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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
FORM 10-K
____________________________________________________
ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended: September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_ to_
Commission File Number: 0-18059
 
PTC Inc.
(Exact name of registrant as specified in its charter)
 
 
Massachusetts
 
04-2866152
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
121 Seaport Boulevard, Boston, MA 02210
(Address of principal executive offices, including zip code)
(781370-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 Trading Symbol
Name of each exchange on which registered
Common Stock, $.01 par value per share
 PTC
NASDAQ Global Select Market
Securities registered pursuant
to Section 12(g) of the Act: None
 
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No  ¨
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨    No  
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
 
 
 
 
 
 
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.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     Yes      No  
The aggregate market value of our voting stock held by non-affiliates was approximately $10,784,576,792 on April 1, 2019 based on the last reported sale price of our common stock on the Nasdaq Global Select Market on March 29, 2019. There were 118,097,684 shares of our common stock outstanding on that day and 115,492,735 shares of our common stock outstanding on November 15, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement in connection with the 2020 Annual Meeting of Stockholders (2020 Proxy Statement) are incorporated by reference into Part III.





PTC Inc.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR 2019
Table of Contents
 
 
 
Page
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
Item 15.
Item 16.
 
 
 
 
 
 





Forward-Looking Statements
Statements in this Annual Report about our anticipated financial results and growth, as well as about the development of our products and markets, are forward-looking statements that are based on our current plans and assumptions. Important information about factors that may cause our actual results to differ materially from these statements is discussed in Item 1A. “Risk Factors” and generally throughout this Annual Report.
Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.
PART I

ITEM 1.
Business
PTC is a global software and services company that, together with a partner ecosystem, drives digital transformation for industrial companies. We serve a broad range of these companies, including discrete manufacturers (industrial machinery & components, aerospace & defense, automotive, and electronics & high technology), process/continuous manufacturers (life sciences, energy & resources, and consumer packaged goods), and operators. Our technology enables customers to improve operational efficiency, accelerate product and service innovation, and increase workforce productivity.
We go to market with four technology platforms, consisting of and supported by products that enable 3D modeling (CAD), lifecycle management (PLM), data orchestration (IIoT), and experience creation (AR). Together, these technologies power the digital thread across industrial enterprises.
https://cdn.kscope.io/4e736148da0c62321d3527171ca65438-technologyplatformsa03.jpg
We continue to expand our solution offerings to address the most pressing business problems our customers confront. These solutions are being designed to aggregate products and technology from our portfolio as well as from other companies, including our key partners.
Our business is based on a subscription business model, which provides flexibility to customers and increases predictability and consistency of billings to PTC. Our customer success program partners with customers to enable successful deployment and utilization of our solutions.
We generate revenue through the sale of software subscriptions, which include license access and support (technical support and software updates), support for existing perpetual licenses, professional services (consulting, implementation, and training), and cloud services.
Recent Events
On November 1, 2019, we acquired Onshape, creators of the first Software as a Service (SaaS) product development platform that unites robust CAD with powerful data management and collaboration tools, for approximately $470 million, net of cash acquired. The acquisition is expected to accelerate our ability to attract new customers with a SaaS-based product offering and position the company to capitalize on an industry transition to SaaS. In connection with the acquisition, we borrowed $455 million under our existing credit facility.
On November 13, 2019, we also increased the revolving loan commitment under the credit facility to $1 billion and made other amendments to the credit facility.
Our Principal Products and Services
3D (CAD)
Our 3D platform enables users to create conceptual and detailed designs, analyze designs, perform engineering calculations and leverage the information created downstream using 2D, 3D, parametric and direct modeling. Our principal 3D product is described below.

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Our Creo® interoperable suite of product design software provides a scalable set of packages for design engineers to meet a variety of specialized needs. Creo provides capabilities for design flexibility, advanced assembly design, piping and cabling design, advanced surfacing, comprehensive virtual prototyping and other essential design functions. Our Creo solutions include augmented and virtual reality through a native cloud dependent integration with our Vuforia® augmented reality (AR) solution. With every seat of Creo, our customers can create and publish AR experiences and share their design instantly to collaborate with anyone across the entire enterprise around the world on any device. Creo also now includes the Discovery Live real-time simulation technology from ANSYS. This solution offers customers a unified modeling and simulation environment and provides design engineers with an interactive design experience that will enable them to create higher quality products, while reducing product and development costs.

Lifecycle Management (PLM)
Our PLM platform enables efficient and consistent product data management from inception through design, as well as communication and collaboration across the entire enterprise, including product development, manufacturing and the supply chain. Our principal Lifecycle Management product is described below.

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Our Windchill® suite of PLM software provides product lifecycle management capabilities - from design to service. Windchill offers a single repository for all product information, thus providing a “single source of truth” for all product-related content such as CAD models, documents, technical illustrations, embedded software, calculations, and requirement specifications for all phases of the product lifecycle to help companies streamline enterprise-wide communication and make informed decisions. As the “single source of truth,” Windchill provides the digital thread that connects the full product lifecycle. Our Windchill product now also includes augmented reality (AR) capabilities, enabling customers to build a digital product definition and publish the representation of the resulting product in AR. Using AR in the product development process connects the digital model to the physical product to determine real-time behavior, conduct product design reviews in real-world environments, and share the product definition with disparate stakeholders.
Data Orchestration (IIoT)
Our data orchestration platform delivers tools, technologies, and solutions that empower companies to rapidly develop and deploy powerful industrial IoT applications, enabling them to transform their operations, products, and services - and unlock new business models. Our principal data orchestration product is described below.

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Our ThingWorx® product enables customers to reduce the time, cost, and risk required to build and deploy IoT applications; connect devices, systems, and applications; manage connected products; and analyze industrial IoT data. ThingWorx includes cloud-based tools that allow customers to easily and more securely connect products and devices to the cloud, and intelligently process and store product and sensor data. ThingWorx Solution Central is a centralized portal in the cloud that allows users of ThingWorx to efficiently discover, deploy, and manage ThingWorx applications across the enterprise from a single location, which allows for cost-effective, efficient, and version controlled management of applications. ThingWorx contains integral communications connectivity to industrial automation environments through our ThingWorx Kepware® product, which enables users to connect, manage,

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monitor, and control disparate devices and software applications. ThingWorx also offers sophisticated artificial intelligence and machine learning technology that enables customers to simplify and automate complex analytical processes that enhance industrial IoT solutions through real-time insights, predictions and recommendations from information collected from smart, connected products. ThingWorx also includes AR capabilities that superimpose IoT digital information on a human’s view of the physical world, enabling valuable insights.

Experience Creation (AR)
Our Experience Creation platform offers a way to capture, create, and deliver content for industrial augmented reality experiences. Our principal experience creation products are described below.

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Our Vuforia Studio™ product is a powerful, easy-to-use, cloud-based tool that enables industrial enterprises to rapidly author and publish augmented reality experiences. These augmented reality experiences overlay important digital information from IoT, CAD, and other sources onto the view of the physical things on which users work. Our Vuforia Expert Capture™ product chronicles the real-time movements of a person wearing an AR headset by monitoring the individual both audio-visually and spatially in three dimensions. Vuforia Expert Capture supports a variety of industrial use cases, such as creating step-by-step operating or repair instructions, procedural guidance, and hands-on training. The Vuforia suite also includes the Vuforia Engine™ technology for application development and Vuforia Chalk™ collaboration and remote assistance solution.
Strategic Partners
Building an ecosystem of partners is becoming increasingly important as we expand the capabilities of our core solutions, and IoT offerings and as we expand our addressable markets by leveraging our partner sales and services distribution channels. With this in mind, in 2018, we entered into the three strategic alliances described below.
We partnered with Rockwell Automation to align our respective smart factory technologies to address the market for smart, connected operations, with particular focus on the plant and factory setting. As part of this strategic alliance, we have aligned our ThingWorx® IoT, Kepware® industrial connectivity, and Vuforia® augmented reality (AR) platforms with Rockwell Automation’s FactoryTalk® MES, FactoryTalk Analytics, and Industrial Automation platforms, and we both offer these solutions in the market. This suite is now launched and marketed as FactoryTalk Innovation Suite Powered by PTC. Rockwell Automation has exclusive rights to resell certain of our solutions to certain customers and geographic regions. In connection with this strategic alliance, Rockwell Automation made a $1 billion equity investment in PTC.
We partnered with Microsoft to make the ThingWorx® Industrial Innovation Platform available on the Microsoft Azure cloud platform as our preferred cloud platform. By partnering with Microsoft, we are able to leverage the two companies’ complementary technologies and together pursue opportunities in industrial sectors. This integration enables us to deliver a combined and connected solution for industrial IoT and digital product lifecycle management that enable companies to bring new products to market faster, enhance customer service, and introduce new revenue streams, while reducing operating costs.
We partnered with ANSYS to enable us to embed Ansys' Discovery Live real-time simulation within Creo, enabling us to offer a fully-integrated CAD and real-time simulation solution.
Our Markets and How We Address Them
We compete in the Industrial IoT (IIoT) and augmented reality markets and the CAD and PLM markets. The markets we serve present different growth opportunities for us. We see greater opportunity for market growth for our IIoT and AR solutions for the enterprise, followed by more moderate market growth for our CAD and PLM solutions.

