 million to $3.5 million, with $0.4 million accrued.
- The company faces potential overlapping headquarters lease costs from July 2020 through November 2022 unless it exits or subleases its current premises on acceptable terms. Failure to do so could affect cash flow and require a charge.
- Results remain exposed to timing and size of large transactions, foreign-exchange movements, subscription-mix and customer-conversion outcomes, macroeconomic conditions, and facility leverage restrictions. The credit facility matures September 15, 2019; the subscription transition has affected the leverage ratio used in the facility.
Important facts for investors to verify
- How subscription bookings, ARR and deferred revenue convert into recognized revenue and cash collections; these measures do not replace reported revenue.
- Whether subscription growth and the shift away from support and perpetual licenses deliver the margin expansion management expects.
- The final effects of tax reform, including any revisions to estimates, valuation allowances and future effective tax rates.
- Collection of the disputed receivable and the outcome of the Korean tax appeal and other tax audits.
- Progress resolving or subleasing the current headquarters lease, and the potential cost of overlapping rent or asset write-offs.
- Debt, covenant headroom and refinancing needs, particularly given the September 2019 credit-facility maturity and the company’s leverage sensitivity to subscription-transition effects.