PTC Announces Second Quarter Fiscal Year 2019 Results

Revenue, Operating Margin and EPS at or Above the High End of
Guidance

BOSTON–(BUSINESS WIRE)–PTC (NASDAQ: PTC) today reported financial results for its fiscal second
quarter 2019.


Financial Summary – ASC 606 (1)

Revenue of $290 million


GAAP net loss was $44 million or ($0.37) per diluted share; non-GAAP
net income was $26 million or $0.22 per diluted share


GAAP operating margin of (8%); non-GAAP operating margin of 15%


Financial Summary ASC 605 (1)

Revenue of $315 million


GAAP net loss was $12 million or ($0.10) per diluted share; non-GAAP
net income was $45 million or $0.38 per diluted share


GAAP operating margin of 0%; non-GAAP operating margin of 21%


(1)We adopted ASC 606 on October 1, 2018,
which impacted our reported financial results, including the timing and
classification of revenue. For comparability purposes, and unless
otherwise specified, the amounts included in the commentary below refer
to results under ASC 605, as shown in our financial statements,
including the notes thereto.


“We are pleased with our second quarter financial performance with
revenue, margin and EPS at or above the high end of our guidance range,”
said James Heppelmann, President and CEO, PTC. “Bookings growth of 18%
year over year in constant currency was driven by a strong quarter for
IoT, with IoT bookings growth well above the estimated 30-40% market
growth rate. With our subscription business model transition complete,
we were pleased to deliver Subscription bookings mix above 90%.”


Other second quarter 2019 results:Additional operating and
financial highlights are set forth below. Information about our bookings
and other reporting measures (as updated) is provided below. For
additional details, please refer to the prepared remarks and financial
data tables that have been posted to the Investor Relations section of
our website at investor.ptc.com.


Additional Operating Highlights:


License and subscription bookings: Q2’19 license and subscription
bookings were $112 million, an increase of 18% on a constant currency
basis, driven by a strong quarter for IoT; for the first time IoT
bookings surpassed both CAD and PLM in the quarter.


Software revenue: Q2’19 software revenue was $277 million, an
increase of 6% year over year or 8% in constant currency.


Recurring Software revenue: Q2’19 software recurring revenue was
$266 million, an increase of 11% year over year or 14% in constant
currency.


IoT software revenue: Q2’19 IoT software revenue was $37 million,
up 27% year over year or 30% on a constant currency basis, driven by 48%
constant currency growth in subscription revenue.


Annualized recurring revenue (ARR): Q2’19 ARR was $1,065 million,
a constant currency increase of 15% year over year and the ninth
consecutive quarter of double-digit year-over-year growth.


Deferred revenue: Billed deferred revenue increased 11% year over
year to $554 million. Total deferred revenue – billed and unbilled –
increased $61 million year over year, despite a 400-basis point currency
headwind. Billed deferred revenue primarily relates to software
agreements invoiced to customers for which the revenue has not yet been
recognized. Billed deferred revenue fluctuates quarterly based upon the
contractual billing dates in our recurring revenue contracts, and the
timing of our fiscal reporting periods. Additionally, total deferred
revenue is impacted by changes in FX rates and the length of new and
renewal contracts.


Operating margin: GAAP operating margin in the second quarter was
0%, compared to 7% in the same period last year driven by restructuring
charges associated with the relocation of our headquarters; non-GAAP
operating margin was 21%, compared to 18% in the same period last year.


Operating cash flow and free cash flow: Operating cash flow in
the second quarter was $141 million, up 27% over Q2’18, and free cash
flow was $120 million, up 13% over Q2’18. Free cash flow in Q2’19
includes cash payments of approximately $10 million related to our
restructuring plan, including the relocation of our headquarters.


Total cash, cash equivalents, and marketable securities: As of
the end of the second quarter total cash, cash equivalents, and
marketable securities was $351 million and total debt, net of deferred
issuance costs, was $739 million. During the second quarter we used $65
million to repurchase 725,000 shares.