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We derive most of our sales from products and services sold directly by our sales force to end-user customers. Approximately 20% to 30% of our sales of products and services are through third-party resellers and other strategic partners. Our sales force focuses on large accounts, while our reseller channel provides a cost-effective means of covering the small- and medium-size business market. Our strategic services partners provide service offerings to help customers implement our product offerings. As we grow our IIoT business, we expect our go-to-market strategy will rely more on partners, including the types of strategic partners described above, and marketing directly to end users and developers.
Additional financial information about our segments and international and domestic operations may be found in Note 18. Segment and Geographic Information of Notes to Consolidated Financial Statements in this Annual Report, which information is incorporated herein by reference.
Competition
We compete with a number of companies that offer solutions that address one or more specific functional areas covered by our solutions. In our IIoT business, we compete with large established companies like Amazon, IBM, Oracle, SAP, Siemens AG, and GE. There are also a number of small companies that compete in the market for IoT products. We believe our ThingWorx IoT platform and solutions are complementary to the offerings of many of our competitors, and we have partnered with many of the named competitors. For enterprise CAD and PLM solutions and for discrete desktop CAD products, we compete with companies including AutoDesk, Dassault Systèmes SA and Siemens AG. For PLM solutions, we also compete with Oracle and SAP, but we believe our products are more specifically targeted toward the business process challenges of manufacturing companies and offer broader and deeper functionality for those processes than ERP-based solutions.
Proprietary Rights
Our software products and related technical know-how, along with our trademarks, including our company names, product names and logos, are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection. The nature and extent of such legal protection depends in part on the type of intellectual property right and the relevant jurisdiction. In the U.S., we are generally able to maintain our trademark registrations for as long as the trademarks are in use and to maintain our patents for up to 20 years from the earliest effective filing date. We also use license management and other anti-piracy technology measures, as well as contractual restrictions, to curtail the unauthorized use and distribution of our products.
Our proprietary rights are subject to risks and uncertainties described under Item 1A. “Risk Factors” below. You should read that discussion, which is incorporated into this section by reference.
Deferred Revenue and Backlog (Unbilled Deferred Revenue)
Information about Deferred Revenue and Backlog (Unbilled Deferred Revenue) is discussed in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview” below. You should read that discussion, which is incorporated into this section by reference.
Employees
As of September 30, 2019, we had 6,055 employees, including 1,889 in product development; 1,674 in customer support, training, consulting, cloud services and product distribution; 1,777 in sales and marketing; and 715 in general and administration. Of these employees, 2,203 were located in the United States and 3,852 were located outside the United States.
Website Access to Reports and Code of Business Conduct and Ethics
We make available free of charge on our website at www.ptc.com the following reports as soon as reasonably practicable after electronically filing them with, or furnishing them to, the SEC: our Annual Reports on Form 10-K; our Quarterly Reports on Form 10-Q; our Current Reports on Form 8-K; and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934. Our Proxy Statements for our Annual Meetings and Section 16 trading reports on SEC Forms 3, 4 and 5 also are available on our website. The reference to our website is not intended to incorporate information on our website into this Annual Report by reference.
Our Code of Ethics for Senior Executive Officers is embedded in our Code of Business Conduct and Ethics, which is also available on our website. Additional information about this code and amendments and waivers thereto can be found below in Part III, Item 10 of this Annual Report.

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Executive Officers
Information about our executive officers is incorporated by reference from our 2020 Proxy Statement.
Corporate Information
PTC was incorporated in Massachusetts in 1985 and is headquartered in Boston, Massachusetts.
ITEM 1A.    Risk Factors

The following are important factors we have identified that could affect our future results and your investment in our securities. You should consider them carefully when evaluating an investment in PTC securities or any forward-looking statements made by us, including those contained in this Annual Report, because these factors could cause actual results to differ materially from historical results or the performance projected in forward- looking statements. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition and/or operating results. Holders of the 6.00% Senior Notes due 2024 (the “2024 6% Notes”) that we issued in May 2016 should also consider the risk factors related to those notes described in the prospectus supplement we filed with the Securities and Exchange Commission on May 5, 2016, which are incorporated herein by reference.
I.Risks Related to Our Business Operations and Industry
We face significant competition, which may reduce our profitability and limit or reduce our market share.
The markets for our products and solutions are rapidly changing and characterized by intense competition, disruptive technology developments, evolving distribution models and increasingly lower barriers to entry. If we are unable to provide products and solutions that address customers’ needs as well as our competitors’ products and solutions do, or to align our pricing, licensing and delivery models with customer preferences, we could lose customers and/or fail to attract new customers, which could cause us to lose revenue and market share. Competitive pressures could also cause us to reduce our prices, which could reduce our revenue and margins.
Our current and potential competitors range from large and well-established companies to emerging start-ups. Some of our competitors and potential competitors have greater name recognition in the markets we serve and greater financial, technical, sales and marketing, and other resources, which could limit our ability to gain customer recognition and confidence in our products and solutions and successfully sell our products and solutions, which could adversely affect our ability to grow our business.
A breach of security in our products or computer systems, or those of our third-party service providers, could compromise the integrity of our products, cause loss of data, harm our reputation, create additional liability and adversely impact our financial results.
We have implemented and continue to implement measures intended to maintain the security and integrity of our products, source code and computer systems. The potential consequences of a security breach or system disruption (particularly through cyber-attack or cyber-intrusion, including by computer hackers, foreign governments and cyber terrorists) have increased in scope as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Despite efforts to create security barriers to such threats, it is impossible for us to eliminate this risk, and, in fact, we deal with security issues on a regular basis and have experienced security incidents from time to time. Accordingly, there is a risk that we might encounter a material event or issue and that such an event or issue may occur.
In addition, we offer cloud services to our customers and some of our products are hosted by third-party service providers, which expose us to additional risks as those repositories of our customers’ proprietary data may be targeted by hackers.
A significant breach of the security and/ or integrity of our products or systems, or those of our third-party service providers, could prevent our products from functioning properly, could enable access to sensitive, proprietary or confidential information, including that of our customers, or could disrupt our business operations or those of our customers. This could require us to incur significant costs of investigation, remediation, and further protection, harm our reputation, cause customers to stop buying our products, and cause us to face lawsuits and potential liability, which could have a material adverse effect on our financial condition and results of operations.

