PTC Inc.
PTC INC. (Form: 8-K, Received: 04/19/2017 16:06:46)
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 8-K
 
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 
Date of report (Date of earliest event reported)
April 19, 2017
 
PTC Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Massachusetts
(State or Other Jurisdiction of Incorporation)
 
0-18059
04-2866152
(Commission File Number)
(IRS Employer Identification No.)
 
140 Kendrick Street
Needham, Massachusetts
 
02494-2714
(Address of Principal Executive Offices)
(Zip Code)
 
(781) 370-5000
(Registrant’s Telephone Number, Including Area Code)
 
 
(Former Name or Former Address, if Changed Since Last Report)
 
 
     Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions ( see General Instruction A.2. below):
 
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
 
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
 
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
 
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
 
Emerging growth company ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
 
 
 
 
Section 2 - Financial Information
 
Item 2.02.                       
Results of Operations and Financial Condition.
 
On April 19, 2017, PTC Inc. announced its financial results for its second quarter ended April 1, 2017.  PTC also posted a copy of its supplemental prepared remarks about the completed quarter on the Investor Relations section of its website at www.ptc.com.  Copies of the press release and the prepared remarks are furnished herewith as Exhibits 99.1 and 99.2, respectively.
 
 
Section 9 - Financial Statements and Exhibits
 
Item 9.01.                       
Financial Statements and Exhibits.
 
(d)            Exhibits .
 
99.1
PTC Inc. press release dated April 19, 2017.
 
99.2
Prepared remarks posted by PTC Inc. on April 19, 2017.
 
 
 
 
 
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
PTC Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
Date: April 19, 2017
By:
/s/ Andrew Miller
 
 
 
Andrew Miller
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PTC Announces Second Quarter FY’17 Results
 
Bookings and Subscription Mix Both Exceed the High End of Guidance
 
NEEDHAM, MA, April 19, 2017 - PTC (NASDAQ: PTC) today reported financial results for the second quarter ended April 1, 2017 .
 
Overview
Second quarter FY’17 GAAP revenue was $280 million; non-GAAP revenue was $281 million. We recorded a GAAP net loss of $1 million or $0.01 per share; non-GAAP net income was $35 million or $0.30 per share.
 
“We are very pleased with our second fiscal quarter performance,” said James Heppelmann, President and CEO, PTC. “Bookings of $95 million and subscription mix of 71% both exceeded the high end of our guidance for the quarter. Bookings growth of 11% year-over-year was driven by another strong quarter in IoT, with new bookings growing faster than the estimated 40% market growth rate; as well as solid bookings results in CAD and core PLM, which both grew at or above the estimated market growth rates.”
 
Heppelmann added, “Even with the higher than guidance subscription mix in the quarter, which drove down reported revenue in the current period as revenue is deferred and recognized over future periods, revenue and non-GAAP EPS both fell within our guidance ranges. Despite the higher subscription mix, revenue grew year-over-year for the first time in nine quarters, evidencing that we have exited the subscription trough. In addition, total deferred revenue - billed and unbilled - grew $56 million over last quarter, and billed deferred revenue grew $117 million over last quarter.”
 
Heppelmann continued, “Our strong Q2 results are yet another positive step along our journey to create significant long-term value for our customers and shareholders through our transition to a subscription business model. Due to the success of this transition, we have separately announced today a plan to accelerate our transition by offering our core Solutions products and ThingWorx platform only by subscription in the Americas and Western Europe beginning January 1, 2018.”
 
Operating and Financial Overview
Q2’17 operating and financial highlights are set forth below. Information about our bookings and other reporting measures is provided beginning on page 4 . 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.
 
o
Q2’17 license and subscription bookings were $95 million, up 11% YoY, both as reported and in constant currency, and above the high end of the guidance range of $80 million to $90 million. On a YTD basis, license and subscription bookings were $185 million, up 20% YoY, both as reported and in constant currency;excluding Kepware, YTD bookings were up 15% YoY as reported and 16% YoY in constant currency.
 
o
Q2’17 subscription annualized contract value (ACV) was $34 million, up 43% YoY and above our guidance range of $24 million to $27 million. On a YTD basis, ACV was $63 million, up 85% YoY.
 
 
 
 
o
Q2’17 subscription bookings were 71% of total bookings, above our guidance assumption of 60% and up from 54% in Q2’16. For Q2’17, we estimate that this higher-than-guidance mix of subscription in the quarter reduced revenue by approximately $10 million and reduced non-GAAP EPS by approximately $0.08 as compared to our guidance.
 
o
Strong subscription results, as well as the timing of annual renewals of recurring revenue contracts, contributed to a significant increase in our total deferred revenue – billed plus unbilled - which increased $56 million sequentially and $223 million year-over-year to $881 million as of the end of Q2’17. Billed deferred revenue increased $117 million sequentially and $45 million year-over-year to $492 million. Billed deferred revenue can fluctuate quarterly based upon the contractual billings dates in our recurring revenue contracts as well as the timing of our fiscal reporting periods.
 
o
Q2’17 GAAP and non-GAAP software revenue were both approximately $235 million. Despite a higher mix of subscription than last year, both were up approximately 5% year-over-year as reported and in constant currency. We estimate that the higher-than-guidance mix of subscription in the quarter reduced both GAAP and non-GAAP Q2’17 software revenue by approximately $10 million as compared to guidance .  
 
o
Annualized recurring revenue (ARR) was approximately $834 million for Q2’17, an increase of 12% year-over-year.
 
o
Q2’17 GAAP operating expenses were approximately $191 million; non-GAAP operating expenses were approximately $163 million. Both GAAP and non-GAAP operating expenses were approximately flat year-over-year.
o
Q2’17 GAAP operating margin was 3% and non-GAAP operating margin was 16%, which compares to Q2’16 GAAP operating margin of 1% and non-GAAP operating margin of 14%. We estimate that the higher-than-guidance mix of subscription in Q2’17 reduced non-GAAP operating margin by approximately 300 basis points.
 
o
For Q2’17, we recorded a GAAP income tax expense of $0.05 million, or less than $0.01 per share;non-GAAP income tax expense was $3 million, or $0.02 per share. The GAAP tax rate for the quarter was (5%) and the non-GAAP tax rate for the quarter was 8%.
 
o
Cash flow from operations for Q2’17 was $76 million, and free cash flow was $69 million, both of which include cash payments for restructuring of $13 million.
 
o
We ended the quarter with total cash, cash equivalents, and marketable securities of $292 million and total debt, net of deferred issuance costs, of $712 million.
 
 
 
 
 
FY’17 Business Outlook
For the third quarter ending July 1, 2017 and for fiscal year 2017, the company expects:
 
In millions except per share amounts
 
 
 
 
 
 
 
 
Operating Measures (1)
 
Q3’17
Low
 
Q3’17 
High
 
FY’17
Low
 
FY’17
High
 
 
 
 
 
 
 
 
 
Subscription ACV
 
$ 32
 
$ 36
 
$ 136
 
$ 143
License and Subscription Bookings
 
$ 95
 
$ 105
 
$ 400
 
$ 420
Subscription % of Bookings
 
68%
 
68%
 
68%
 
68%
(1) An explanation of the metrics included in this table is provided below.
 
