PTC Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended July 4, 2015; comparable periods ended June 28, 2014. Amounts below are in U.S. dollars. PTC sells software and related services across CAD, PLM, ALM, SLM and Internet of Things (IoT) markets.
Key financial results
| Metric | Q3 2015 | Q3 2014 | First nine months 2015 | First nine months 2014 |
|---|---|---|---|---|
| Revenue | $303.1 million | $336.6 million | $942.7 million | $990.3 million |
| Gross margin | $223.7 million; 73.8% | $245.6 million; 72.9% | $684.3 million; 72.6% | $712.4 million; 71.9% |
| Operating income | $21.6 million; 7.1% margin | $54.4 million; 16.2% margin | $63.2 million; 6.7% margin | $160.5 million; 16.2% margin |
| Net income | $17.4 million | $38.0 million | $53.1 million | $121.4 million |
| Diluted EPS | $0.15 | $0.32 | $0.46 | $1.01 |
| Cash from operating activities | $86.8 million | $106.4 million | $192.5 million | $253.4 million |
Q3 revenue declined 10% reported and 1% at constant currency; nine-month revenue declined 5% reported but increased 2% at constant currency. Q3 non-GAAP operating margin was 24.1% versus 24.2%, and non-GAAP diluted EPS was $0.53 in both periods. Non-GAAP measures exclude, among other items, stock compensation, acquired-intangible amortization, restructuring, acquisition and pension costs, and the China investigation accrual.
Business and material changes
- Q3 software revenue fell 7% reported but rose 2% at constant currency. License and subscription solutions revenue decreased 14% reported (7% constant currency); support fell 4% reported but rose 6% constant currency. Professional services declined 20% reported (10% constant currency), reflecting increased use of service partners.
- Large deals weakened: PTC recorded eight Q3 customer bookings above $1 million, versus 21 a year earlier; there were no Q3 mega-deals above $5 million, versus one. Management cited fewer large deals and challenging macroeconomic conditions, particularly in the Americas and China.
- IoT was a relative growth area: IoT license revenue exceeded 20% of Q3 license and subscription solutions revenue, and three of the quarter’s eight largest deals were IoT transactions. Recurring revenue streams represented about 60% of Q3 revenue, compared with about 53% a year earlier; subscription solutions were 16% of Q3 bookings.
- Q3 revenue by solution included CAD $119.7 million, ePLM $122.8 million, SLM $39.2 million and IoT $21.4 million. CAD and ePLM were pressured by weaker license sales and fewer large deals; IoT and SLM performed comparatively well.
Cash, debt and liquidity
- Cash and cash equivalents were $275.1 million at July 4, 2015, down from $293.7 million at September 30, 2014. Nine-month operating cash flow was $192.5 million; investing cash outflow was $130.0 million and financing cash outflow was $66.6 million.
- At quarter-end, credit-facility debt totaled $624.4 million: $481.3 million term debt and $143.1 million revolving debt. PTC reported $190 million available under the revolving facility, a 2.31x leverage ratio and 7.25x fixed-charge coverage ratio, and compliance with covenants. The facility matures September 2019.
- Nine-month cash uses included $98.4 million for acquisitions, $20.6 million for capital expenditures, $50.0 million for share repurchases and $29.1 million for withholding taxes on vested stock awards. Management said cash, operating cash generation and facility availability should meet working-capital and capital needs for at least the next 12 months.
Outlook, unusual items and risks
- Management said fiscal 2015 revenue and non-GAAP earnings were expected to be below previous guidance, citing currency depreciation and greater-than-expected macroeconomic uncertainty. No revised numerical guidance is provided in the filing text.
- PTC recorded a $13.6 million liability for pending discussions with the SEC and DOJ concerning its China business and business-partner expenditures that apparently benefited employees of state-owned-enterprise customers. The company described this as the minimum expected settlement amount; additional fines could be significant, and settlement or other resolution could materially exceed the accrual or have business consequences.
- A 2015 restructuring plan recorded $42.6 million of charges in the first nine months, associated principally with termination benefits for 443 employees. Expected charges were up to $45 million, with approximately $30 million in net annualized expense reductions anticipated.
- PTC acquired ColdLight in May for approximately $98.6 million net cash; the acquisition was funded with a $100 million facility borrowing. Up to $5 million of additional consideration depends on technology milestones. The company also estimated the full $18 million ThingWorx earn-out would be earned; a $9 million first-year payment was made July 17, 2015.
- After quarter-end, PTC contributed $26 million to complete termination of its U.S. pension plan. Management expected a fourth-quarter pre-tax settlement loss of approximately $66 million, or $47 million net of tax.
- Foreign exchange materially affected reported results: management estimated Q3 operating income would have been $12.9 million higher using prior-year exchange rates. Other risks include subscription mix potentially reducing near-term revenue, margins and EPS; dependence on large transactions; macroeconomic weakness; and variable-rate debt exposure.
Most important facts for investors to verify
- Updated fiscal 2015 revenue and non-GAAP earnings outlook, including the assumptions for exchange rates and macroeconomic conditions.
- Progress in closing large core-market deals and whether IoT and subscription bookings convert into recognized revenue and cash flow.
- Final SEC/DOJ resolution of the China investigation and any fines or collateral business effects beyond the $13.6 million accrual.
- Debt repayment, revolver availability and covenant headroom, particularly as restructuring and pension cash requirements are paid.
- Actual pension settlement loss and realized savings from the workforce and facility restructuring.