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We may be unable to hire or retain personnel with the necessary skills to operate and grow our business, which could adversely affect our ability to compete.
Our success depends upon our ability to attract and retain highly skilled managerial, sales and marketing, technical, financial and administrative personnel to operate and grow our business. Competition for such personnel in our industry is intense, particularly in the Boston, Massachusetts area where our global headquarters is located.
The technical personnel required to develop our products and solutions are in high demand, particularly technical personnel with augmented and virtual reality and analytics expertise as there are comparatively fewer persons with those skills. If we are unable to attract and retain technical personnel with the requisite skills, our product and solution development efforts could be delayed, which could adversely affect our ability to compete and thereby adversely affect our revenues and profitability.
The managerial, sales and marketing, financial and administrative personnel necessary to guide our operations, market and sell our solutions and support our business operations are also in high demand due to the intense competition in our industry.
If we are unable to attract and retain the personnel we need to develop compelling products and solutions, and guide, operate and support our business, we may be unable to successfully compete in the marketplace, which would adversely affect our revenues and profitability.
We depend on sales within the discrete manufacturing sector and our business could be adversely affected if manufacturing activity does not grow, or if it contracts, or if manufacturers are adversely affected by other economic factors.
A large amount of our sales are to customers in the discrete manufacturing sector. The global Manufacturing Purchasing Managers' Index (PMI) has declined significantly over the past year and remained below the 50% level in September 2019, with a particularly large recent decline in Europe. Although the decline in Manufacturing PMI did not have a significant adverse affect on our business in 2019, if the manufacturing sector does not improve or continues to decline, our customers in this sector may, as they have in the past, reduce or defer purchases of our products and services, which could adversely affect our financial results.
In addition, manufacturers worldwide are facing increasing uncertainty about the global economic climate due to, among other factors, the geopolitical environment and ongoing trade tensions and tariffs. In addition, within the technology industry the U.S. Administration’s focus on technology transactions with non-U.S. entities and potential expanded prohibitions has created additional uncertainty. In light of these concerns and challenges, including the potential enactment or expansion of laws that restrict our ability to sell our solutions to customers, customers may delay, reduce or forego purchases of our solutions, which would adversely affect our business and financial results.
If we fail to successfully manage our transition to a subscription-based licensing company, our business and financial results could be adversely affected.
We completed our transition from offering perpetual licenses for our products to offering only subscription-based licenses worldwide in January 2019 (excluding Kepware). While we expect our subscription base, recurring revenue and cash flow to increase over time as a result of this licensing model transition, our ability to achieve these financial objectives is subject to risks and uncertainties. Becoming a subscription-based licensing company requires a considerable investment of technical, financial, legal and sales resources, and a scalable organization. Whether our transition will be successful and will accomplish our business and financial objectives is subject to uncertainties, including but not limited to: customer demand, attach and renewal rates, channel acceptance, our ability to further develop and scale infrastructure, our ability to include functionality and usability in such offerings that address customer requirements, and our costs. If we are unable to successfully establish these new offerings and navigate our business transition due to the foregoing risks and uncertainties, our business and financial results could be adversely impacted.
Because our sales and operations are globally dispersed, we face additional compliance risks and any compliance risk could adversely affect our business and financial results.
We sell and deliver software and services, and maintain support operations, in a large number of countries whose laws and practices differ from one another and are subject to unexpected changes. Managing these geographically dispersed operations requires significant attention and resources to

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ensure compliance with laws of those countries and those of the U.S. governing our activities in non-U.S. countries.
Those laws include, but are not limited to, anti-corruption laws and regulations (including the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act 2010), data privacy laws and regulations (including the European Union's General Data Privacy Regulation), and trade and economic sanctions laws and regulations (including laws administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control, the U.S. State Department, the U.S. Department of Commerce, the United Nations Security Council and other relevant sanctions authorities).  Our compliance risks are heightened due to the go-to-market approach for our businesses that relies heavily on a partner ecosystem, the fact that we operate in, and are expanding into, countries with a higher incidence of corruption and fraudulent business practices than others, the fact that we deal with governments and state-owned business enterprises, the fact that cyber attacks and intrusions that could expose sensitive information have increased, and the fact that global enforcement of laws has significantly increased.
Accordingly, while we strive to maintain a comprehensive compliance program, we cannot guarantee that an employee, agent or business partner will not act in violation of our policies or U.S. or other applicable laws, that a cyber attack or intrusion would not be successful, or that we may inadvertently violate such laws. Investigations of alleged violations of those laws and cyber intrusions can be expensive and disruptive. Violations of such laws can lead to civil and/or criminal prosecutions, substantial fines and other sanctions, including the revocation of our rights to continue certain operations, and also cause business and reputation loss, which could adversely affect our financial results and/or stock price.
Our international businesses present economic and operating risks, which could adversely affect our business and financial results.
We expect that our international operations will continue to expand and to account for a significant portion of our total revenue. Because we transact business in various foreign currencies, the volatility of foreign exchange rates has had and may in the future have a material adverse effect on our revenue, expenses and operating results.
Other risks inherent in our international operations include, but are not limited to, the following:
difficulties in staffing and managing foreign sales and development operations;
possible future limitations upon foreign-owned businesses;
increased financial accounting and reporting burdens and complexities;
inadequate local infrastructure; and
greater difficulty in protecting our intellectual property.
We may have exposure to additional tax liabilities and our effective tax rate may increase or fluctuate, which could increase our income tax expense and reduce our net income.
As a multinational organization, we are subject to income taxes as well as non-income based taxes in the U.S. and in various foreign jurisdictions. Significant judgment is required in determining our worldwide income tax provision and other tax liabilities. In the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. Our tax returns are subject to review by various taxing authorities. Although we believe that our tax estimates are reasonable, the final determination of tax audits or tax disputes could be different from what is reflected in our historical income tax provisions and accruals. For example, we have an open tax dispute in South Korea with respect to which we paid $12 million in 2017 to accommodate the potential tax liability through 2015, which we are disputing. If we do not prevail in that challenge, we could be subject to additional liabilities for periods after 2015, which we estimate could be $13 million.
Our effective tax rate can be adversely affected by several factors, many of which are outside of our control, including:
changes in tax laws, regulations, and interpretations in multiple jurisdictions in which we operate;
assessments, and any related tax interest or penalties, by taxing authorities;
changes in the relative proportions of revenues and income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;
changes to the financial accounting rules for income taxes;
unanticipated changes in tax rates; and

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changes to a valuation allowance on net deferred tax assets, if any.
II.Risks Related to Acquisitions and Strategic Relationships
Businesses we acquire may not generate the revenue and earnings we anticipate and may otherwise adversely affect our business.
We have acquired, and intend to continue to acquire, new businesses and technologies. If we fail to successfully integrate and manage the businesses and technologies we acquire, or if an acquisition does not further our business strategy as we expect, our operating results will be adversely affected.
Moreover, business combinations involve risks and uncertainties that can adversely affect our operations and operating results, including:
difficulties managing an acquired company’s technologies or lines of business or entering new markets where we have limited or no prior experience or where competitors may have stronger market positions;
unanticipated operating difficulties in connection with the acquired entities, including potential declines in revenue of the acquired entity;
failure to achieve the expected return on our investments, which could adversely affect our business or operating results and impair the assets that we recorded as a part of an acquisition, including intangible assets and goodwill;
diversion of management and employee attention;
loss of key personnel;
assumption of unanticipated legal or financial liabilities or other unidentified issues with the acquired business;
potential incompatibility of business cultures;
significant increases in our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition; and
if we were to issue a significant amount of equity securities in connection with future acquisitions, existing stockholders would be diluted and earnings per share would likely decrease.
Our inability to maintain or develop our strategic and technology relationships could adversely affect our business.
We have many strategic and technology relationships with other companies with which we work to offer complementary solutions and services, that market and sell our solutions, and that provide technologies that we embed in our solutions. We may not realize the expected benefits from these relationships and such relationships may be terminated by the other party. If these companies fail to perform or if a company terminates or substantially alters the terms of the relationship, we could suffer delays in product development, reduced sales or other operational difficulties and our business, results of operations and financial condition could be materially adversely affected.
III.Risks Related to Our Intellectual Property
We may be unable to adequately protect our proprietary rights, which could adversely affect our business and our ability to compete effectively.
Our software products are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection, as well as restrictions on disclosures and transferability contained in our agreements with other parties. Despite these measures, the laws of all relevant jurisdictions may not afford adequate protection to our products and other intellectual property. In addition, we frequently encounter attempts by individuals and companies to pirate our software. If our measures to protect our intellectual property rights fail, others may be able to use those rights, which could reduce our competitiveness and revenues.
In addition, any legal action to protect our intellectual property rights that we may bring or be engaged in could be costly, may distract management from day-to-day operations and may lead to additional claims against us, and we may not succeed, all of which would materially adversely affect our operating results.
Intellectual property infringement claims could be asserted against us, which could be expensive to defend and could result in limitations on our use of the claimed intellectual property.