Financial Measures
 
Q3’17
Low
 
Q3’17
High
 
FY’17
Low
 
FY’17
High
Subscription Revenue
 
$ 74
 
$ 75
 
$ 275
 
$ 280
Support Revenue
 
140
 
140
 
575
 
575
Perpetual License Revenue
 
29
 
33
 
130
 
135
Total Software Revenue (2)
 
243
 
248
 
980
 
990
Professional Services Revenue
 
45
 
45
 
182
 
182
Total Revenue (2)
 
$ 288
 
$ 293
 
$ 1,162
 
$ 1,172
 
 
 
 
 
 
 
 
 
Operating Expense (GAAP)
 
$ 195
 
$ 200
 
$ 780
 
$ 790
Operating Expense (Non-GAAP)
 
168
 
173
 
673
 
683
Operating Margin (GAAP)
 
2%
 
4%
 
4%
 
4%
Operating Margin (Non-GAAP)
 
15%
 
16%
 
16%
 
17%
Tax Rate (GAAP)
 
5%
 
5%
 
75%
 
75%
Tax Rate (Non-GAAP)
 
10%
 
8%
 
10%
 
8%
Shares Outstanding (GAAP)
 
116
 
117
 
116
 
117
Shares Outstanding (Non-GAAP)
 
117
 
117
 
117
 
117
EPS (GAAP)
 
 $ (0.04)
 
$ 0.00
 
$ 0.00
 
$ 0.02
EPS (Non-GAAP) (2)
 
$ 0.24
 
$ 0.29
 
$ 1.13
 
$ 1.23
Free Cash Flow
 
 
 
 
 
$ 115
 
$ 125
Adjusted Free Cash Flow (3)
 
 
 
 
 
$ 158
 
$ 168
(2) We estimate that, on an annual basis, every 1% change in subscription mix will impact annual revenue by $4 million, and annual non-GAAP EPS by $0.03 . We cannot estimate the effect on GAAP EPS due to the number of unknown items, including tax items, included in GAAP EPS.
(3) Adjusted Free Cash Flow is net cash provided by (used in) operating activities less capital expenditures, excluding restructuring payments of approximately $40 million and legal payments of approximately $3 million.
 
The Q3’17 and full year FY’17 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 or reflected).
In millions
 
Q3’17
 
FY’17
 
 
 
 
 
Effect of acquisition accounting on fair value of acquired deferred revenue
 
  $ 1
 
$ 3
Stock-based compensation expense
 
18
 
76
Intangible asset amortization expense
 
14
 
57
Restructuring charges (4)
 
3
 
10
Acquisition-related charges
 
0
 
1
Non-operating credit facility refinancing charges
 
0
 
1
Total Estimated Pre-Tax GAAP adjustments
 
$ 36
 
$ 148
(4) We expect to record approximately $3 million in restructuring charges in the third quarter of 2017 related to the closure of a leased facility.
 
 
 
 
PTC’s Second Quarter FY’17 Results Conference Call, Prepared Remarks and Financial Data Tables
Prepared 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 19, 2017. 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 800-857-5592 or 773-799-3757 and provide the passcode PTC. The call will be recorded and a replay will be available for 10 days following the call by dialing 888-566-0398 and entering the pass code 7021. The archived webcast will also be available on PTCs Investor Relations website .
 
Software Revenue
Any 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. References to “software revenue” include cloud services revenue.
 
Bookings Metrics
We 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 (revenue is recognized at the time of sale) and a subscription (revenue is deferred and recognized ratably over the subscription term), we use bookings for internal planning, forecasting and reporting of new license and cloud services transactions. In order to normalize between perpetual and subscription licenses, we define subscription bookings as the subscription annualized contract value (subscription ACV) of new subscription bookings 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 booking divided by the term of the contract (in days) multiplied by 365. If the term of the subscription contract is less than a year, the ACV is equal to the total contract value.
 
License and subscription bookings equal subscription bookings (as described above) plus perpetual license bookings plus any monthly software rental bookings during the period. Total ACV equals subscription ACV (as described above) plus the annualized value of incremental monthly software rental bookings during the period.
 
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.
 
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. 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, and (3) multiple other contractual factors with the customer including other elements sold with the subscription or support contract, and these elements can result in variability in disclosed ARR.
 
Navigate Allocation
In FY’16, we launched Navigate, a ThingWorx-based IoT solution for PLM. In FY’17, revenue and bookings for Navigate are being allocated 50% to Solutions and 50% to IoT. FY’16 reported amounts have been reclassified to conform with the current presentation. The impact of the reclassification on FY’16 revenue was immaterial .
 
Constant Currency Change Metric
Year-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 References
PTC 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 PTC’s 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   is a purchase accounting adjustment recorded to reduce acquired deferred revenue to the fair value of the remaining obligation, so our GAAP revenue after an acquisition does not reflect the full amount of revenue that would have been reported if the acquired deferred revenue was not written down to fair value. We believe excluding these adjustments to revenue from these contracts (and associated costs in fair value adjustment to deferred services cost ) is useful to investors as an additional means to assess revenue trends of our business.
 
Stock-based compensation is a non-cash expense relating to stock-based awards issued to executive officers, employees and outside directors and to our employee stock purchase plan. We exclude this expense as it is a non-cash expense and we assess our internal operations excluding this expense and believe it facilitates comparisons to the performance of other companies in our industry.  
 
Amortization of acquired intangible assets   is a non-cash expense that is impacted by the timing and magnitude of our acquisitions. We believe the assessment of our operations
 
 
 

excluding these costs is relevant to our assessment of internal operations and comparisons to the performance of other companies in our industry.
 
Acquisition-related charges included in general and administrative costs are   direct costs of potential and completed acquisitions and expenses related to acquisition integration activities, including transaction fees, due diligence costs, severance and professional fees. In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges. These costs are not considered part of our normal operations as the occurrence and amount will vary depending on the timing and size of acquisitions.
 
Restructuring charges   include excess facility restructuring charges and severance costs resulting from reductions of personnel driven by modifications to our business strategy and not considered part of our normal operations. These costs may vary in size based on our restructuring plan.
 
Non-operating credit facility refinancing costs are non-operating charges we record as a result of the refinancing of our credit facility. We assess our internal operations excluding these costs and believe it facilitates comparisons to the performance of other companies in our industry.
 
Income tax adjustments include the tax impact of the items above and assumes that we are profitable on a non-GAAP basis in the U.S. and one foreign jurisdiction, and eliminates the effect of the valuation allowance recorded against our net deferred tax assets in those jurisdictions. Additionally, we exclude other material tax items that we view as non-ordinary course.
 
 
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 Statements
Statements in this press release that are not historic facts, including statements about our third quarter and full fiscal 2017 targets and other future financial and growth expectations and targets, and anticipated tax rates, 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 not improve or may deteriorate; customers may not purchase our solutions when or at the rates we expect; our businesses, including our Internet of Things (IoT) 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 customers may purchase more of our solutions as subscriptions than we expect, which would adversely affect near-term revenue, operating margins, and EPS; customers may not purchase subscriptions as we expect, which could impact our ability to achieve targeted subscription bookings and subscription mix; sales of our solutions as subscriptions may not have the longer-term effect on revenue that 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 could preclude share repurchases; and any repatriation of cash held outside the U.S., which constitutes a significant portion of our cash ,
 
 
 
 
could be subject to significant taxes. 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 and loans and cash repatriations from foreign subsidiaries. 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 Report on Form 10-Q .
 
PTC and the PTC logo are trademarks or registered trademarks of PTC Inc. or its subsidiaries in the United States and in other countries.
 