Restructuring: The restructuring charge in the second quarter
related to exiting our headquarters in Needham was $27 million.


Other information – Q2’19 subscription bookings: Bookings include
a $7.5 million IoT booking for which the contract terms were approved on
March 30, but for which the electronic signature process was not fully
complete until the morning of March 31.


Management’s 2019 Financial Outlook:The Company’s third
quarter and fiscal year 2019 revenue and diluted earnings per share
guidance is provided below. The revenue and diluted earnings per share
guidance is provided on both a GAAP and a non-GAAP basis, and in
accordance with both ASC 606 and ASC 605. Non-GAAP financial measures
exclude the income statement effects of acquisition adjustments to
deferred revenue, stock-based compensation, amortization of acquired
intangible assets, acquisition-related transaction costs, restructuring
charges and measurement-period adjustments related to the Tax Cuts and
Jobs Act.


Fiscal 2019 Business Outlook – ASC 606For the third quarter
and fiscal year ending September 30, 2019, the company expects:


In millions except per share amounts


Operating Measures (1)

 


 


Q3’19Low


 


Q3’19High


 


 


FY’19Low


 


FY’19High






















 


Subscription ACV






$51




$55






$ 207




$ 217


License and Subscription Bookings






$110




$120






$ 485




$ 505


Subscription % of Bookings






92%




92%






86%




86%


(1) An explanation of the metrics included in this table
is provided below.


 


Financial Measures (1)





Q3’19Low




Q3’19High






FY’19Low




FY’19High


Total Subscription Revenue






$138




$147






$ 596




$ 616


Perpetual Support Revenue






$100




$103






$419




$424


Total Recurring Revenue






$238




$250






$1,015




$1,040


Perpetual License Revenue






$9




$10






$70




$73


Total Software Revenue






$247




$260






$1,084




$1,112


Professional Services Revenue






$41




$43






$166




$168


Total Revenue






$288




$303






$ 1,250




$ 1,280






















 


Operating Expense (GAAP)






$211




$212






$ 886




$ 890


Operating Expense (Non-GAAP)






$180




$182






$715




$718


Operating Margin (GAAP)






(1%)




4%






3%




6%


Operating Margin (Non-GAAP)






13%




17%






20%




22%


Tax Rate (GAAP)






(50%)




(50%)






(60%)




(60%)


Tax Rate (Non-GAAP)






18%




18%






19%




18%


Shares Outstanding






118




118






118


 


118


EPS (GAAP)






($0.15)




$0.03






$ 0.02




$ 0.44


EPS (Non-GAAP)






$0.20




$0.30






$1.45


 


$ 1.70


Free Cash Flow
















$ 265


 


$ 275


Adjusted Free Cash Flow
















$ 290


 


$ 300






















 


(1) The third quarter and fiscal 2019 non-GAAP operating
expense, non-GAAP operating margin and non-GAAP EPS guidance exclude the
estimated items outlined in the table below, as well as any tax effects
and discrete tax items (which are not known nor reflected). Adjusted
free cash flow excludes $25 million of restructuring payments related to
our workforce realignment and headquarters relocation. From a cash
perspective, the free rent and estimated sublease income over the first
18 months on our Seaport headquarters total approximately $30 million,
as compared to the estimated cash outflows of $34 million on the Needham
headquarters facility, which will be incurred over the next 44 months.




 


 




 




In millions






Q3’19




FY’19












 


Effect of acquisition accounting on fair value of acquired
deferred revenue






$0




$1


Acquisition-related charges






–




1


Restructuring and headquarters relocation charges (1)





–




45


Intangible asset amortization expense






13




51


Stock-based compensation expense






28




114


Total Estimated Pre-Tax GAAP adjustments






$41




$212












 


(1) Includes $16 million related to our workforce realignment
recorded in the first quarter of 2019 and $29 million recorded in the
first and second quarters of 2019 related to lease commitments and
accelerated depreciation expense associated with exiting the Needham
headquarters facility and relocating to our new worldwide headquarters
in the Boston Seaport District, which occurred in January 2019.