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The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. If a lawsuit of this type is filed, it could result in significant expense to us and divert the efforts of our technical and management personnel. We cannot be sure that we would prevail against any such asserted claims. If we did not prevail, we could be prevented from using the claimed intellectual property or be required to enter into royalty or licensing agreements, which might not be available on terms acceptable to us. In addition to possible claims with respect to our proprietary products, some of our products contain technology developed by and licensed from third parties and we may likewise be susceptible to infringement claims with respect to these third-party technologies.
IV.Risks Related to Our Indebtedness
Our substantial indebtedness could adversely affect our business, financial condition and results of operations, as well as our ability to meet our payment obligations under our debt.
We have a significant amount of indebtedness. As of November 15, 2019, our total debt outstanding was approximately $1.1 billion, approximately $628 million of which was under our $1 billion secured credit facility (which matures in September 2023) and $500 million of which was associated with the 6% Senior Notes issued May 2016, which mature in May 2024 and are unsecured. Of the $628 million outstanding under our secured credit facility, $455 million was borrowed on November 1, 2019 to finance our acquisition of Onshape. In November 2019, we also amended the credit facility to increase the revolving loan commitment from $700 million to $1 billion (see Liquidity and Capital Resources-Outstanding Notes in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report). All amounts outstanding under the credit facility and the notes will be due and payable in full on their respective maturity dates. As of November 15, 2019, we had unused commitments under our credit facility of approximately $357 million. PTC Inc. and one of our foreign subsidiaries are eligible borrowers under the credit facility and certain other foreign subsidiaries may become borrowers under our credit facility in the future, subject to certain conditions.
Notwithstanding the limits contained in the credit agreement governing our credit facility and the indenture governing our 2024 6% Notes, we may be able to incur substantial additional debt from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our level of debt could intensify. Specifically, our level of debt could:
make it more difficult for us to satisfy our debt obligations and other ongoing business obligations, which may result in defaults;
result in an event of default if we fail to comply with the financial and other covenants contained in the agreements governing our debt instruments, which could result in all of our debt becoming immediately due and payable or require us to negotiate an amendment to financial or other covenants that could cause us to incur additional fees and expenses;
limit our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;
reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes and limit our ability to obtain additional financing for these purposes;
increase our vulnerability to the impact of adverse economic and industry conditions;
expose us to the risk of increased interest rates as certain of our borrowings, including borrowings under the credit facility, are at variable rates of interest;
limit our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industries in which we operate, and the overall economy;
place us at a competitive disadvantage compared to other, less leveraged competitors; and
increase our cost of borrowing.
Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under our debt agreements.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors some

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of which are beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. Our debt agreements restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations and our ability to satisfy our debt obligations.
If we cannot make scheduled payments on our debt, we will be in default and the lenders under our credit facility could terminate their commitments to loan money, the lenders could foreclose against the assets securing their borrowings, the holders of our 2024 6% Notes could declare all outstanding principal, premium, if any, and interest to be due and payable, and we could be forced into bankruptcy or liquidation. All of these events could result in a loss of your investment.
We are required to comply with certain financial and operating covenants under our debt agreements. Any failure to comply with those covenants could cause amounts borrowed to become immediately due and payable and/or prevent us from borrowing under the credit facility.
We are required to comply with specified financial and operating covenants under our debt agreements and to make payments under our debt, which limit our ability to operate our business as we otherwise might operate it. Our failure to comply with any of these covenants or to meet any debt payment obligations could result in an event of default which, if not cured or waived, would result in any amounts outstanding, including any accrued interest and/or unpaid fees, becoming immediately due and payable. We might not have sufficient working capital or liquidity to satisfy any repayment obligations in the event of an acceleration of those obligations. In addition, if we are not in compliance with the financial and operating covenants under the credit facility when we wish to borrow funds, we will be unable to borrow funds.
In addition, the financial and operating covenants under the credit facility may limit our ability to borrow funds, including for strategic acquisitions and share repurchases.
Our credit facility has variable interest tied to LIBOR and we could become subject to higher interest rates if the replacement rate we agree on with our banks is higher.
Borrowings under our revolving credit facility use the London Interbank Offering Rate (LIBOR) as a benchmark for establishing the interest rate. LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. Although we believe the recent discussions about alternative rates will not materially increase the interest rates on our credit facility, the final agreed rate may increase the cost of our variable rate indebtedness.
V.Risks Related to Our Common Stock and Debt Securities
Our operating results fluctuate from quarter to quarter, making future operating results difficult to predict; failure to meet market expectations could cause the price of our securities to decline.
Our quarterly operating results historically have fluctuated and are likely to continue to fluctuate depending on many factors, including:
variability in our contracts, including timing of start dates, length of contracts, and mix of on-premise and cloud-based purchases, which would impact our revenue and earnings;
a high percentage of our orders historically have been generated in the third month of each fiscal quarter and any failure to receive, complete or process orders at the end of any quarter could cause us to fall short of our financial and operating targets;
our adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers: Topic 606 in 2019 creates significant revenue volatility;

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a significant percentage of our orders comes from transactions with large customers, which tend to have long lead times that are less predictable;
because our operating expenses are largely fixed in the short term and are based on expected revenues, any failure to achieve our revenue targets could cause us to miss our earnings targets;
because a significant portion of our revenue and expenses are generated from outside the U.S., shifts in foreign currency exchange rates could adversely affect our reported results; and
we may incur significant expenses in a quarter in connection with corporate development initiatives, restructuring efforts or the investigation, defense or settlement of legal actions that would increase our operating expenses and reduce our earnings for the quarter in which those expenses are incurred.
Accordingly, our quarterly results are difficult to predict prior to the end of the quarter and we may be unable to confirm or adjust expectations with respect to our operating results for a quarter until that quarter has closed. Any failure to meet our quarterly revenue or earnings targets could adversely impact the market price of our securities.
Our long-range financial targets are predicated on expanding our portfolio of recurring revenue contracts (ARR growth), operating margin improvements and cash flow growth that we may fail to achieve, which could reduce our expected earnings and cause us to fail to meet the expectations of analysts or investors and cause the price of our securities to decline.
We are projecting long-term ARR, operating margin and cash flow growth. Our projections are based on the expected growth potential in the IoT and AR markets, as well as more modest growth in our core CAD and PLM markets. We may not achieve the expected ARR growth if the markets we serve do not grow at expected rates, if customers do not purchase, renew, or expand subscriptions as we expect, if we are not able to deliver solutions desired by customers and potential customers, and/or if acquired businesses do not generate the revenue growth that we expect.
Over time, we expect our operating margin to improve, which improvements are predicated on operating leverage and on improved operating efficiencies, particularly within our sales organization, and on service margin improvements. If we are unable to reduce our sales and marketing expenses as a percentage of revenue through productivity initiatives, or to reduce the amount of services we provide and/or to improve our services margins, we may not achieve our operating margin targets.
If we fail to achieve our long-range financial targets, or if analysts and investors expect that we will not achieve our long-range financial targets, the price of our securities could decline.
Our stock price has been volatile, which may make it harder to resell shares at a favorable time and price.
Market prices for securities of software companies are generally volatile and are subject to significant fluctuations that may be unrelated or disproportionate to the operating performance of these companies. The trading prices and valuations of these stocks, and of ours, may not be predictable. Negative changes in the public’s perception of the prospects of software companies, or of PTC or the markets we serve, could depress our stock price regardless of our operating results.
Also, a large percentage of our common stock is held by institutional investors and by Rockwell Automation. Purchases and sales of our common stock by these investors could have a significant impact on the market price of the stock. For more information about those investors, please see our proxy statement with respect to our most recent annual meeting of stockholders and Schedules 13D and 13G filed with the SEC with respect to our common stock.
Our 2024 6% Notes are not listed on any national securities exchange or included in any automated quotation system, which could make it harder to resell the notes at a favorable time and price.
Our 2024 6% Notes are not listed on any national securities exchange or included in any automated quotation system. As a result, an active market for the notes may not exist or be maintained, which would adversely affect the market price and liquidity of the notes. In that case, holders may not be able to sell their notes when they want to or at a favorable price.
The market for non-investment grade debt historically has been subject to severe disruptions that have caused substantial volatility in the prices of securities similar to the notes. The market, if any, for