About PTC (NASDAQ: PTC)
PTC has the most robust Internet of Things technology in the world. In 1986 we revolutionized digital 3D design, and in 1998 were first to market with Internet-based PLM. Now our leading IoT and AR platform and field-proven solutions bring together the physical and digital worlds to reinvent the way you create, operate, and service products. With PTC, global manufacturers and an ecosystem of partners and developers can capitalize on the promise of the IoT today and drive the future of innovation.
PTC.com             @PTC             Blogs
 
 
 
PTC Investor Relations Contacts
Tim Fox, 781-370-5961
tifox@ptc.com
 
Jason Howard, 781-370-5087
jahoward@ptc.com
 
 
 
 
 
 
 
 
  PTC Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
 
 
 
  Three Months Ended        
 
 
  Six Months Ended        
 
 
 
April 1,
 
 
April 2,
 
 
April 1,
 
 
April 2,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
Subscription
  $ 65,780  
  $ 23,659  
  $ 120,142  
  $ 45,835  
Support
    141,718  
    160,625  
    293,196  
    332,381  
Total recurring revenue
    207,498  
    184,284  
    413,338  
    378,216  
Perpetual license
    27,372  
    39,689  
    61,751  
    87,452  
Total subscription, support and license revenue
    234,870  
    223,973  
    475,089  
    465,668  
Professional services
    45,170  
    48,654  
    91,278  
    97,976  
Total revenue
    280,040  
    272,627  
    566,367  
    563,644  
 
       
       
       
       
Cost of revenue:
       
       
       
       
Cost of subscription, support and license revenue (1)
    43,131  
    38,613  
    86,078  
    75,427  
Cost of professional services revenue (1)
    38,699  
    41,578  
    77,867  
    84,912  
Total cost of revenue
    81,830  
    80,191  
    163,945  
    160,339  
 
       
       
       
       
Gross margin
    198,210  
    192,436  
    402,422  
    403,305  
 
       
       
       
       
Operating expenses:
       
       
       
       
Sales and marketing (1)
    87,777  
    87,177  
    178,467  
    169,606  
Research and development (1)
    57,710  
    56,610  
    115,624  
    114,279  
General and administrative (1)
    36,800  
    33,916  
    73,495  
    72,483  
Amortization of acquired intangible assets
    7,946  
    8,396  
    16,013  
    16,746  
Restructuring charges
    464  
    4,579  
    6,749  
    41,726  
Total operating expenses
    190,697  
    190,678  
    390,348  
    414,840  
 
       
       
       
       
Operating income (loss)
    7,513  
    1,758  
    12,074  
    (11,535 )
Other expense, net
    (8,569 )
    (5,327 )
    (19,633 )
    (11,580 )
Loss before income taxes
    (1,056 )
    (3,569 )
    (7,559 )
    (23,115 )
Provision for income taxes
    48  
    1,604  
    2,686  
    5,950  
Net loss
  $ (1,104 )
  $ (5,173 )
  $ (10,245 )
  $ (29,065 )
 
       
       
       
       
Loss per share:
       
       
       
       
Basic
  $ (0.01 )
  $ (0.05 )
  $ (0.09 )
  $ (0.25 )
Weighted average shares outstanding
    115,709  
    114,563  
    115,498  
    114,354  
 
       
       
       
       
Diluted
  $ (0.01 )
  $ (0.05 )
  $ (0.09 )
  $ (0.25 )
Weighted average shares outstanding
    115,709  
    114,563  
    115,498  
    114,354  
 
 
(1)
The amounts in the tables above include stock-based compensation as follows:        
 
 
 
  Three Months Ended        
 
 
  Six Months Ended        
 
 
 
April 1,
 
 
April 2,
 
 
April 1,
 
 
April 2,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
Cost of subscription, support and license revenue
  $ 1,669  
  $ 1,100  
  $ 3,106  
  $ 3,005  
Cost of professional services revenue
    1,538  
    1,279  
    2,995  
    2,730  
Sales and marketing
    4,130  
    3,777  
    7,751  
    8,059  
Research and development
    3,951  
    2,534  
    6,948  
    5,047  
General and administrative
    10,289  
    6,146  
    18,765  
    19,184  
Total stock-based compensation
  $ 21,577  
  $ 14,836  
  $ 39,565  
  $ 38,025  
 
       
       
       
       
 
 
 
 
 
PTC Inc.
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS (UNAUDITED)
(in thousands, except per share data)
 
 
 
 
  Three Months Ended      
 
 
  Six Months Ended        
 
 
 
April 1,
 
 
April 2,
 
 
April 1,
 
 
April 2,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP revenue
  $ 280,040  
  $ 272,627  
  $ 566,367  
  $ 563,644  
Fair value adjustment of acquired deferred subscription revenue
    411  
    777  
    1,057  
    965  
Fair value adjustment of acquired deferred services revenue
    262  
    286  
    530  
    595  
Non-GAAP revenue
  $ 280,713  
  $ 273,690  
  $ 567,954  
  $ 565,204  
 
       
       
       
       
GAAP gross margin
  $ 198,210  
  $ 192,436  
  $ 402,422  
  $ 403,305  
Fair value adjustment of acquired deferred revenue
    673  
    1,063  
    1,587  
    1,560  
Fair value adjustment to deferred services cost
    (108 )
    (125 )
    (221 )
    (257 )
Stock-based compensation
    3,207  
    2,379  
    6,101  
    5,735  
Amortization of acquired intangible assets included in cost of revenue
    6,389  
    6,725  
    12,777  
    11,852  
Non-GAAP gross margin
  $ 208,371  
  $ 202,478  
  $ 422,666  
  $ 422,195  
 
       
       
       
       
GAAP operating income (loss)
  $ 7,513  
  $ 1,758  
  $ 12,074  
  $ (11,535 )
Fair value adjustment of acquired deferred revenue
    673  
    1,063  
    1,587  
    1,560  
Fair value adjustment to deferred services cost
    (108 )
    (125 )
    (221 )
    (257 )
Stock-based compensation
    21,577  
    14,836  
    39,565  
    38,025  
Amortization of acquired intangible assets included in cost of revenue
    6,389  
    6,725  
    12,777  
    11,852  
Amortization of acquired intangible assets
    7,946  
    8,396  
    16,013  
    16,746  
Acquisition-related charges included in general and administrative costs
    554  
    1,071  
    723  
    2,278  
Restructuring charges
    464  
    4,579  
    6,749  
    41,726  
Non-GAAP operating income (1)
  $ 45,008  
  $ 38,303  
  $ 89,267  
  $ 100,395  
 
       
       
       
       
GAAP net loss
  $ (1,104 )
  $ (5,173 )
  $ (10,245 )
  $ (29,065 )
Fair value adjustment of acquired deferred revenue
    673  
    1,063  
    1,587  
    1,560  
Fair value adjustment to deferred services cost
    (108 )
    (125 )
    (221 )
    (257 )
Stock-based compensation
    21,577  
    14,836  
    39,565  
    38,025  
Amortization of acquired intangible assets included in cost of revenue
    6,389  
    6,725  
    12,777  
    11,852  
Amortization of acquired intangible assets
    7,946  
    8,396  
    16,013  
    16,746  
Acquisition-related charges included in general and administrative costs
    554  
    1,071  
    723  
    2,278  
Restructuring charges
    464  
    4,579  
    6,749  
    41,726  
Non-operating credit facility refinancing costs
    1,152  
    -  
    1,152  
    2,359  
Income tax adjustments (2)
    (2,787 )
    (5,208 )
    (2,639 )
    (279 )
Non-GAAP net income
  $ 34,756  
  $ 26,164  
  $ 65,461  
  $ 84,945  
 
 
 
 
 
PTC Inc.
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS (UNAUDITED), CONT'D.
(in thousands, except per share data)
 
 
 
 
  Three Months Ended      
 
 
  Six Months Ended        
 
 
 