Fiscal 2019 Business Outlook – ASC 605For the third quarter
and fiscal year ending September 30, 2019, the company expects:


In millions except per share amounts


Operating Measures (1)

 


 


Q3’19Low


 


Q3’19High


 


 


FY’19Low


 


FY’19High






















 


Subscription ACV






$51




$55






$ 207




$ 217


License and Subscription Bookings






$110




$120






$ 485




$ 505


Subscription % of Bookings






92%




92%






86%




86%


(1) An explanation of the metrics included in this table
is provided below.


 


Financial Measures






Q3’19Low




Q3’19High






FY’19Low




FY’19High


Subscription Revenue






$166




$170






$ 664




$ 670


Support Revenue






$105




$105






$424




$425


Perpetual License Revenue






$9




$10






$70




$73


Total Software Revenue






$280




$285






$1,158




$1,168


Professional Services Revenue






$40




$40






$155




$157


Total Revenue






$320




$325






$ 1,313




$ 1,325


Operating Expense (GAAP)






$221




$223






$ 912




$917


Operating Expense (Non-GAAP)






$190




$ 192






$740




$745


Operating Margin (GAAP)






5%




7%






6%




7%


Operating Margin (Non-GAAP)






18%




19%






23%




23%


Tax Rate (GAAP)






30%




30%






30%




30%


Tax Rate (Non-GAAP)






19%




18%






19%




18%


Shares Outstanding






118




118






118


 


118


EPS (GAAP)






$0.03




$0.07






$ 0.25




$ 0.32


EPS (Non-GAAP)






$0.31




$0.36






$ 1.75


 


$ 1.85


Free Cash Flow
















$ 265


 


$ 275


Adjusted Free Cash Flow
















$ 290


 


$ 300






















 


The third quarter and fiscal 2019 non-GAAP operating expense, non-GAAP
operating margin and non-GAAP EPS guidance exclude the estimated items
outlined in the table below, as well as any tax effects and discrete tax
items (which are not known nor reflected). Adjusted free cash flow
excludes $25 million of restructuring payments related to our workforce
realignment and headquarters relocation. From a cash perspective, the
free rent and estimated sublease income over the first 18 months on our
Seaport headquarters total approximately $30 million, as compared to the
estimated cash outflows of $34 million on the Needham headquarters
facility, which will be incurred over the next 44 months.




 


 




 




In millions






Q3’19




FY’19












 


Effect of acquisition accounting on fair value of acquired
deferred revenue






$0




$1


Acquisition-related charges






–




1


Restructuring and headquarters relocation charges (1)





–




45


Intangible asset amortization expense






13




51


Stock-based compensation expense






28




114


Total Estimated Pre-Tax GAAP adjustments






$41




$212












 


(1) Includes $16 million related to our workforce realignment
recorded in the first quarter of 2019 and $29 million recorded in the
first and second quarters of 2019 related to lease commitments and
accelerated depreciation expense associated with exiting the Needham
headquarters facility and relocating to our new worldwide headquarters
in the Boston Seaport District, which occurred in January 2019.


PTC’s Fiscal Second Quarter Results Conference Call, Prepared Remarks
and Data TablesPrepared remarks and financial data tables have
been posted to the Investor Relations section of our website at ptc.com.
The Company will host a management presentation to discuss results at
5:00 pm ET on Wednesday, April 24, 2019. To access the live webcast,
please visit PTC’s Investor Relations website at investor.ptc.com at
least 15 minutes before the scheduled start time to download any
necessary audio or plug-in software. To participate in the live
conference call, dial 773-799-3757 or 800-857-5592 and provide the
passcode PTC. The call will be recorded, and a replay will be available
for 10 days following the call by dialling 866-483-9088 and entering the
passcode 8020. The archived webcast will also be available on PTC’s
Investor Relations website.


