PTC Inc. — Q1 FY2020 Form 10-Q
Business context and reporting period. PTC provides software and services for industrial customers, including CAD, PLM, IoT and augmented reality. The quarter ended December 28, 2019, compared with the quarter ended December 29, 2018. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change/comment |
|---|---|---|---|
| Total revenue | $356.1 | $334.7 | +6% reported; +8% constant currency |
| Recurring revenue | $305.4 | $251.4 | +21% reported; +23% constant currency |
| GAAP gross margin | $268.7; 75% | $257.3; 77% | Revenue rose, but margin rate declined |
| GAAP operating income | $30.4; 8.5% margin | $30.0; 9.0% margin | Income +1%; margin down 0.5 percentage point |
| GAAP net income | $35.5 | $21.0 | Includes a $21.0 tax benefit associated with Onshape acquisition |
| Diluted EPS | $0.31 | $0.18 | Non-GAAP diluted EPS was $0.57 vs. $0.56 |
| Cash from operations | $7.5 | $21.2 | Down; lower receivable collections were a principal factor |
| Adjusted free cash flow | $12.5 | $(0.8) | Non-GAAP measure; excludes specified payments |
Software revenue grew 7%. Perpetual-license revenue fell 78%, reflecting the end of substantially all perpetual-license sales after Q1 FY2019; recurring revenue and subscription growth partly offset that decline. Growth Products revenue rose 36%, Core Products revenue rose 5%, and Focused Solutions Group revenue fell 6%. By region, Europe grew 23%, the Americas 10%, and Asia-Pacific declined 22%.
Liquidity, debt and balance sheet
- At December 28, 2019, cash and cash equivalents were $237.0 million, marketable securities were $57.5 million, and restricted cash was $0.9 million: $295.4 million in aggregate.
- Total debt was $1,128.1 million, including $500 million of 6.0% senior notes due 2024 and $628.1 million drawn under the revolver. The revolver commitment had been increased to $1.0 billion; $275.2 million was available for borrowing.
- PTC reported compliance with debt covenants. Its total leverage ratio was 3.63x against a 4.50x maximum; senior secured leverage was 2.04x against a 3.00x maximum; interest coverage was 7.69x against a 3.00x minimum.
- Current assets were $739.2 million and current liabilities were $631.5 million. Reported lease liabilities totaled $225.3 million, following adoption of the new lease standard.
Material changes and significant items
- PTC acquired Onshape on November 1, 2019 for approximately $468 million net of cash acquired, funded primarily with $455 million of revolver borrowings. Onshape is a SaaS CAD and data-management platform; management said it was not expected to be material to FY2020 results. Purchase accounting remained preliminary, including the valuation of acquired intangibles and related deferred taxes.
- Onshape contributed $363.2 million of goodwill. Total goodwill increased to $1.606 billion from $1.238 billion at September 30, 2019.
- PTC adopted ASC 842 leases on October 1, 2019, recognizing a $224.0 million lease liability and a $167.9 million right-of-use asset at adoption. Prior periods were not recast.
- A voluntary restructuring tied to Onshape-related synergies incurred $13.6 million in the quarter, with an estimated $21 million charge for that plan and approximately $30 million of total restructuring charges expected in FY2020. Management estimated a further $16 million of restructuring charges for the remainder of the fiscal year.
- The effective tax rate was negative 86%, largely reflecting a $21.0 million reduction in the U.S. valuation allowance related to Onshape. PTC continued to maintain a full valuation allowance against U.S. net deferred tax assets.
Outlook, management commentary and risks
Management reported ARR of $1.158 billion, up 11% year over year, with Growth Products ARR up 35%, Core Products up 9%, and FSG up 1%. It expected FY2020 capital expenditures of approximately $27 million and believed existing cash, operating cash flows and available credit would fund working capital and capital requirements for at least the next 12 months.
Management noted that large customer transactions and contract timing can make quarterly results volatile. Risks highlighted include macroeconomic and manufacturing conditions, trade tensions, foreign exchange movements, slower adoption or renewal of subscriptions, competition, execution of SaaS/IoT/AR growth plans, and integration or customer uptake of acquired technologies. PTC also cited potential higher cash outflows if it cannot sublease its former headquarters; estimated net outflows for the remaining lease term were approximately $30 million. The company remained in a South Korean tax appeal concerning an approximately $12 million assessment paid in 2017; it had not recorded a tax reserve and described potential additional exposure through 2019 of approximately $13 million. Legal claims were estimated at $0.6–$2.3 million, with $0.4 million accrued.
Most important facts for investors to verify
- Whether ARR and recurring-revenue growth translate into recognized revenue and operating cash flow, especially as perpetual-license sales have largely ended.
- The durability of margins and the underlying earnings picture after separating the acquisition-related tax benefit and non-GAAP adjustments from GAAP results.
- Onshape integration, SaaS customer adoption, final purchase accounting, and the expected restructuring costs and savings.
- Debt, leverage and covenant headroom, including the effects of variable-rate borrowing and future cash needs.
- Sublease assumptions for the former headquarters and the outcome of the South Korean tax appeal.