PTC Inc. — FY2018 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2018. PTC develops software and services for industrial customers, including IoT and augmented reality solutions, CAD and PLM products, support, and professional services. The filing also reports fourth-quarter results.
Financial performance and key metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $1,241.8 million | $1,164.0 million |
| GAAP gross margin | $915.6 million; 74% of revenue | $835.0 million; 72% |
| GAAP operating income | $73.2 million; 5.9% margin | $40.9 million; 3.5% margin |
| GAAP net income | $52.0 million; diluted EPS $0.44 | $6.2 million; diluted EPS $0.05 |
| Non-GAAP operating income | $230.0 million; 18.4% margin | $188.4 million; 16.1% margin |
| Non-GAAP diluted EPS | $1.45 | $1.17 |
| Cash from operations | $247.8 million | $135.2 million |
| Cash, cash equivalents and marketable securities | $315.9 million | $330.3 million |
| Total debt at fiscal year-end | $648.1 million | $718.1 million |
Revenue increased 7% year over year, or 4% at constant currency. Subscription revenue rose 73% to $482.0 million, while support revenue fell 14% to $496.8 million and perpetual-license revenue fell 18% to $109.6 million. Professional-services revenue declined 13% to $153.3 million. IoT revenue grew 35% to $139.3 million; Solutions revenue grew 4% to $1,102.5 million.
Recurring revenue was $978.9 million, up 15%; recurring software represented about 90% of software revenue and 79% of total revenue. License and subscription bookings increased 11% to $466 million; subscription ACV rose 24% to $177 million; ARR was approximately $1.012 billion, up 12%. Deferred revenue and unbilled deferred revenue totaled $1.410 billion, including $911 million unbilled.
Fourth-quarter revenue was $312.5 million versus $306.4 million in Q4 FY2017; net income was $13.2 million versus $17.4 million.
Changes versus the prior period
- Growth reflected the shift to subscriptions and recurring revenue, alongside continued growth in CAD, PLM and IoT. Subscription mix increased 800 basis points year over year.
- Operating performance improved: GAAP operating margin rose 2.4 percentage points, and non-GAAP operating margin rose 2.3 points. Management attributed improvement to revenue growth, maturing subscriptions, a favorable revenue mix and cost discipline, partly offset by higher sales and marketing and R&D expenses.
- Operating cash flow increased by $112.6 million, primarily reflecting higher collections, higher net income, lower restructuring payments and the prior-year Korean tax payment.
- PTC received a $1 billion Rockwell Automation equity investment and used it, together with $100 million of operating cash, for $1.1 billion of share repurchases. Year-end debt declined by $70 million net under the credit facility; cash and securities were slightly lower.
Outlook, commentary and notable items
- Management expects the subscription transition to remain a near-term headwind: subscription mix is expected to rise a further 1,100–1,300 basis points in FY2019, with the transition effect expected to moderate in FY2020. It expects IoT and AR adoption to be important growth drivers and targets continued operating-margin expansion. The provided filing text does not give a clear numerical FY2019 revenue or EPS forecast.
- From October 1, 2018, PTC adopted ASC 606 using the modified retrospective method. It expected a $350–$380 million retained-earnings adjustment related to billed and unbilled deferred revenue, and approximately $70 million of commission costs to be capitalized and amortized. Revenue timing will change materially, including more subscription-license revenue recognized upfront.
- A workforce realignment announced after year-end is expected to generate an approximately $18 million FY2019 restructuring charge; management said it is intended to redirect investment, not deliver significant cost savings.
- PTC expects to move to its Boston Seaport headquarters in 2019. It had not secured a sublease for its existing headquarters, whose lease runs through November 2022. Failure to sublease on adequate terms could result in overlapping rent and an additional charge.
- In Q4, a customer dispute settlement produced a net $9.3 million revenue write-down: a $14.5 million professional-services write-down partly offset by $5.2 million of new subscription revenue. The dispute concerned a receivable previously recorded in earlier periods.
- At September 30, PTC had $500 million of 6% senior notes due 2024 and $148.1 million outstanding on a variable-rate revolving facility due 2023. Credit-facility covenants were met. In November 2018, PTC borrowed a further $80 million for working capital, bringing debt to approximately $728 million as of November 15.
- Key risks include execution and renewal risks in the subscription transition, competition and uncertain IoT/AR adoption, manufacturing-sector weakness and tariffs, foreign exchange exposure, cybersecurity, and debt-service and covenant constraints. PTC also disclosed an appealed Korean tax assessment of approximately $12 million, paid pending resolution and not reserved; ordinary-course legal claims were estimated at $0.7–$5.0 million, with $0.9 million accrued.
Important facts for investors to verify
- Track bookings, subscription ACV, ARR, renewal trends and deferred-revenue conversion alongside reported revenue, especially after ASC 606 adoption.
- Check the FY2019 effects of the subscription mix shift, ASC 606, the $18 million realignment charge and any additional restructuring or headquarters costs.
- Monitor operating cash generation, liquidity, November borrowing, variable-rate debt exposure, covenant headroom and the remaining settlement of the $1 billion accelerated share repurchase.
- Assess whether IoT and AR growth, partner relationships and service-margin improvements support management’s growth and margin expectations.
- Follow the headquarters sublease outcome, Korean tax appeal, other tax audits and the amount and resolution of legal claims.