PTC Inc. (Parametric Technology Corporation) — Q1 FY2011 10-Q
Reporting period: Three months ended January 1, 2011; unaudited. Comparisons are with the three months ended January 2, 2010. Unless stated otherwise, financial amounts are in U.S. dollars.
Business context
PTC develops and supports product lifecycle management and computer-aided design software, along with maintenance, consulting and training services. It reports Software Products and Services segments. Management said demand improved, while noting uncertainty about the durability of the global economic recovery.
Key financial results
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $266.6 million | $258.4 million | +3% reported; +4% constant currency |
| License revenue | $75.5 million | $74.8 million | +1% |
| Service revenue | $191.1 million | $183.6 million | +4% |
| Operating income (GAAP) | $17.1 million | $22.3 million | −23% |
| Operating margin (GAAP) | 6.4% | 8.6% | Down 2.2 percentage points |
| Net income | $13.3 million | $17.9 million | −26% |
| Diluted EPS (GAAP) | $0.11 | $0.15 | Down $0.04 |
| Operating cash flow | $(48.0) million | $22.8 million | Declined $70.8 million |
Non-GAAP operating income was $35.3 million versus $45.1 million, with a 13.3% margin versus 17.5%; non-GAAP diluted EPS was $0.22 versus $0.27. These measures exclude specified items, including stock-based compensation and acquired-intangible amortization, and should be considered alongside GAAP results.
Revenue growth reflected Desktop revenue up 8% and Enterprise revenue down 2%. Desktop license revenue rose 36%, while Enterprise license revenue fell 23%, in part because the prior-year quarter included unusually large Windchill deals. By geography, Europe grew 9% reported and the Americas declined 7%.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $182.9 million at January 1, 2011, down from $240.3 million at September 30, 2010.
- Current assets were $538.8 million and current liabilities were $398.1 million. Total assets were $1.268 billion; total liabilities were $503.5 million.
- No borrowings were outstanding under the $300 million revolving credit facility; the filing reported the full $300 million available. The facility matures in August 2014, subject to its terms and covenants. PTC reported compliance with covenants.
- Operating cash use included a $52.1 million litigation settlement payment and year-end compensation-related payments. Investing activities used $5.4 million, mainly for property and equipment; financing activities used $4.7 million.
Material changes, outlook and risks
- Automotive contract: PTC signed a first-phase Windchill engagement with a large automotive OEM. No revenue was recorded in the quarter; PTC immediately recognized an estimated $5 million contract loss because expected costs exceed revenue. Management said this reduced GAAP and non-GAAP operating income by $5 million and diluted EPS by $0.035.
- Litigation settlement: PTC paid GE Japan Corporation $52.1 million to resolve related U.S. and Japanese claims. GEJ withdrew its claims; neither party admitted liability. PTC received certain rights of recovery against third parties. Management said other ordinary-course matters were not expected to have a material adverse effect.
- FY2011 outlook: Management expected revenue growth of 10%–12%, license revenue growth of 20%–25%, maintenance growth of approximately 5%, and services growth of approximately 10%. It planned modest increases in sales, R&D and services investment, with possible reductions or delays if revenue underperformed. The filing cautioned that these expectations are subject to uncertainty and are not guaranteed.
- Risks and sensitivities: Economic weakness could defer customer purchases; large direct PLM deals have long lead times and may make results volatile. Currency movements affect reported results; about two-thirds of revenue and half of expenses were transacted in currencies other than the U.S. dollar. The quarter included net foreign-currency losses of $2.2 million.
- Taxes and commitments: The 13% effective tax rate included a $1.8 million benefit from the retroactive R&D tax credit extension. Pending Japanese tax legislation could produce an estimated $3 million non-cash tax charge if enacted. The Needham headquarters lease renewal carries approximately $92 million of future minimum payments, with $12.8 million of landlord funding for improvements.
- Management expected existing cash and operating cash generation to cover working capital and capital expenditures for at least 12 months. It anticipated approximately $21 million of capital expenditures for the remainder of FY2011 and expected to use $55 million of operating cash for share repurchases during FY2011.
Important facts for investors to verify
- Whether FY2011 revenue and product-line growth guidance was achieved, particularly given Enterprise license weakness and large-deal volatility.
- Actual costs, revenue recognition and eventual economics of the automotive OEM contract, including the estimated $5 million loss.
- Cash generation after the one-time GEJ settlement and compensation payments; track cash, receivables and deferred revenue.
- Developments in tax audits and Japanese tax legislation, including any change to unrecognized tax benefits or deferred tax assets.
- Share repurchase activity: the filing says no shares were repurchased under the public program in the quarter, while separately reporting 92,340 shares acquired from executives for tax withholding.