Bookings MetricsWe offer both
perpetual and subscription licensing options to our customers, as well
as monthly software rentals for certain products. Given the difference
in revenue recognition between the sale of a perpetual software license
and a subscription, we use bookings for internal planning, forecasting
and reporting of new license and cloud services transaction (as
subscription bookings includes cloud services bookings).


In order to normalize between perpetual and subscription licenses, we
define subscription bookings as the subscription annualized contract
value (subscription ACV) of new subscription contracts multiplied by a
conversion factor of 2. We arrived at the conversion factor of 2 by
considering a number of variables including pricing, support, length of
term, and renewal rates. We define subscription ACV as the total value
of a new subscription contract (which may include annual values that
increase over time) divided by the term of the contract (in days)
multiplied by 365. If the term of the subscription contract is less than
a year, and is not associated with an existing contract, the booking is
equal to the total contract value. Beginning in Q3’18, minimum ACV
commitments under our Strategic Alliance Agreement with Rockwell
Automation are included in subscription ACV if the period-to-date
minimum ACV commitment exceeds actual ACV sold under the Agreement.


License and subscription bookings equal subscription bookings (as
described above) plus perpetual license bookings. Because subscription
bookings is a metric we use to approximate the value of subscription
sales if sold as perpetual licenses, it does not represent the actual
revenue that will be recognized with respect to subscription sales or
that would be recognized if the sales were perpetual licenses, nor does
the annualized value of monthly software rental bookings represent the
value of any such booking.


Total Deferred RevenueTotal
Deferred Revenue consists of Billed Deferred Revenue and Unbilled
Deferred Revenue.


Billed Deferred Revenue primarily relates to software agreements
invoiced to customers for which the revenue has not yet been recognized.
Billed deferred revenue can fluctuate quarterly based upon the
contractual billing dates in our recurring revenue contracts and the
timing of our fiscal reporting periods. Additionally, total deferred
revenue is impacted by changes in FX rates and the length of new and
renewal contracts.


Unbilled Deferred Revenue is the aggregate of booked orders for license,
support and subscription (including multi-year subscription contracts
with start dates after October 1, 2018 that are subject to a limited
annual cancellation right) for which the associated revenue has not been
recognized and the customer has not been invoiced. We do not record
unbilled deferred revenue on our Consolidated Balance Sheet; we record
such amounts as deferred revenue when we invoice the customer.


Software RevenueAny reference
to “total recurring software revenue” or “recurring software revenue”
means the sum of subscription revenue and support revenue. Any reference
to “total software revenue” or “software revenue” means the sum of
subscription revenue, support revenue and perpetual license revenue.
“Subscription revenue” includes cloud services revenue.


Navigate AllocationRevenue and
bookings for Navigate, a ThingWorx-based IoT solution for PLM, are
allocated 50% to Solutions and 50% to IoT.


Annualized Recurring Revenue (ARR)To
help investors understand and assess the success of our subscription
transition, we provide an Annualized Recurring Revenue operating
measure. Annualized Recurring Revenue (ARR) for a given quarter is
calculated by dividing the portion of non-GAAP software revenue
attributable to subscription and support for the quarter by the number
of days in the quarter and multiplying by 365. (A related metric is
Subscription ARR, which is calculated by dividing the portion of
non-GAAP revenue attributable to subscriptions for the quarter by the
number of days in the quarter and multiplying by 365.) ARR should be
viewed independently of revenue and deferred revenue as it is an
operating measure and is not intended to be combined with or to replace
either of those items. ARR is not a forecast of future revenue, which
can be impacted by contract expiration and renewal rates, and does not
include revenue reported as perpetual license or professional services
revenue in our Consolidated Statement of Income. Subscription and
support revenue and ARR disclosed in a quarter can be impacted by
multiple factors, including but not limited to (1) the timing of the
start of a contract or a renewal, including the impact of on-time
renewals, support win-backs, and support conversions, which may vary by
quarter, (2) the ramping of committed monthly payments under a
subscription agreement over time, (3) multiple other contractual factors
with the customer including other elements sold with the subscription or
support contract, and (4) the impact of currency fluctuations. These
factors can cause disclosed ARR to vary.