11



the notes may experience similar disruptions and any such disruptions may adversely affect the liquidity in that market or the prices at which the notes may be sold.
ITEM 1B.
Unresolved Staff Comments
None.
ITEM 2.
Properties
We currently have 80 primary office locations used in operations in the United States and internationally, predominately as sales and/or support offices and for research and development work. Of our total of approximately 1,812,000 square feet of leased facilities used in operations, approximately 420,000 square feet are located in the U.S., including 250,000 square feet at our headquarters facility located in Boston, Massachusetts, and approximately 289,000 square feet are located in India, where a significant amount of our research and development is conducted. In addition, approximately 520,000 feet are associated with facilities that have been restructured, primarily our previous headquarters facility in Needham, Massachusetts. We believe that our facilities are adequate for our present and foreseeable needs.
ITEM 3.
Legal Proceedings
None. 
ITEM 4.
Mine Safety Disclosures
Not applicable.
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the Nasdaq Global Select Market under the symbol "PTC."
On September 30, 2019, the close of our fiscal year, and on November 13, 2019, our common stock was held by 1,107 and 1,104 shareholders of record, respectively.
The table below shows the shares of our common stock we repurchased in the fourth quarter of 2019.
Period (1)
Total Number of Shares (or Units) Purchased
Average Price Paid per Share (or Unit)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs  
Approximate Dollar Value of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
June 30, 2019 - July 27, 2019


$—


$310,005,304 (2)
July 28, 2019 - August 24, 2019
301,459


$66.39

301,459

$290,006,120 (2)
August 25, 2019 - September 30, 2019
76,705


$65.19

76,705

$285,006,347 (2)
Total
378,164


$66.15

378,164

$285,006,347 (2)
(1) Periods are our fiscal months within the fiscal quarter.

12



(2) Our Board of Directors has authorized us to repurchase up to $1,500 million of our common stock for the period October 1, 2017 through September 30, 2020, which program we announced on September 19, 2017 and announced expansion of in July 2018.

ITEM 6.        Selected Financial Data
Our five-year summary of selected financial data and quarterly financial data for the past two years is located on pages A-1 and A-2 at the end of this Form 10-K and incorporated herein by reference.
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Statements in this Annual Report about anticipated financial results and growth, as well as about the development of our products and markets, are forward-looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Item 1A. “Risk Factors” of this Annual Report.
Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.
Operating and Non-GAAP Financial Measures
Our discussion of results includes discussion of our operating measures (including "ARR," “license and subscription bookings” and other subscription-related measures) and non-GAAP financial measures. Our operating measures and non-GAAP financial measures, including the reasons we use those measures, are described below in Results of Operations - Operating Measures and Results of Operations - Non-GAAP Financial Measures, respectively. You should read those sections to understand our operating and non-GAAP financial measures.
Revenue Sources and Recognition
We sell software subscription and perpetual licenses, support for perpetual licenses, cloud services and professional services.
Subscription revenue is comprised of time-based licenses whereby customers use our software and receive related support for a specified term. Results for reporting periods beginning on or after October 1, 2018 are presented under the Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASC 606), while prior period amounts are not adjusted and continue to be reported in accordance with the guidance provided by ASC 985-605, Software-Revenue Recognition and revenues for non-software deliverables in accordance with ASC 605-25, Revenue Recognition, Multiple-Element Arrangements (ASC 605). Through 2018, revenue for our subscription contracts was recognized ratably over the term of the contract under ASC 605; this differs from how revenue for such contracts is recognized under ASC 606. Our contracts with customers may include multiple goods and services. Under ASC 606, revenue is recognized for each performance obligation that can be separately identified under the contract. Accordingly, our on-premise subscription contracts are unbundled into multiple performance obligations (i.e., license, cloud and support). Determining whether the software licenses and the cloud services are distinct from each other, and therefore performance obligations to be accounted for separately, or not distinct from each other, and therefore part of a single performance obligation, may require significant judgment. To date, for the majority of our products, we have concluded that the on-premise software licenses and cloud services provided in our subscription offerings are distinct from each other such that revenue from each performance obligation within the offering should be recognized separately. We will continue to review this conclusion as the cloud services that we deliver in combination with our on-premise subscriptions continue to evolve, which could result in changes to how we recognize revenue for such products. The license portion of our on-premise subscription contracts (approximately 50% to 55%) is recognized upfront and the cloud and support portions (approximately 45% to 50%) are recognized ratably over the term. Software as a Service (SaaS) and cloud services for which revenue is generally recognized ratably over the term of the contract are included in subscription revenue and have been immaterial to date.
Perpetual licenses are a perpetual right to use the software, for which revenue is generally recognized up front upon shipment to the customer. Support revenue is comprised of contracts to maintain new and/or previously purchased licenses, for which revenue is recognized ratably over the

13



term of the contract. Professional services engagements typically result from sales of new licenses, and for which revenue is recognized as the services are performed.
Our revenue recognition practices and the effects of our adoption of ASC 606, including adjustments to accumulated deficit related to billed and unbilled deferred revenue, are described in "revenue Recognition" and "Recently Adopted Accounting Pronouncements" in Note 2. Summary of Significant Accounting Policies and in Note 3. Revenue from Contracts with Customers in the Notes to Consolidated Financial Statements in this Annual Report.
Our adoption of ASC 606 has increased the volatility of our revenue results as a significant portion of subscription revenue is recognized at the time of delivery, rather than being recognized ratably over the contract period.
Executive Overview
ARR increased 10% to $1,116 million ($1,134 million and 12% at the guidance rate) as of the end of 2019 reflecting solid growth for this metric across all our businesses, particularly in our IoT and AR businesses.
Operating cash flow was $285 million, up 15% in 2019 compared to 2018. We made $22 million more in restructuring payments in 2019 compared to 2018 related to our workforce realignment and headquarters relocation.
Our 2019 results reflect continued demand for our PLM and CAD products as well as growing demand for our IoT and Augmented Reality (AR) products. License and subscription bookings in the fourth quarter of 2019 were $150 million, higher than anticipated, driven by strong bookings in IoT and AR, including a mega deal (bookings greater than $5 million) with our strategic alliance partner, Rockwell Automation. License and subscription bookings were $472 million, up 1% (4% constant currency) in 2019 compared to 2018, primarily driven by strong IoT and AR bookings growth, offset by declines in PLM and CAD bookings.
Under ASC 605, total revenue, software revenue and subscription revenue grew in 2019 compared to 2018, despite an 800 basis point increase in subscription mix in 2019. Under ASC 605, recurring software revenue was $1,079 million, an increase of 10% (13% constant currency) in 2019 compared to 2018. Under ASC 605, recurring revenue as a percentage of software revenue was 94% in 2019 compared to 90% in 2018. Under ASC 605, perpetual license and support revenue decreased year over year because we discontinued offering perpetual licenses for most of our solutions effective January 1, 2019. Operating margin under ASC 605 increased 200 basis points in 2019 resulting from the compounding effect of subscription licenses and lower operating expenses due to effective cost discipline. EPS declined under ASC 605 in 2019 primarily due to a higher tax provision.