April 1,
 
 
April 2,
 
 
April 1,
 
 
April 2,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
GAAP diluted loss per share
  $ (0.01 )
  $ (0.05 )
  $ (0.09 )
  $ (0.25 )
Fair value of acquired deferred revenue
    0.01  
    0.01  
    0.01  
    0.01  
Stock-based compensation
    0.18  
    0.13  
    0.34  
    0.33  
Amortization of acquired intangibles
    0.12  
    0.13  
    0.25  
    0.25  
Acquisition-related charges
    -  
    0.01  
    0.01  
    0.02  
Restructuring charges
    -  
    0.04  
    0.06  
    0.36  
Non-operating credit facility refinancing costs
    0.01  
    -  
    0.01  
    0.02  
Income tax adjustments
    (0.02 )
    (0.05 )
    (0.02 )
    -  
Non-GAAP diluted earnings per share
  $ 0.30  
  $ 0.23  
  $ 0.56  
  $ 0.74  
 
       
       
       
       
GAAP diluted weighted average shares outstanding
    115,709  
    114,563  
    115,498  
    114,354  
Dilutive effect of stock based compensation plans
    1,737  
    428  
    1,736  
    758  
Non-GAAP diluted weighted average shares outstanding
    117,446  
    114,991  
    117,234  
    115,112  
 
 
(1)
Operating margin impact of non-GAAP adjustments:              
 
 
 
  Three Months Ended      
 
 
  Six Months Ended      
 
 
 
April 1,
 
 
April 2,
 
 
April 1,
 
 
April 2,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
GAAP operating margin
    2.7 %
    0.6 %
    2.1 %
    -2.0 %
Fair value of acquired deferred revenue
    0.2 %
    0.4 %
    0.3 %
    0.3 %
Fair value adjustment to deferred services cost
    0.0 %
    0.0 %
    0.0 %
    0.0 %
Stock-based compensation
    7.7 %
    5.4 %
    7.0 %
    6.7 %
Amortization of acquired intangibles
    5.1 %
    5.5 %
    5.1 %
    5.1 %
Acquisition-related charges
    0.2 %
    0.4 %
    0.1 %
    0.4 %
Restructuring charges
    0.2 %
    1.7 %
    1.2 %
    7.4 %
Non-GAAP operating margin
    16.0 %
    14.0 %
    15.7 %
    17.8 %
 
 
(2)
We have recorded a full valuation allowance against our U.S. net deferred tax assets and a valuation allowance against net deferred tax assets in certain foreign jurisdictions. As we are profitable on a non-GAAP basis, the 2017 and 2016 non-GAAP tax provisions are being calculated assuming there is no valuation allowance. Income tax adjustments reflect the tax effects of non-GAAP adjustments which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments listed above. For the three and six months ended April 1, 2017 and April 2, 2016 our non-GAAP tax provision is based on our annual expected non-GAAP tax rate applied to our year-to-date non-GAAP earnings.
 
 
 
 
 
 
PTC Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
 
April 1,
 
 
September 30,
 
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
  $ 243,316  
  $ 277,935  
Marketable securities
    48,191  
    49,616  
Accounts receivable, net
    142,620  
    161,357  
Property and equipment, net
    63,429  
    67,113  
Goodwill and acquired intangible assets, net
    1,441,577  
    1,480,118  
Other assets
    394,615  
    309,590  
 
       
       
Total assets
  $ 2,333,748  
  $ 2,345,729  
 
       
       
LIABILITIES AND STOCKHOLDERS' EQUITY
       
       
 
       
       
Deferred revenue
  $ 492,472  
  $ 413,657  
Debt, net of deferred issuance costs
    711,976  
    751,601  
Other liabilities
    281,956  
    337,805  
Stockholders' equity
    847,344  
    842,666  
 
       
       
Total liabilities and stockholders' equity
  $ 2,333,748  
  $ 2,345,729  
 
 
 
 
 
 PTC Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
 
 
   Three Months Ended    
 
 
   Six Months Ended      
 
 
 
April 1,
 
 
April 2,
 
 
April 1,
 
 
April 2,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
  $ (1,104 )
  $ (5,173 )
  $ (10,245 )
  $ (29,065 )
Stock-based compensation
    21,577  
    14,836  
    39,565  
    38,025  
Depreciation and amortization
    21,229  
    22,291  
    42,683  
    42,904  
Accounts receivable
    (5,811 )
    28,398  
    15,373  
    63,617  
Accounts payable and accruals
    13,022  
    (28,067 )
    (40,586 )
    (17,692 )
Deferred revenue
    39,183  
    22,757  
    27,457  
    24,019  
Income taxes
    (8,584 )
    (5,471 )
    (14,680 )
    (8,826 )
Excess tax benefits from stock-based awards
    (37 )
    -  
    (139 )
    (56 )
Other
    (3,086 )
    (686 )
    (31,017 )
    (2,787 )
Net cash provided by operating activities
    76,389  
    48,885  
    28,411  
    110,139  
 
       
       
       
       
Capital expenditures
    (7,689 )
    (4,681 )
    (14,789 )
    (8,866 )
Acquisitions of businesses, net of cash acquired (1)
    -  
    (99,411 )
    -  
    (164,191 )
Proceeds (payments) on debt, net
    (20,000 )
    120,000  
    (40,000 )
    170,000  
Proceeds from issuance of common stock
    3,978  
    -  
    3,978  
    1  
Payments of withholding taxes in connection with
   
       
       
       
 vesting of stock-based awards
    (543 )
    (638 )
    (19,166 )
    (15,471 )
Excess tax benefits from stock-based awards
    37  
    -  
    139  
    56  
Proceeds from sales of investments
    13,716  
    -  
    15,218  
    -  
Net proceeds from marketable securities
    1,280  
    -  
    1,280  
    -  
Other financing & investing activities
    (184 )
    -  
    (2,895 )
    (2,300 )
Foreign exchange impact on cash
    2,965  
    7,504  
    (6,795 )
    5,671  
 
       
       
       
       
Net change in cash and cash equivalents
    69,949  
    71,659  
    (34,619 )
    95,039  
Cash and cash equivalents, beginning of period
    173,367  
    296,797  
    277,935  
    273,417  
Cash and cash equivalents, end of period
  $ 243,316  
  $ 368,456  
  $ 243,316  
  $ 368,456  
 
(1)
We aquired Kepware, Inc. on January 11, 2016 for $99 million (net of cash acquired) and Vuforia on November 3, 2015 for $65 million (net of cash acquired).
 
 
 
 
 
 
PTC
SECOND QUARTER FISCAL 2017
PREPARED REMARKS
APRIL 19, 2017
 
Please refer to the “Important Disclosures” section of these prepared remarks for important information about our operating metrics (including Subscription ACV, License and Subscription Bookings, and Subscription % of Bookings), GAAP and non-GAAP definitions, and other important disclosures. Additional financial information is provided in the PTC Financial Data Tables posted with these prepared remarks to PTC’s Investor Relations website at investor.ptc.com.
 
Any 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. References to “subscription revenue” include cloud services revenue.
 
Q2’17 Results vs. January 18, 2017 Guidance
 
Operating Measures
Guidance
Results
In millions
Q2’17
Low
Q2’17
High
Actual
Subscription ACV
$24
$27
$34
License and Subscription Bookings
$80
$90
$95
Subscription % of Bookings
60%
60%
71%
 
 
Financial Measures
GAAP Guidance
GAAP Results
Non-GAAP Guidance
Non-GAAP Results
Non-GAAP at Guidance Mix (1)
In millions, except per share amounts
Q2’17
Low
Q2’17
High
Q2’17
Low
Q2’17
High
Subscription Revenue
$64
$64
$66
$64
$64
$66
$66
Support Revenue
$140
$140
$142
$140
$140
$142
$142
Perpetual License Revenue
$31
$36
$27
$31
$36
$27
$38
Software Revenue
$235
$240
$235
$235
$240
$235
$245
Professional Services Revenue
$45
$45
$45
$45
$45
$45
$45
Total Revenue
$280
$285
$280
$280
$285
$281
$291
Operating Expense
$184
$188
$191
$161
$166
$163
$163
Operating Margin
4%
5%
3%
16%
17%
16%
19%
Tax Rate
35%
35%
(5%)
10%
8%
8%
8%
EPS
$0.01
$0.04
($0.01)
$0.26
$0.31
$0.30
$0.38
 
(1)
Operating measure that adjusts Non-GAAP results to guidance mix of 60% vs. actual Q2’17 mix of 71% and includes other adjustments as described in “Important Disclosures” set forth below.
 