Foreign Currency Impacts on our BusinessWe
have a global business, with Europe and Asia historically representing
approximately 60% of our revenue, and fluctuation in foreign currency
exchange rates can significantly impact our results. We do not forecast
currency movements; rather we provide detailed constant currency
commentary. We employ a hedging strategy to limit our exposure to
currency risk.


Constant Currency Change MetricYear-over-year
changes in revenue and bookings on a constant currency basis compare
reported results excluding the effect of any hedging converted into U.S.
dollars based on the corresponding prior year’s foreign currency
exchange rates to reported results for the comparable prior year period.


Important Information About Non-GAAP ReferencesPTC
provides non-GAAP supplemental information to its financial results. We
use these non-GAAP measures, and we believe that they assist our
investors, to make period-to-period comparisons of our operational
performance because they provide a view of our operating results without
items that are not, in our view, indicative of our operating results. We
believe that these non-GAAP measures help illustrate underlying trends
in our business, and we use the measures to establish budgets and
operational goals, communicated internally and externally, for managing
our business and evaluating our performance. We believe that providing
non-GAAP measures affords investors a view of our operating results that
may be more easily compared to the results of peer companies. In
addition, compensation of our executives is based in part on the
performance of our business based on these non-GAAP measures. However,
non-GAAP information should not be construed as an alternative to GAAP
information as the items excluded from the non-GAAP measures often have
a material impact on our financial results and such items often recur.
Management uses, and investors should consider, non-GAAP measures in
conjunction with our GAAP results.


Non-GAAP revenue, non-GAAP operating expense, non-GAAP operating margin,
non-GAAP gross profit, non-GAAP gross margin, non-GAAP net income and
non-GAAP EPS exclude the effect of the following items: fair value of
acquired deferred revenue, fair value adjustment to deferred services
cost, stock-based compensation, amortization of acquired intangible
assets, acquisition-related and other transactional charges included in
general and administrative costs, restructuring and headquarters
relocation charges, and income tax adjustments. Additional information
about the items we exclude from our non-GAAP financial measures and the
reasons we exclude them can be found in “Non-GAAP Financial Measures” of
our Annual Report on Form 10-K for the fiscal year ended September 30,
2018.


A reconciliation of non-GAAP measures to GAAP results is provided within
this press release.


PTC also provides information on “free cash flow” and “adjusted free
cash flow” to enable investors to assess our ability to generate cash
without incurring additional external financings and to evaluate our
performance against our announced long-term goal of returning
approximately 40% of our free cash flow to shareholders via stock
repurchases. Free cash flow is net cash provided by (used in) operating
activities less capital expenditures; adjusted free cash flow is free
cash flow excluding restructuring payments and certain identified
non-ordinary course payments. Free cash flow and adjusted free cash flow
are not measures of cash available for discretionary expenditures.