14



Summary Revenue and Earnings Results

https://cdn.kscope.io/4e736148da0c62321d3527171ca65438-chart-0235e3ad015a961e854.jpg

 

 
 
Year Ended September 30,
 
 
 
 
 
 
 
 
Percent change
 
 
 
 
 
 
 
 
ASC 605
 
 
As Reported ASC 606
 
ASC 605
 
As Reported ASC 605
 
2019 vs 2018
Revenue (in thousands)
 
2019
 
2019
 
2018
 
Change
 
Constant Currency
Subscription license
 
$
253.7

 
 
 
 
 
 
 
 
Subscription support & cloud services
 
348.5

 
 
 
 
 
 
 
 
Total subscription
 
602.2

 
667.6

 
482.0

 
38
 %
 
41
 %
Perpetual support
 
415.2

 
411.0

 
496.8

 
(17
)%
 
(15
)%
Total recurring revenue
 
1,017.4

 
1,078.6

 
978.9

 
10
 %
 
13
 %
Perpetual license
 
70.7

 
72.2

 
109.6

 
(34
)%
 
(32
)%
Total software revenue (1)
 
1,088.1

 
1,150.8

 
1,088.5

 
6
 %
 
8
 %
Professional services
 
167.5

 
160.7

 
153.3

 
5
 %
 
9
 %
Total revenue
 
$
1,255.6

 
$
1,311.5

 
$
1,241.8

 
6
 %
 
8
 %
 
 
 
 
 
 
 
 
 
 
 
(1) Total software revenue includes:
 
 
 
 
 
 
 
 
 
 
License (2)
 
$
324.4

 
$
666.8

 
$
529.3

 
26
 %
 
29
 %
Support and cloud services
 
763.7

 
484.0

 
559.2

 
(13
)%
 
(11
)%
Total software revenue
 
$
1,088.1

 
$
1,150.8

 
$
1,088.5

 
6
 %
 
8
 %
(2) Under ASC 605, we have classified all subscription revenue as subscription license revenue.

15



 
 
Year Ended September 30,
 
 
As Reported ASC 606
 
ASC 605
 
As Reported ASC 605
 
ASC 605
Earnings Measures
 
2019
 
2019
 
2018
 
Change
Operating Margin
 
5.0
%
 
7.7
%
 
5.8
%
 
33
 %
Earnings (Loss) Per Share
 
$
(0.23
)
 
$
0.03

 
$
0.44

 
(94
)%
Non-GAAP Operating Margin(1)
 
20.3
%
 
22.4
%
 
18.3
%
 
22
 %
Non-GAAP Earnings Per Share(1)
 
$
1.64

 
$
1.74

 
$
1.45

 
20
 %
(1) Non-GAAP financial measures are reconciled to GAAP results under Results of Operations - Non-GAAP Measures below.

We ended 2019 with cash, cash equivalents and marketable securities of $327 million, up from $316 million at the end of 2018. We generated $285 million of cash from operations in 2019 compared to $248 million in 2018. Cash from operations in 2019 includes $25 million of restructuring payments compared to $3 million in the year-ago period. In 2019, we also used cash from operations to repurchase $115 million of common stock. As of September 30, 2019, the balance outstanding under our credit facility was $173 million and total debt outstanding was $673 million.
Operating Measures
We provide these measures to help investors understand the progress of our subscription transition. These measures are not necessarily indicative of revenue for the period or any future period.
ARR
ARR at the end of 2019 grew 10% (12% constant currency) compared to the end of 2018, reflecting the strength of our products and solutions and the value we provide to our customers. Our CAD and PLM businesses saw combined ARR growth of 8% (10% constant currency). Our IoT and AR businesses delivered 26% ARR growth (28% constant currency). With the combination of IoT and AR exiting fiscal 2019 at greater than 12% of total ARR and one-third of total bookings, these businesses represent a growing portion of the PTC business. Our focused solutions group closed the year stronger than expected, delivering 8% (10% constant currency) ARR growth for the year.
License and Subscription Bookings
https://cdn.kscope.io/4e736148da0c62321d3527171ca65438-chart-be91c64c186a28e1b17.jpg
License and subscription bookings for 2019 were $472 million, up 1% over 2018 (4% on a constant currency basis). In the fourth quarter of 2019 we had a mega deal (bookings greater than $5 million) with Rockwell Automation. The mega deal from Rockwell Automation was issued to satisfy a portion of

16



expected 2020 demand and will be credited against committed ACV minimums due in 2020 under the parties’ strategic alliance agreement, as amended.
Subscription ACV
New subscription ACV increased 13% over 2018 to $199 million due to continued adoption of our subscription offerings around the globe.
Deferred Revenue and Backlog (Unbilled Deferred Revenue)
Deferred revenue primarily relates to software agreements invoiced to customers for which the revenue has not yet been recognized. Unbilled deferred revenue (backlog) is the aggregate of booked orders for license, support and subscription (including multi-year subscription contracts with start dates after October 1, 2018 through the third quarter of 2019 that were subject to a limited annual cancellation right, of which approximately $158 million was cancellable at September 30, 2019) for which the associated revenue has not been recognized and the customer has not yet been invoiced. Early in the fourth quarter of 2019, we discontinued the cancellation right for substantially all new contracts. We do not record unbilled deferred revenue on our Consolidated Balance Sheets; such amounts are recorded as deferred revenue when we invoice the customer. We provide this view of deferred revenue and backlog to enable investors to understand the significant contractual commitments we have to customers and to provide a view of future revenue that we expect will be recognized, even if those commitments are not reflected on our balance sheet.
https://cdn.kscope.io/4e736148da0c62321d3527171ca65438-chart-8605d6eec2b66c29f54.jpg
 (Dollar amounts in millions)
 
September 30,
 
 
ASC 606 (1)
 
ASC 605
 
ASC 605
 
ASC 605
 
 
2019
 
2019
 
2018
 
2017
Deferred revenue
 
$
397

 
$
579

 
$
499

 
$
459

Unbilled deferred revenue
 
738

 
881

 
911

 
633

Total
 
$
1,135

 
$
1,460

 
$
1,410

 
$
1,092


(1) Upon adoption of ASC 606, approximately $367 million of total deferred revenue was recorded as a decrease to accumulated deficit with an offsetting $219 million increase to unbilled accounts receivable, a $143 million decrease to deferred revenue and a $5 million increase in other assets net of liabilities, primarily as a result of the acceleration of subscription license revenue under ASC 606.

17



Of the unbilled deferred revenue balance at September 30, 2019, we expect to invoice customers approximately $504 million within the next twelve months. Unbilled deferred revenue decreased by 3% year over year due to initial multi-year contracts renewing for shorter periods.
We expect that the amount of deferred revenue and unbilled deferred revenue will fluctuate from quarter to quarter due to the specific timing, duration and size of customer subscription and support agreements, varying billing cycles of such agreements, the specific timing of customer renewals (which are typically for one year), foreign currency fluctuations, the timing of when deferred revenue is recognized as revenue and the timing of our fiscal quarter ends. The average contract duration was approximately 2 years for new subscription contracts in 2019, 2018 and 2017.
The effects of our adoption of ASC 606, including the adjustments to accumulated deficit related to billed and unbilled deferred revenue, are described in Note 3. Revenue from Contracts with Customers in the Notes to Consolidated Financial Statements.
Subsequent Events
On November 1, 2019, PTC acquired Onshape, creators of the first Software as a Service (SaaS) product development platform that unites robust CAD with powerful data management and collaboration tools, for approximately $470 million, net of cash acquired. The acquisition is expected to accelerate PTC's ability to attract new customers with a SaaS-based product offering and position the company to capitalize on the inevitable industry transition to SaaS. In connection with the acquisition, PTC borrowed $455 million under its existing credit facility.
On November 13, 2019 we increased the revolving loan commitment under the credit facility to $1 billion and made other administrative amendments to the credit facility.
Future Expectations, Strategies and Risks
Our transition to a subscription model has been a headwind for revenue and earnings in 2019 with an increase in our subscription bookings mix of 800 basis points as compared to 2018. We expect the effect of the transition to moderate in fiscal 2020. We expect to grow revenue and expand our margins in fiscal 2020. We anticipate that IoT and AR adoption rates will continue to expand and will be the most significant driver to growth. In addition, we believe the recent acquisition of Onshape will provide us an opportunity to participate in the higher growth CAD and PLM markets serving small and medium businesses where we traditionally have not had a presence.
PTC remains committed to long-term development of Creo and Windchill. We want to be best-in-class with both the on-premise and SaaS deployment models in the CAD market. We will continue our pursuits of real-time simulation, generative design, additive manufacturing, and embedded IoT and AR capabilities.
With the growth opportunity in the SaaS-based CAD market and other strategic initiatives we have undertaken, as well as our continued commitment to operating margin improvement, we are realigning our workforce in 2020 to shift investment to support these strategic, high growth opportunities. We expect this realignment will result in a restructuring charge of up to $25 million in 2020. The effect of the realignment is reflected in our 2020 guidance.
As we move into 2020, our three overriding goals are:
          https://cdn.kscope.io/4e736148da0c62321d3527171ca65438-sustainablegrowtha09.jpg