 
 
Key Highlights of Quarterly Operating Measures
 
In millions
Q2’17
YoY
YoY
CC
Management Comments
Subscription ACV
$34
43%
43%
  Subscription ACV was well above the high end of our guidance of $24M to $27M due to continued adoption of subscriptions, strong new bookings performance, conversions, and our “Get Active” re-activation program.
  On a YTD basis, subscription ACV is up 85% over the first half of FY’16 both as reported and in constant currency.
License and Subscription Bookings
$95
11%
11%
  New bookings were well above the high end of our guidance range of $80M to $90M, due to strong IoT results and continued improvements in go-to-market execution in our Solutions business. Deal close timing may also have benefited Q2 by a modest amount (low single-digit millions $).
  Improved execution drove bookings growth within our Solutions business, led by another strong quarter from CAD, with double-digit bookings growth, and solid performance in PLM.
  IoT bookings grew faster than market growth, which we estimate at around 40%, with expansions representing more than half of bookings and the number of 6-figure bookings increasing over 60% YoY.
  On a YTD basis, total bookings were up 20% (both as reported and in CC) over the first half of FY’16; excluding Kepware, bookings were up 15% YoY as reported and 16% YoY CC.
Subscription % of Bookings
71%
31%
31%
  Our subscription transition continues to exceed our expectations, with a subscription mix of 71% in the quarter vs. our guidance of 60%. We were pleased to see continued improvements in a number of areas, including our partner channel and APAC, which were both greater than 55% subscription mix this quarter.
  From a segment perspective, all businesses were over 60% subscription mix and from a regional perspective, both the Americas and Europe were over 75%, while APAC improved to over 55%.
  We announced today the end-of-life of perpetual licenses in the Americas and Western Europe as of January 1, 2018, for all of our products except Kepware.
 
 
 

 
 
Key Highlights of Quarterly Financial Measures
All references to revenue are to GAAP revenue, unless otherwise noted
 
In millions, except per share amounts
Q2’17
YoY
YoY
CC
Management Comments
Total Revenue
 
 
 
$280
 
 
 
 
3%
 
 
 
 
3%
 
 
 
 
  Despite exceeding our guidance subscription mix by 11 percentage points, total revenue still achieved the low end of our guidance range of $280M to $285M.
  Total revenue grew YoY for the first time in nine quarters, evidencing that we have exited the subscription trough.
  We estimate that, at our guidance subscription mix, revenue would have been $10M higher, or approximately $290M, above the high end of our guidance range by $5M, representing 6% growth YoY.
 
Software Revenue
 
 
$235
 
 
 
5%
 
 
 
5%
 
 
  Despite exceeding our guidance subscription mix by 11 percentage points, software revenue still achieved the low end of our guidance range of $235M to $240M.
  We estimate that, at our guidance subscription mix software revenue would have been $10M higher, or approximately $245M, above the high end of our guidance by $5M, representing 9% growth YoY.
  Subscription revenue increased 178% YoY, perpetual license revenue declined 31% YoY and support revenue declined 12% YoY. The support decrease is due to a higher mix of subscription bookings, support conversions to subscription and fewer support win-backs in the channel as we launched a new win-back program in Q3’16 where customers continue to return to PTC on a subscription basis.
EPS (GAAP)
 
(Non-GAAP)
 
($0.01)
 
$0.30
 
(79%)
 
30%
(56%)
 
23%
  Both GAAP and non-GAAP EPS were negatively impacted relative to guidance by the effect of the higher mix of subscription in the quarter.
  Despite the higher subscription mix, non-GAAP EPS was near the higher end of our guidance range of $0.26 to $0.31.
  We estimate that if the license mix were adjusted to our guidance mix, non-GAAP EPS would have been $0.08   higher, or $0.38, above the high end of our guidance range by $0.07.
 
 

 
 
Quarterly Software Revenue Performance by Group
In millions
Q2’17
YoY
YoY
CC
Management Comments
Solutions Software Revenue
$213
3%
3%
  CAD, PLM and SLM all delivered software revenue growth in the quarter.
IoT Software Revenue
 
 
 
$22
 
 
 
 
26%
 
 
 
 
26%
 
 
  IoT software revenue was driven by the continuation of a series of strong bookings quarters coupled with continued adoption and expansion of the ThingWorx platform.
  IoT revenue growth in Q2’17 is largely organic as we completed the Kepware acquisition in early Q2’16. With a higher subscription mix than Q2’16, IoT revenue growth of 26% CC was lower than YoY bookings growth. Virtually all ThingWorx bookings were subscription this quarter.
  Sequential IoT software revenue was up 1%, despite a higher subscription mix and lower perpetual bookings / revenue. Recurring IoT software revenue grew 10% sequentially.
All references to revenue are to GAAP revenue, unless otherwise noted
 
 
Quarterly Software Revenue Performance by Region
In millions
Q2’17
YoY
YoY
CC
Management Comments
 
Americas Software Revenue
 
 
 
$107
 
 
 
 
8%
 
 
 
 
8%
 
 
  YoY CC bookings growth of 15% and subscription mix of greater than 75%.
  Subscription revenue grew 164% YoY CC.
Europe Software Revenue
 
 
$82
 
 
 
2%
 
 
 
5%
 
 
  YoY CC bookings growth of 24% and subscription mix of greater than 75%.
  Subscription revenue grew 153% YoY CC.
APAC Software Revenue
$47
3%
0%
  YoY CC bookings declined 6% YoY, with weakness in Japan, while subscription mix increased to greater than 55%.
  Subscription revenue grew 493% YoY CC.
All references to revenue are to GAAP revenue, unless otherwise noted
 
 
 

 
 
Quarterly Operating Performance
 
In millions
Q2’17
GAAP
Q2’17
Non-GAAP
Management Comments
Professional Services Gross Margin
14%
18%
  We delivered solid professional services results for the quarter, with revenue in line with guidance, margins in line with expectations and partner bookings growing 32% YoY.
Operating Expense
$191
$163
  GAAP operating expense was above the high end of our guidance range of $184 million to $188 million due to higher stock-based compensation expense.
  Non-GAAP operating expense was just below the midpoint of our guidance range of $161 million to $166 million.
Operating Margin
3%
16%
  GAAP operating margin was just below our guidance range of 4% to 5%, primarily due to higher subscription mix and higher stock-based compensation expense.
  Despite the higher-than-guidance subscription mix in the quarter, non-GAAP operating margin was within our guidance range of 16% to 17%. At our guidance subscription mix, we estimate non-GAAP operating margin would have been 19%, and at the subscription mix from the year ago period, we estimate our non-GAAP operating margin would have been 21%.
Tax Rate
(5%)
8%
 
 
 

 
 
Other Highlights in Quarterly and Annual Operating Performance
 
In Q2’17, subscription bookings represented 71% of total bookings, above our guidance of 60%, driven by programs promoting the adoption of our subscription offering in each of the regions in which we operate, in both our direct and indirect channels, and due to our support conversion and “Get Active” program.
 
