PTC Inc. — Q1 Fiscal 2019 Form 10-Q
Reporting period: Three months ended December 29, 2018. PTC sells software and related services, including CAD, product lifecycle management, Industrial IoT and augmented reality solutions.
Financial results and position
| Metric | Q1 FY2019 | Comparable period |
|---|---|---|
| Total revenue | $334.7 million under ASC 606 | $306.6 million in Q1 FY2018 under prior accounting |
| Gross margin | $257.3 million; 77% of revenue | $223.6 million; 73% |
| Operating income | $30.0 million; 9.0% margin | $17.3 million; 5.6% margin |
| Net income | $21.0 million; diluted EPS $0.18 | $13.9 million; diluted EPS $0.12 |
| Operating cash flow | $21.2 million | $25.5 million |
- On a comparable ASC 605 basis, Q1 FY2019 revenue was $338.8 million, up 10% year over year (12% at constant currency); operating income was $33.2 million and diluted EPS was $0.16. These figures differ from reported ASC 606 results.
- Recurring revenue was $251.4 million as reported, including subscription revenue of $140.9 million. On the company’s ASC 605 comparison basis, subscription revenue grew 48% and total recurring revenue grew 11% year over year.
- Cash, cash equivalents, restricted cash and marketable securities totaled $333.8 million at quarter-end. Total debt was $783.1 million, including $500 million of 6% senior notes and $283.1 million drawn on the revolving facility.
- The company reported $417 million of undrawn revolving capacity, with approximately $401 million available to borrow. It was in compliance with debt covenants; total leverage was 2.30x and interest coverage was 7.24x.
- Investing cash outflow was $101.2 million, including $69.6 million for the Frustum acquisition and $30.3 million of property and equipment additions, primarily for the new headquarters. Financing cash inflow was $95.0 million, including $135 million of net debt borrowings.
Changes, accounting and unusual items
- Revenue increased year over year, driven by subscription growth and the maturing subscription model. PTC said perpetual license revenue was also boosted by final-purchase activity in Asia Pacific ahead of discontinuing perpetual licenses there.
- Bookings were weaker despite revenue growth: license and subscription bookings were $101 million, down 3%; subscription ACV was $29 million versus $34 million a year earlier. Management cited sales execution issues, including sales-force realignment, and last-time perpetual purchases in Asia Pacific.
- PTC adopted ASC 606 on October 1, 2018 using the modified retrospective method, without restating prior-year results. The standard accelerates recognition of the license portion of certain subscriptions. Adoption increased accumulated equity by $367.4 million net of tax and reduced deferred revenue; therefore, reported year-over-year comparisons are not fully like-for-like. The company provided ASC 605 comparisons for context.
- Q1 restructuring and headquarters relocation charges totaled $18.5 million, including $16.6 million primarily for workforce realignment affecting about 240 employees and $1.9 million of accelerated depreciation. The realignment shifts resources toward IoT and AR and is not expected to produce significant cost savings.
- The Frustum acquisition added $53.8 million of goodwill. PTC did not expect it to add material revenue in FY2019.
Outlook, commentary and risks
- Management targeted an increase of 1,100–1,300 basis points in subscription mix in FY2019 and expected continued operating-margin expansion as the subscription business matures. New licenses for core and ThingWorx solutions became subscription-only worldwide on January 1, 2019; Kepware remained available under perpetual license.
- PTC expected a roughly $24 million restructuring charge in Q2 FY2019 for vacating its former headquarters while seeking a subtenant. The charge and related cash outflows could rise if subleasing assumptions are not achieved.
- Management expected FY2019 capital expenditures of about $40 million, net of expected landlord funding, and said available liquidity and operating cash flow should fund working capital, capital needs and intended repurchases for at least 12 months. PTC expected approximately $65 million of repurchases in Q2 and stated a longer-term goal of returning 40% of free cash flow to shareholders.
- Key risks include ASC 606 increasing quarterly revenue volatility; dependence on large transactions and customer subscription conversions; macroeconomic, trade and foreign-exchange conditions; execution in IoT and AR; and the possibility that bookings or strategic initiatives do not translate into expected revenue and cash flow.
- PTC disclosed a Korean tax assessment of approximately $12 million, which it is appealing and for which it has recorded no reserve. It also faced tax audits in multiple jurisdictions. The CFO announced plans to retire in 2019; a departure date had not been set.
Important facts for investors to verify
- Compare growth using consistent accounting: ASC 606 reported results versus the company’s ASC 605 comparative figures.
- Track bookings and subscription ACV alongside recognized revenue to assess sales execution and subscription demand.
- Monitor operating cash flow, debt drawn, covenant headroom and the funding of planned repurchases and capital spending.
- Check whether the former headquarters is subleased and whether Q2 relocation charges remain near the estimated $24 million.
- Review the outcome of tax audits and the Korean tax appeal, and assess the effects of subscription-only licensing and the CFO transition.