Sustainable Growth
We are focused on driving ARR growth both in the high-growth Industrial IoT and AR markets and in our core CAD and PLM markets.
          https://cdn.kscope.io/4e736148da0c62321d3527171ca65438-expandsubscriptiona10.jpg

Cost Controls and Margin Expansion
Our goal is to drive continued margin expansion over the long term. We continue to proactively manage our cost structure and invest in what we believe are high return opportunities in our business. We expect to deliver continued long-term operating margin expansion, as we drive ARR growth and realize the compounding benefit of our maturing subscription business.


18



          https://cdn.kscope.io/4e736148da0c62321d3527171ca65438-costctrlsmarginexpansiona10.jpg

Expand Free Cash Flow
Our goal is to grow our free cash flow. PTC's free cash flow is driven primarily by increasing operating profit and efficiently managing both working capital and capital expenditures. Our plan for 2020 is to increase operating profit by expanding ARR and maintaining an efficient cost structure.
Results of Operations
The following table shows the financial measures that we consider the most significant indicators of the performance of our business. In addition to providing measures calculated under generally accepted accounting principles (“GAAP”), we also provide non-GAAP financial measures for the reported periods. Investors should use these non-GAAP financial measures only in conjunction with our GAAP results.
For discussion of 2018 results and comparison with 2017 results refer to "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.
(Dollar amounts in millions, except per share data)
Year ended September 30,
 
 
 
 
 
 
 
 
 
Percent Change
 
 
 
 
 
 
 
 
 
ASC 605
 
As Reported ASC 606
 
ASC 605
 
As Reported ASC 605
 
As Reported ASC 605
 
2019 vs. 2018
 
2018 vs. 2017
 
2019
 
2019
 
2018
 
2017
 
Actual
 
Constant
Currency
 
Actual
 
Constant
Currency
Subscription
$
602.2

 
$
667.6

 
$
482.0

 
$
279.2

 
38
 %
 
41
 %
 
73
 %
 
69
 %
Perpetual support
415.2

 
411.0

 
496.8

 
574.7

 
(17
)%
 
(15
)%
 
(14
)%
 
(16
)%
Total recurring revenue
1,017.4

 
1,078.6

 
978.9

 
853.9

 
10
 %
 
13
 %
 
15
 %
 
12
 %
Perpetual license
70.7

 
72.2

 
109.6

 
133.4

 
(34
)%
 
(32
)%
 
(18
)%
 
(20
)%
Total software revenue
1,088.1

 
1,150.8

 
1,088.5

 
987.3

 
6
 %
 
8
 %
 
10
 %
 
8
 %
Professional services
167.5

 
160.7

 
153.3

 
176.7

 
5
 %
 
9
 %
 
(13
)%
 
(16
)%
Total revenue
1,255.6

 
1,311.5

 
1,241.8

 
1,164.0

 
6
 %
 
8
 %
 
7
 %
 
4
 %
Total cost of revenue
325.4

 
318.2

 
326.5

 
328.5

 
(3
)%
 
 
 
(1
)%
 
 
Gross margin
930.3

 
993.3

 
915.3

 
835.5

 
9
 %
 
 
 
10
 %
 
 
Operating expenses
867.2

 
891.7

 
842.7

 
793.8

 
6
 %
 
 
 
6
 %
 
 
Total costs and expenses
1,192.6

 
1,209.9

 
1,169.2

 
1,122.3

 
3
 %
 
5
 %
 
4
 %
 
2
 %
Operating income
$
63.0

 
$
101.6

 
$
72.6

 
$
41.8

 
40
 %
 
55
 %
 
74
 %
 
52
 %
Non-GAAP operating income (1)
$
255.3

 
$
293.9

 
$
229.4

 
$
189.3

 
28
 %
 
33
 %
 
21
 %
 
15
 %
Operating margin
5.0
%
 
7.7
%
 
5.8
%
 
3.6
%
 
 
 
 
 
 
 
 
Non-GAAP operating margin (1)
20.3
%
 
22.4
%
 
18.3
%
 
16.2
%
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share (2)
$
(0.23
)
 
$
0.03

 
$
0.44

 
$
0.05

 
 
 
 
 
 
 
 
Non-GAAP diluted earnings per share (2)
$
1.64

 
$
1.74

 
$
1.45

 
$
1.17

 
 
 
 
 
 
 
 
Cash flow from operations (3)
$
285.1

 
$
285.1

 
$
247.8

 
$
135.2

 
 
 
 
 
 
 
 
 
(1) See Non-GAAP Financial Measures below for a reconciliation of our GAAP results to our non-GAAP measures.
(2) We have 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 2019 - 2017 non-GAAP tax provisions are 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. We recorded the impact of the Tax Cuts and Jobs Act in our 2018 GAAP earnings, resulting in a non-cash benefit of approximately $12 million. We have excluded this benefit from our non-GAAP results.

19



(3) Cash flow from operations for 2019 includes $25 million of restructuring payments. Cash flow from operations for 2018 includes $3 million of restructuring payments. Cash flow from operations for 2017 includes $37 million of restructuring payments, a $12 million payment related to a Korea tax audit and $3 million of legal settlement payments.
Impact of Foreign Currency Exchange on Results of Operations
Approximately 60% of our revenue and 40% of our expenses are transacted in currencies other than the U.S. dollar. Currency translation affects our reported results, which are in U.S. Dollars. If 2019 reported results were converted into U.S. dollars based on the corresponding prior year’s foreign currency exchange rates, 2019 revenue would have been higher by $34 million and expenses would have been higher by $22 million. The net impact on year-over-year results would have been an increase in operating income of $12 million in 2019. The results of operations, revenue by line of business and revenue by geographic region in the tables that follow present both actual percentage changes year over year and percentage changes on a constant currency basis.
Revenue
We discuss our revenue results by line of business, by product group and by geographic region below. Our discussion is focused on our results under ASC 605 for purposes of comparability. In 2019 our ASC 606 software revenue results were lower than under ASC 605 primarily as a result of the acceleration of our on-premise subscription revenue associated with the retained earnings adoption adjustment recorded in the first quarter, offset by revenue recognized in 2019, which would otherwise have been recognized ratably over future years under ASC 605. Professional services revenue under ASC 606 was higher than under ASC 605 due to the requirement to separately identify certain performance obligations, which would have otherwise been combined and recognized ratably under ASC 605, but instead were recognized in 2019.
Revenue by Line of Business
https://cdn.kscope.io/4e736148da0c62321d3527171ca65438-chart-c26169db1bcaba6af13.jpghttps://cdn.kscope.io/4e736148da0c62321d3527171ca65438-chart-34631fafb38379acab6.jpghttps://cdn.kscope.io/4e736148da0c62321d3527171ca65438-chart-b224684ae00538b1a99.jpghttps://cdn.kscope.io/4e736148da0c62321d3527171ca65438-chart-bf47dad49e0502c992c.jpg
https://cdn.kscope.io/4e736148da0c62321d3527171ca65438-revenuepiechartlabel.jpg
Software
Software revenue consists of subscription, support, and perpetual license revenue. Under ASC 605, recurring software revenue consists of subscription and support revenue and was 82% of total revenue and 94% of software revenue for 2019. Our subscription revenue includes an immaterial amount of Software as a Service (SaaS) and cloud services revenue.
As our mix of subscription sales relative to perpetual license sales has increased, perpetual license revenue and support revenue have declined and are expected to continue to decline as customers purchase our solutions as subscriptions and convert existing perpetual licenses with support contracts to