Annualized recurring revenue (ARR), was approximately $834 million, which grew 12% compared to Q2’16 and 2% sequentially. Due to our calculation methodology, quarterly variability in this metric should be expected, primarily due to the linearity of support billings during the year and the percentage of on-time renewals, the amount of support win-backs in a quarter, and whether the win-backs are traditional support, with immediate revenue recognition of the past-due amount, or a conversion to subscription, where all revenue is recognized over the future period. Multiple other contractual factors including ramping of committed monthly payments and other elements that may be sold with the subscription or support contract can impact the timing of revenue and the calculation of ARR.
 
Total Deferred Revenue consists of Billed Deferred Revenue and Unbilled Deferred Revenue. We define Unbilled Deferred Revenue as contractually committed orders for license, subscription and support with a customer 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 until we invoice the customer. Billed Deferred Revenue primarily relates to software agreements invoiced to customers for which the revenue has not yet been recognized. Total Deferred Revenue grew 34% year-over-year and 7% sequentially. Billed Deferred Revenue grew $45 million year-over-year and $117 million sequentially. Please note that we believe that Total Deferred Revenue is the most relevant indicator, as billed deferred revenue fluctuates throughout the year based upon the seasonality of our recurring revenue billings and the timing of our fiscal quarter ends.
 
 
(in millions)
Q2’17
4/1/17
Q1’17
12/31/16
Q2’16
4/2/16
Q/Q
% Change
Y/Y
% Change
Billed Deferred Revenue
$492
$375
$447
31%
10%
Unbilled Deferred Revenue
$389
$450
$211
-14%
84%
Total Deferred Revenue
$881
$825
$658
7%
34%
 
In keeping with our strategy to grow our professional services partner ecosystem, Q2’17 service partner bookings grew approximately 32% YoY, with strong bookings growth among our large system integrator partners.
 
For Q2’17, approximately 88% of software revenue came from recurring revenue streams, up from 82% in Q2’16.
 
Cash, cash equivalents, and marketable securities totaled $292 million as of April 1, 2017.
 
For Q2’17, cash flow provided by operating activities was $76 million, and free cash flow was $69 million, both of which include restructuring payments of $13 million.
 
As of April 1, 2017, gross borrowings totaled $718 million, including $500 million of senior notes and $218 million outstanding under our revolving credit facility. During the quarter, we repaid a net $20 million under the credit facility. Under our revolving credit facility, our leverage covenant is limited to 4.5 times adjusted EBITDA. Further, if our leverage covenant ratio exceeds 3.25 times adjusted EBITDA, our stock repurchases are limited to $50 million in a year plus a $100 million aggregate basket through June 30, 2018. Our leverage ratio at the end of Q2’17 reflecting all current terms under the credit facility was 3.34. As of April 1, 2017, we had approximately $260 million available
 
 
 

to borrow under the credit facility. Given the significant over-performance of our subscription transition in FY’16, our operating profit and EBIDTA were lower than in the past and lower than we had planned as we started FY’16. As a result, we deferred stock repurchases in FY’16. Returning capital to shareholders is a fundamental element of our capital strategy, and based on our current forecast, we intend to resume repurchases in the third quarter of FY’17.
 
 
Guidance and Long-Range Targets
Our Q3 and FY’17 guidance includes the following general considerations:
 
When looking at the full year, we suggest our FY’17 bookings guidance should be compared to FY’16 excluding the $20 million SLM booking recorded in Q4’16 due to the unusual size of this transaction. Excluding this from FY’16 bookings results, and despite a mixed macroeconomic environment and currency headwinds, we are projecting bookings growth in FY’17.
 
A higher mix of subscription bookings is expected to benefit us over the long term, but results in lower revenue and lower earnings in the near term.
 
Because we are only 18 months into our strategic objective of becoming a subscription company, it can be challenging to forecast the rate of customer adoption, the pace of our subscription transition and the overall impact to near-term reported financial results.
 
We expect large deals, which historically represented 30% to 50% of bookings, will remain at the lower end of that range. This is based on the effect of a mixed global manufacturing economy on large deal volumes in our Solutions Group business and the potential for smaller average deal sizes as the subscription transition continues.
 
Despite recent improvements in certain global macroeconomic factors, we continue to remain cautious of the global macroeconomic environment. This caution has been factored into our guidance.
 
Our Fx assumptions in our guidance approximate current spot rates. Fx changes since our guidance in January 2017 in total have been relatively minor, and as such, do not significantly impact our prior full year guidance.
 
 
 
 
 
Q3’17 and FY’17 Operating Guidance
 
In millions
Q3’17
Low
Q3’17
High
FY’17
Low
FY’17
High
Management Comments
Subscription ACV
$32
$36
$136
$143
  At the midpoint, Q3 guidance is up 12% YoY.
  At the midpoint, FY’17 guidance is up 22% YoY. We are raising guidance $6.5M or 5% at the midpoint due to higher expected subscription mix for the full year.
License and Subscription Bookings
$95
$105
$400
$420
  There is no change to our full year bookings guidance, which implies growth of 7% to 12% YoY CC (excluding the $20M SLM booking in Q4’16).
  Please recall that we raised our constant currency guidance in Q1’17 by $12 million.
  The Q3 guidance range represents constant currency growth of (8%) to 1% on a tough compare with an exceptionally strong Q3’16. Please recall that in Q3’16 we exceeded the high end of our guidance range and delivered $105M in bookings (32% YoY growth). In addition, deal close timing may have benefited Q2 by a modest amount (low single-digit millions $), negatively impacting Q3’17.
 
Subscription % of Bookings
68%
68%
68%
68%
 
  For Q3, we expect 68% of our bookings to be subscription, based on our current view of the pipeline.
  For FY’17, we are raising guidance from 65% to 68% based on the outlook for the second half of the year.
 
 
 
 
 
 
Q3’17 and FY’17 Financial Guidance
 
In millions
Q3’17
Low
Q3’17
High
FY’17
Low
FY’17
High
Management Comments
Subscription Revenue
$74
$75
$275
$280
  At the midpoint, Q3 guidance is up more than 130% YoY as the subscription transition continues to accelerate.
  We are raising our FY’17 guidance by $13M or 5% at the midpoint due to YTD subscription bookings performance, an increase in expected subscription mix for the year, and continued success with our conversion program.
Support Revenue
$140
$140
$575
$575
  Q3 guidance is down 14% YoY as a growing proportion of our bookings are subscription-based and more customers continue to convert from support to subscription.
  We are lowering our FY’17 guidance by $3M or 1% based on the continuing trends noted above.
Perpetual License Revenue
$29
$33
$130
$135
  At the midpoint, Q3 guidance is down 31% YoY as an increasing proportion of our customers purchase software as a subscription.
  We are lowering our FY’17 guidance by $12M or 9% at the midpoint based on the continuing trends noted above.
Software Revenue
$243
$248
$980
$990
  At the midpoint, Q3 guidance is up 3% YoY due to the increase in subscription revenue more than offsetting the decline in both support and perpetual license revenue.
  We are lowering our FY’17 guidance by $2.5M at the midpoint due to an increase in expected subscription mix for the year.
  At the midpoint, FY’17 guidance is up 4% YoY.
Professional Services Revenue
$45
$45
$182
$182
  Q3 guidance is down 11% YoY with fewer large services engagements as we emphasize more standard implementations of our products and as we continue to execute on our strategy of growing our service partner ecosystem and expanding margins.
  We are lowering our FY’17 guidance by $3M or 2% due to the continued success in the strategy stated above.
Total Revenue
$288
$293
$1,162
$1,172
  At the midpoint, Q3 guidance is up 1% YoY.
  We are lowering our FY’17 guidance by $5.5M at the midpoint due to an increase in expected subscription mix for the year and lower professional services revenue.
  At the midpoint, FY’17 guidance is up 2% YoY.
 