Forward-Looking StatementsStatements
in this press release that are not historic facts, including statements
about our future financial and growth expectations and targets, are
forward-looking statements that involve risks and uncertainties that
could cause actual results to differ materially from those projected.
These risks include: the macroeconomic and/or global manufacturing
climates may deteriorate due to, among other factors, the geopolitical
environment, including the focus on technology transactions with
non-U.S. entities and potential expanded prohibitions, and ongoing trade
tensions and tariffs; customers may not purchase our solutions or
convert existing support contracts to subscription when or at the rates
we expect; our businesses, including our Internet of Things (IoT)
business, and Augmented Reality business, may not expand and/or generate
the revenue we expect; foreign currency exchange rates may vary from our
expectations and thereby affect our reported revenue and expense; the
mix of revenue between license & subscription solutions, support and
professional services could be different than we expect, which could
impact our EPS results; our transition to subscription-only licensing
could adversely affect sales and revenue; sales of our solutions as
subscriptions may not have the longer-term effect on revenue and
earnings that we expect; bookings associated with minimum ACV
commitments under our Strategic Alliance Agreement with Rockwell
Automation may not result in subscription contracts sold through to
end-user customers; our strategic initiatives and investments may not
generate the revenue we expect; we may be unable to expand our partner
ecosystem as we expect and our partners may not generate the revenue we
expect; we may be unable to generate sufficient operating cash flow to
return 40% of free cash flow to shareholders and other uses of cash or
our credit facility limits or other matters could preclude share
repurchases. In addition, our assumptions concerning our future GAAP and
non-GAAP effective income tax rates are based on estimates and other
factors that could change, including the geographic mix of our revenue,
expenses and profits. Other risks and uncertainties that could cause
actual results to differ materially from those projected are detailed
from time to time in reports we file with the Securities and Exchange
Commission, including our most recent Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q.


About PTC (NASDAQ: PTC)PTC
unleashes industrial innovation with award-winning, market-proven
solutions that enable companies to differentiate their products and
services, improve operational excellence, and increase workforce
productivity. With PTC, and its partner ecosystem, manufacturers can
capitalize on the promise of today’s new technology to drive digital
transformation.


PTC.com
@PTC
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PTC Inc.


UNAUDITED CONSOLIDATED STATEMENTS OF INCOME


(in thousands, except per share data)




 


 




 




 










Three Months Ended








March 30,




March 30,




March 31,








2019




2019




2018








ASC 606




ASC 605




ASC 605
















 


Revenue:
















Subscription license






$


51,540












Subscription support & cloud services






 


83,228


 










Total Subscription








134,768






$


162,070






$


112,931




Perpetual support






 


104,417


 




 


103,564


 




 


126,683


 


Total recurring revenue








239,185








265,634








239,614




Perpetual license






 


10,336


 




 


11,267


 




 


22,839


 


Total software revenue








249,521








276,901








262,453




Professional services






 


40,930


 




 


38,598


 




 


45,430


 


Total revenue (1)





 


290,451


 




 


315,499


 




 


307,883


 
















 


Cost of revenue:
















Cost of software revenue (2) (3)







45,749








45,222








46,189




Cost of professional services revenue (2) (3)





 


34,155


 




 


32,745


 




 


37,519


 


Total cost of revenue






 


79,904


 




 


77,967


 




 


83,708


 
















 


Gross margin






 


210,547


 




 


237,532


 




 


224,175


 
















 


Operating expenses:
















Sales and marketing (2) (3)







103,722








109,421








98,390




Research and development (2) (3)







61,402








61,402








62,197




General and administrative (2) (3)







35,371








35,371








33,369




Amortization of acquired intangible assets








5,930








5,930








7,895




Restructuring and other charges, net






 


26,980


 




 


26,980


 




 


114


 


Total operating expenses






 


233,405


 




 


239,104


 




 


201,965


 
















 


Operating income (loss)








(22,858


)






(1,572


)






22,210




Other expense, net (3)





 


(10,562


)




 


(10,318


)




 


(10,664


)


Income (loss) before income taxes








(33,420


)






(11,890


)






11,546




Provision for income taxes






 


10,093


 




 


140


 




 


3,624


 


Net income (loss)






$


(43,513


)




$


(12,030


)




$


7,922


 
















 


Earnings (loss) per share:
















Basic






$


(0.37


)




$


(0.10


)




$


0.07




Weighted average shares outstanding








118,461








118,461








116,241


















 


Diluted






$


(0.37


)




$


(0.10


)




$


0.07




Weighted average shares outstanding








118,461








118,461








117,905




 


Contacts

Tim Fox, 781-370-5961tifox@ptc.com


Noelle Faris, 781-370-6899