PTC Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended December 31, 2016; comparable period ended January 2, 2016. Amounts below are in U.S. dollars. The filing is unaudited.
Business context
PTC sells software and related services, including CAD, PLM and SLM products and Internet of Things (IoT), analytics and augmented-reality solutions. Its subscription transition continued to shift sales away from perpetual licenses, affecting the timing of reported revenue and earnings. PTC reports three segments: Solutions, IoT and Professional Services.
Financial performance and position
| Metric | Q1 FY2017 | Q1 FY2016 | Change / context |
|---|---|---|---|
| Total revenue | $286.3 million | $291.0 million | Down 2% (also down 2% constant currency) |
| Subscription revenue | $54.4 million | $22.2 million | Up 145% |
| Support revenue | $151.5 million | $171.8 million | Down 12% |
| Perpetual license revenue | $34.4 million | $47.8 million | Down 28% |
| Recurring software revenue | $205.8 million | $193.9 million | Up 6%; 86% of software revenue was recurring, versus 80% |
| Gross margin | $204.2 million; 71.3% of revenue | $210.9 million; 72.5% | Down 3% in dollars |
| Operating income (loss) | $4.6 million; 1.6% margin | $(13.3) million; (4.6)% margin | Improved, partly reflecting lower restructuring charges |
| Net income (loss) | $(9.1) million | $(23.9) million | Basic and diluted loss per share was $0.08, versus $0.21 |
| Non-GAAP operating income / margin | $44.3 million / 15.4% | $62.1 million / 21.3% | Non-GAAP diluted EPS was $0.26, versus $0.51 |
| Operating cash flow | $(48.0) million | $61.3 million | Cash outflow included bonus and commission payments, bond interest and a Korean tax assessment payment |
Cash and cash equivalents were $173.4 million at December 31, 2016, and marketable securities were $49.8 million, for combined liquidity of $223.2 million. Cash declined $104.6 million from September 30, 2016. Current assets were $513.2 million and current liabilities $556.7 million.
Debt principal totaled $738.1 million: $500 million of 6.0% senior notes due 2024 and $238.1 million drawn on a $900 million revolving credit facility. The balance sheet reports debt net of issuance costs of $731.8 million. PTC repaid $20 million net under the facility during the quarter and borrowed a further $40 million in January 2017. It reported compliance with debt covenants at quarter-end.
Material changes versus the prior comparable period
- The subscription model drove a sharp increase in subscription revenue and a decline in perpetual-license and support revenue. Subscription bookings were 65% of license and subscription bookings, compared with 28%; license and subscription bookings were $90 million, up 31%.
- ARR was approximately $819 million, up 9%. Total billed and unbilled deferred revenue was $825 million, up 43% year over year; unbilled deferred revenue was $450 million.
- IoT business-group revenue was $23.9 million, up 57%, while Solutions business-group revenue was $262.4 million, down 5%. Kepware, acquired in 2016, contributed approximately $6.6 million of software revenue.
- Restructuring charges fell to $6.3 million from $37.1 million. Costs and expenses also reflected lower stock-based compensation and lower professional-services costs, partly offset by higher sales and marketing expense, incentive compensation and software-support costs.
- Interest and other expense increased to $11.1 million from $6.3 million, mainly due to the senior notes and higher credit-facility borrowings. Foreign-currency losses on non-designated forward contracts were $8.3 million.
- Operating cash flow moved from a $61.3 million inflow to a $48.0 million outflow. Management cited approximately $37 million more in bonus and commission payments, a $15 million first bond-interest payment and a $12 million Korean tax payment.
Outlook, management commentary and risks
- Management expects subscription licensing to remain a substantial majority of license and subscription bookings in FY2017. It cautioned that the transition will continue to weigh on revenue, operating margin and EPS until the customer base completes the transition.
- Management’s FY2017 priorities are sustainable growth, continued subscription expansion, cost control and margin improvement. It does not expect net operating-expense reductions in 2017, as restructuring savings are expected to be offset by planned investment and cost increases.
- PTC expects foreign-currency movements versus the prior year to negatively affect results during the remainder of FY2017 and remains cautious about global macroeconomic conditions. It said recent improvements in some indicators had not yet established a change in customer buying behavior.
- Management expects to resume share repurchases in the second half of 2017, subject to liquidity and borrowing capacity. It stated that existing cash, operating cash flow and facility availability should meet working-capital and capital needs for at least the next 12 months.
- Risks highlighted include subscription adoption and revenue-recognition timing, customer demand and deal timing, IoT growth, foreign exchange, the ability to realize restructuring savings, significant debt and covenant restrictions, and taxes on non-U.S. earnings or repatriation.
- The company paid an approximately $12 million Korean tax assessment in the quarter while appealing it; it recorded no reserve because management believed its position was more likely than not to be sustained. The filing notes that tax-audit outcomes could nevertheless change estimates materially.
- A putative shareholder class action relating to disclosures about the China FCPA investigation had a proposed settlement for an amount management described as not material. Court approval remained outstanding. PTC reported a $2.5 million accrual for legal proceedings and claims overall.
- Other subsequent events: PTC sold a cost-method investment in January 2017 for $13.7 million, recording an approximately $3.7 million gain. The filing also reports no material change to market-risk exposure and effective disclosure controls.
Important facts for investors to verify
- Whether subscription bookings, renewals and deferred-revenue growth translate into durable recognized revenue and improved margins; bookings and ARR are operating measures, not GAAP revenue or forecasts.
- The pace and profitability of IoT growth, including the contribution and integration of Kepware, and whether Solutions bookings offset weaker perpetual-license sales.
- Cash generation after the subscription transition, restructuring payments and seasonal compensation outflows; also monitor cash held outside the United States and the effect of repatriation taxes.
- Debt levels, variable-rate exposure, covenant headroom and the impact of the additional January 2017 borrowing.
- Resolution of the Korean tax appeal and shareholder litigation, along with management’s assumptions for tax valuation allowances and unrecognized tax benefits.
- Non-GAAP results alongside GAAP results: PTC excludes items including stock compensation, acquired-intangible amortization and restructuring charges, which can be material and recur.