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Q3’17 and FY’17 Financial Guidance Continued
 
In millions
Q3’17
Low
Q3’17
High
FY’17
Low
FY’17
High
Management Comments
Operating Expense (GAAP)
 
(Non-GAAP)
 
$195
 
$168
 
 
  $200
 
$173
 
 
$780
 
$673
 
 
$790
 
$683
 
  At the midpoint, Q3 GAAP operating expense guidance is down 1% YoY and FY’17 is down 8% YoY primarily due to lower restructuring charges and continued expense discipline.
  At the midpoint, Q3 non-GAAP operating expense guidance is down 3% YoY and up QoQ due to LiveWorx and a modest impact from Fx.
  At the midpoint, FY’17 non-GAAP operating expense guidance is flat YoY due to continued expense discipline.
Operating Margin(GAAP)
2%
4%
4%
4%
  FY’17 GAAP guidance is up over 700 basis points YoY primarily due to lower restructuring charges, progress in our subscription transition, and continued cost discipline.
  We expect non-GAAP operating margin expansion of 100-200 basis points YoY in Q3.
  We are lowering our FY’17 non-GAAP operating margin guidance by 100 basis points on both the high and low end due to higher expected subscription mix for the full year.
  With our current guidance, we expect full year non-GAAP operating margin expansion of 100-200 basis points over FY’16.
(Non-GAAP)
15%
16%
16%
17%
Tax Rate(GAAP)
 
5%
 
5%
 
75%
 
75%
  GAAP guidance updated for current estimates. No change to FY’17 non-GAAP guidance.
(Non-GAAP)
10%
8%
10%
8%
Shares Outstanding
(GAAP)
(Non-GAAP)
 
116
117
 
117
117
 
116
117
 
117
117
  GAAP guidance updated for current estimates. No change to FY’17 non-GAAP guidance.
 
EPS(GAAP)
 
($0.04)
 
$0.00
 
$0.00
 
$0.02
  We are lowering our FY’17 GAAP guidance due to higher than expected subscription mix for the full year and a higher than expected tax rate.
  At the midpoint, we expect Q3 non-GAAP EPS to be up 2% YoY.
  We are lowering our FY’17 non-GAAP EPS guidance by $0.07 at the midpoint due to the higher expected subscription mix for the full year.
  At the midpoint, FY’17 non-GAAP EPS is down 1% YoY due to the impact of higher subscription mix, higher interest expense related to the outstanding notes issued in May 2016 and a less favorable tax rate than FY’16.
(Non-GAAP)
$0.24
$0.29
$1.13
$1.23
 
 
Free Cash Flow
 
Adjusted FCF
 
 
 
 
  $115
 
$158
$125
 
$168
  We exclude restructuring and litigation payments from our adjusted free cash flow guidance. With an increase in our subscription mix guidance, we have reduced our guidance for Free Cash Flow and Adjusted FCF by approximately $12 million.
 
 
 
 
Our guidance above assumes 68% mix of subscription bookings in Q3’17 and 68% for the full-year FY’17. If subscription bookings mix varies from our guidance, it will affect our income statement and cash flow results. Assuming bookings of equal value, we estimate that every 1% change in subscription mix will impact annual revenue by approximately $4 million, annual non-GAAP operating margin by approximately 30 basis points and annual non-GAAP EPS by approximately $0.03. (We cannot estimate the effect on GAAP operating margin and EPS due to the number of unknown items, including tax items, included in GAAP operating margin and EPS.) Of course, the higher mix of subscription bookings is expected to ultimately benefit our financial performance over the long-term.
 
The third quarter and full year FY’17 revenue, non-GAAP operating margin and non-GAAP EPS guidance exclude the estimated items outlined below, as well as any tax effects and discrete tax items that occur (which are not known or reflected).
 
In millions
Q3’17
FY’17
Effect of acquisition accounting on fair value of acquired deferred revenue
 $ 1
 $ 3
Stock-based compensation expense
18
76
Intangible asset amortization expense
14
57
Restructuring charges (1)
3
10
Acquisition-related charges
0
1
Non-operating credit facility refinancing costs
0
1
Total Estimated GAAP adjustments
$ 36
$ 148
(1) We expect to record approximately $3 million in restructuring charges in the third quarter of 2017 related to the closure of a leased facility.
 
Long-Range Targets (Non-GAAP)
Our long-range target model we presented in November 2016 is available on our investor relations website at investor.ptc.com.
 
Important Disclosures
Reporting metrics and non-GAAP definitions – Management believes certain operating measures and non-GAAP financial measures provide additional meaningful information that should be considered when assessing our performance. These measures should be considered in addition to, not as a substitute for, the reported GAAP results.
 
Software licensing model – A majority of our software sales to date have been perpetual licenses, where customers own the software license. Typically, our customers choose to pay for ongoing support, which includes the right to software upgrades and technical support, and attach rates on support are in the high 90% range with retention rates also in the 90% range. A growing percentage of our business consists of ratably recognized subscriptions. Under a subscription, customers pay a periodic fee for the continuing right to use our software, including access to technical support. They may also elect to use our cloud services and have us manage the application. We began offering subscription pricing as an option for most PTC products in Q1 FY’15. We believe this additional purchase option will prove attractive to customers over time as it: (1) increases customer flexibility and opportunity to change their mix of licenses; (2) lowers the initial purchase commitment; and (3) allows customers to use operating rather than capital budgets. Over a three to five-year period we believe the net present value (NPV) of a subscription is likely to exceed that of a perpetual license, assuming similar seat counts. However, initial revenue, operating margin, and EPS will be lower as revenue is recognized ratably in a subscription, rather than up front.
 
Bookings Metrics – We 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 (revenue is recognized at the time of sale) and a subscription (revenue is deferred and recognized ratably over the subscription term), we use bookings for internal planning, forecasting and reporting of new license and cloud services transactions. In order to normalize between perpetual and subscription licenses, we define subscription bookings as the subscription annualized contract value (subscription ACV) of new subscription bookings 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 booking divided by the term of the contract (in days) multiplied by 365. If the term of the subscription contract is less than a year, the ACV is equal to the total contract value. Note that in FY’16, the weighted average contract length of our subscription bookings was approximately 2 years.
 
License and subscription bookings equal subscription bookings (as described above) plus perpetual license bookings plus any monthly software rental bookings during the period. Total ACV equals subscription ACV (as described above) plus the annualized value of incremental monthly software rental bookings during the period.
 
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.
 
License Mix-Adjusted Metrics -These metrics assume that all new software and cloud services bookings since the start of FY’14 were perpetual license sales that included support in subsequent periods. The license mix-adjusted amount is calculated by converting the ACV (as defined above) of a new subscription solutions booking in the period to an assumed perpetual license equivalent by multiplying the ACV by a conversion factor of 2 (as defined above), and adding that amount to the perpetual license revenue amounts recognized in that period. Support calculated at 20% of the annual value of the converted amount is added to support revenue in future periods, beginning the quarter after the converted booking is assumed to be recognized. The assumed support revenue is spread ratably over a 12-month period and is assumed to renew in subsequent years.
 
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. 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, and (3) multiple other contractual factors with the customer including other elements sold with the subscription or support contract, and these elements can result in variability in disclosed ARR.
 
Non-GAAP Revenue – Excludes the fair value adjustment for acquired deferred revenue. In Q1’15, we began including cloud services revenue, which was formerly reported in services, within license & subscription solutions.
 
Navigate Allocation -- In FY’16, we launched Navigate, a ThingWorx-based IoT solution for PLM. In FY’17, revenue and bookings for Navigate are being allocated 50% to Solutions and 50% to IoT. FY’16 reported
 
 
 
 
amounts have been reclassified to conform with the current presentation. The impact of the reclassification on FY’16 revenue was immaterial.
 
Foreign Currency Impacts on our Business – We 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 do employ a hedging strategy to limit our exposure to currency risk.
 
Constant Currency Change Measure (YoY CC) – Year-over-year changes in revenue 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 References
PTC 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 core 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   is a purchase accounting adjustment recorded to reduce acquired deferred revenue to the fair value of the remaining obligation, so our GAAP revenue after an acquisition does not reflect the full amount of revenue that would have been reported if the acquired deferred revenue was not written down to fair value. We believe excluding these adjustments to revenue from these contracts (and associated costs in fair value adjustment to deferred services cost ) is useful to investors as an additional means to assess revenue trends of our business.
 
Stock-based compensation is a non-cash expense relating to stock-based awards issued to executive officers, employees and outside directors and to our employee stock purchase plan. We exclude this expense as it is a non-cash expense and we assess our internal operations excluding this expense and believe it facilitates comparisons to the performance of other companies in our industry.
 
Amortization of acquired intangible assets   is a non-cash expense that is impacted by the timing and magnitude of our acquisitions. We believe the assessment of our operations excluding these costs is relevant to our assessment of internal operations and comparisons to the performance of other companies in our industry.
 
Acquisition-related charges included in general and administrative costs are   direct costs of potential and completed acquisitions and expenses related to acquisition integration activities, including transaction fees, due diligence costs, severance and professional fees. In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated
 
 
 

with specific acquisitions are included within acquisition-related charges. These costs are not considered part of our normal operations as the occurrence and amount will vary depending on the timing and size of acquisitions.
 
Restructuring charges   include severance costs and excess facility restructuring charges resulting from reductions of personnel driven by modifications to our business strategy and not considered part of our normal operations. These costs may vary in size based on our restructuring plan.
 
Non-operating credit facility refinancing costs are non-operating charges we record as a result of the refinancing of our credit facility. We assess our internal operations excluding these costs and believe it facilitates comparisons to the performance of other companies in our industry.
 
Income tax adjustments include the tax impact of the items above and assumes that we are profitable on a non-GAAP basis in the U.S. and one foreign jurisdiction, and eliminates the effect of the valuation allowance recorded against our net deferred tax assets in those jurisdictions.  Additionally, we exclude other material tax items that we view as non-ordinary course.
 
 
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 Statements
Statements in this press release that are not historic facts, including statements about our third quarter and full fiscal 2017 targets and other future financial and growth expectations and targets, and anticipated tax rates, 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 not improve or may deteriorate; customers may not purchase our solutions when or at the rates we expect; our businesses, including our Internet of Things (IoT) 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 customers may purchase more of our solutions as subscriptions than we expect, which would adversely affect near-term revenue, operating margins, and EPS; customers may not purchase subscriptions as we expect, which could impact our ability to achieve targeted subscription bookings and subscription mix; sales of our solutions as subscriptions may not have the longer-term effect on revenue that 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 could preclude share repurchases; and any repatriation of cash held outside the U.S., which constitutes a significant portion of our cash, could be subject to significant taxes. 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 and loans and cash repatriations from foreign subsidiaries. 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 Report on Form 10-Q.
 
 
 
 
 
 
 
 
PTC Inc.
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS (UNAUDITED)
(in thousands, except per share data)
 
 
 
  Three Months Ended        
 
 
  Six Months Ended        
 
 
 
April 1,
 
 
April 2,
 
 
April 1,
 
 
April 2,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GAAP revenue
  $ 280,040  
  $ 272,627  
  $ 566,367  
  $ 563,644  
Fair value adjustment of acquired deferred subscription revenue
    411  
    777  
    1,057  
    965  
Fair value adjustment of acquired deferred services revenue
    262  
    286  
    530  
    595  
Non-GAAP revenue
  $ 280,713  
  $ 273,690  
  $ 567,954  
  $ 565,204  
 
       
       
       
       
GAAP gross margin
  $ 198,210  
  $ 192,436  
  $ 402,422  
  $ 403,305  
Fair value adjustment of acquired deferred revenue
    673  
    1,063  
    1,587  
    1,560  
Fair value adjustment to deferred services cost
    (108 )
    (125 )
    (221 )
    (257 )
Stock-based compensation
    3,207  
    2,379  
    6,101  
    5,735  
Amortization of acquired intangible assets included in cost of revenue
    6,389  
    6,725  
    12,777  
    11,852  
Non-GAAP gross margin
  $ 208,371  
  $ 202,478  
  $ 422,666  
  $ 422,195  
 
       
       
       
       
GAAP operating income (loss)
  $ 7,513  
  $ 1,758  
  $ 12,074  
  $ (11,535 )
Fair value adjustment of acquired deferred revenue
    673  
    1,063  
    1,587  
    1,560  
Fair value adjustment to deferred services cost
    (108 )
    (125 )
    (221 )
    (257 )
Stock-based compensation
    21,577  
    14,836  
    39,565  
    38,025  
Amortization of acquired intangible assets included in cost of revenue
    6,389  
    6,725  
    12,777  
    11,852  
Amortization of acquired intangible assets
    7,946  
    8,396  
    16,013  
    16,746  
Acquisition-related charges included in general and administrative costs
    554  
    1,071  
    723  
    2,278  
Restructuring charges
    464  
    4,579  
    6,749  
    41,726  
Non-GAAP operating income (1)
  $ 45,008  
  $ 38,303  
  $ 89,267  
  $ 100,395  
 
       
       
       
       
GAAP net loss
  $ (1,104 )
  $ (5,173 )
  $ (10,245 )
  $ (29,065 )
Fair value adjustment of acquired deferred revenue
    673  
    1,063  
    1,587  
    1,560  
Fair value adjustment to deferred services cost
    (108 )
    (125 )
    (221 )
    (257 )
Stock-based compensation
    21,577  
    14,836  
    39,565  
    38,025  
Amortization of acquired intangible assets included in cost of revenue
    6,389  
    6,725  
    12,777  
    11,852  
Amortization of acquired intangible assets
    7,946  
    8,396  
    16,013  
    16,746  
Acquisition-related charges included in general and administrative costs
    554  
    1,071  
    723  
    2,278  
Restructuring charges
    464  
    4,579  
    6,749  
    41,726  
Non-operating credit facility refinancing costs
    1,152  
    -  
    1,152  
    2,359  
Income tax adjustments (2)
    (2,787 )
    (5,208 )
    (2,639 )
    (279 )
Non-GAAP net income
  $ 34,756  
  $ 26,164  
  $ 65,461  
  $ 84,945  
 
 
 
 
 
PTC Inc.
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS (UNAUDITED), CONT'D.
(in thousands, except per share data)
 
 
 
  Three Months Ended      
 
 
  Six Months Ended        
 
 
 
April 1,
 
 
April 2,
 
 
April 1,
 
 
April 2,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
GAAP diluted loss per share
  $ (0.01 )
  $ (0.05 )
  $ (0.09 )
  $ (0.25 )
Fair value of acquired deferred revenue
    0.01  
    0.01  
    0.01  
    0.01  
Stock-based compensation
    0.18  
    0.13  
    0.34  
    0.33  
Amortization of acquired intangibles
    0.12  
    0.13  
    0.25  
    0.25  
Acquisition-related charges
    -  
    0.01  
    0.01  
    0.02  
Restructuring charges
    -