20



subscriptions. Effective January 1, 2019, new software licenses for our core solutions and ThingWorx solutions became available only by subscription worldwide.
Our results have been impacted, and we expect will continue to be impacted, by our ability to close large transactions. The amount of bookings and revenue, particularly license and subscriptions, attributable to large transactions, and the number of such transactions, may vary significantly from quarter to quarter based on customer purchasing decisions and macroeconomic conditions. Such transactions may have long lead times as they often follow a lengthy product selection and evaluation process and, for existing customers, are influenced by contract expiration cycles. This may cause volatility in our results.
Professional Services
Professional services engagements typically result from sales of new licenses; revenue is recognized over the term of the engagement. Under ASC 605 professional services revenue was up 5% (9% constant currency) in 2019 compared to 2018. Professional services revenue in 2018 includes a $14.5 million write-down related to a settlement of a customer dispute concerning a receivable. Excluding the impact of this write-down, professional services revenue in 2019 would have declined 4% year over year. We expect that professional services revenue will trend flat-to-down over time due to our strategy to expand margins by migrating services engagements to our partners and delivering products that require less consulting and training services.
Revenue by Product Group
(Dollar amounts in millions)
Year ended September 30,
 
 
 
 
 
 
 
 
 
Percent Change
 
 
 
 
 
 
 
 
 
ASC 605
 
As Reported ASC 606
 
ASC 605
 
As Reported ASC 605
 
As Reported ASC 605
 
2019 vs. 2018
 
2018 vs. 2017
 
2019
 
2019
 
2018
 
2017
 
Actual
 
Constant
Currency
 
Actual
 
Constant
Currency
Solutions Products
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Software revenue
$
947.9

 
$
1,000.2

 
$
964.6

 
$
893.6

 
4
 %
 
6
%
 
8
 %
 
5
 %
Professional services
151.9

 
135.7

 
137.9

 
167.1

 
(2
)%
 
2
%
 
(17
)%
 
(20
)%
Total revenue
$
1,099.8

 
$
1,135.9

 
$
1,102.5

 
$
1,060.7

 
3
 %
 
6
%
 
4
 %
 
1
 %
IoT Products
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Software revenue
$
140.2

 
$
150.6

 
$
123.9

 
$
93.7

 
22
 %
 
24
%
 
32
 %
 
31
 %
Professional services
15.6

 
25.0

 
15.4

 
9.6

 
62
 %
 
65
%
 
60
 %
 
57
 %
Total revenue
$
155.8

 
$
175.6

 
$
139.3

 
$
103.3

 
26
 %
 
28
%
 
35
 %
 
33
 %

Solutions Group
Under ASC 605, Solutions Group software revenue grew in 2019 compared to 2018, driven by growth in subscription revenue, which was up 41% (44% on a constant currency basis) year over year. This growth was offset in part by the 49% (46% on a constant currency basis) decline in perpetual license revenue in 2019 due to the end of life of perpetual licenses.
Solutions professional services revenue in 2018 reflects the $14.5 million write-down described above. Excluding the impact of this write-down, Solutions professional services revenue would have declined 11% year over year. Solutions professional services revenue for 2019 declined compared to 2018 due to our strategy to limit the amount of professional services we provide.
IoT Group
Under ASC 605, IoT recurring software revenue grew by 25% (27% on a constant currency basis) in 2019, reflecting the strong bookings growth over the past several years and the compounding benefit of our maturing subscription model. IoT software revenue in 2018 reflects $5.2 million of new subscription revenue related to the customer dispute settlement described above, which settlement included the purchase of new subscription licenses.

21



IoT professional services revenue increased in 2019 due to implementation and adoption services we sell in connection with new software licenses as part of our efforts to help customers' IoT initiatives succeed.
Revenue by Geographic Region
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(Dollar amounts in millions)
Year ended September 30,
 
 
 
 
 
 
 
 
 
Percent Change
 
 
 
 
 
 
 
 
 
ASC 605
 
As Reported ASC 606
 
ASC 605
 
AS Reported ASC 605
 
AS Reported ASC 605
 
2019 vs. 2018
 
2018 vs. 2017
 
2019
 
2019
 
2018
 
2017
 
Actual
 
Constant
Currency
 
Actual
 
Constant
Currency
Americas
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Software revenue
$
484.1

 
$
512.3

 
$
468.3

 
$
433.7

 
9
 %
 
10
 %
 
8
 %
 
8
 %
Professional services revenue
53.4

 
53.0

 
42.9

 
67.2

 
24
 %
 
24
 %
 
(36
)%
 
(36
)%
Total Revenue
$
537.5

 
$
565.3

 
$
511.2

 
$
500.9

 
11
 %
 
11
 %
 
2
 %
 
2
 %
Europe
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Software revenue
$
379.9

 
$
417.2

 
$
402.9

 
$
356.5

 
4
 %
 
9
 %
 
13
 %
 
7
 %
Professional services revenue
84.8

 
77.7

 
83.0

 
78.7

 
(6
)%
 
(1
)%
 
5
 %
 
(1
)%
Total Revenue
$
464.7

 
$
494.9

 
$
485.9

 
$
435.2

 
2
 %
 
7
 %
 
12
 %
 
5
 %
Asia Pacific
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Software revenue
$
224.1

 
$
221.3

 
$
217.3

 
$
197.1

 
2
 %
 
4
 %
 
10
 %
 
8
 %
Professional services revenue
29.4

 
29.9

 
27.4

 
30.9

 
9
 %
 
12
 %
 
(11
)%
 
(13
)%
Total Revenue
$
253.4

 
$
251.3

 
$
244.7

 
$
228.0

 
3
 %
 
5
 %
 
7
 %
 
5
 %
Americas
The growth in ASC 605 software revenue in 2019 was due to growth of subscription revenue, which was up 37% over 2018. This growth was offset in part by a decline of 9% (8% on a constant currency basis) in perpetual license revenue in 2019 due to the end of life of perpetual licenses in the Americas as of January 1, 2018.

22



Professional services revenue in 2018 reflects the $14.5 million write-down related to the customer dispute settlement described above. Excluding the impact of this write-down, professional services revenue in the Americas would have declined 8% year over year.
Europe
Under ASC 605, software revenue in 2019 grew over 2018 driven by the growth in subscription revenue, which was up 37% (44% on a constant currency basis) year over year. This growth was offset in part by the decline of 51% (47% on a constant currency basis) in perpetual license revenue in 2019 due to the end of life of perpetual licenses in Europe as of January 1, 2018.
Year-over-year declines in foreign currency exchange rates, particularly the Euro, impacted European revenue unfavorably in 2019 by $26 million.
Asia Pacific
Under ASC 605, software revenue in 2019 grew slightly over 2018 driven by growth in subscription revenue of 49% (51% on a constant currency basis) year over year. This growth was offset in part by the decline of 38% (36% on a constant currency basis) in perpetual license revenue in 2019 due to the end of life of perpetual licenses in Asia Pacific as of January 1, 2019.
Year-over-year changes in foreign currency exchange rates unfavorably impacted Asia Pacific revenue by $6 million in 2019.
Gross Margin
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23



(Dollar amounts in millions)
Year ended September 30,
 
As Reported ASC 606
 
ASC 605
 
As Reported ASC 605
 
As Reported ASC 605
 
Percent
Change
 
 
 
 
 
 
 
 
 
ASC 605
 
2019
 
2019
 
2018
 
2017
 
2019 vs. 2018
 
2018 vs. 2017
Gross margin
$
930.3

 
$
993.3

 
$
915.3

 
$
835.5

 
9
%
 
10
%
Non-GAAP gross margin
970.0

 
1,033.1

 
963.7

 
877.0

 
7
%
 
10
%
Gross margin as a % of revenue:
 
 
 
 
 
 
 
 
 
 
 
License
84
%
 
92
%
 
91
%
 
81
%
 
 
 
 
Support and cloud services
83
%
 
73
%
 
76
%
 
82
%
 
 
 
 
Professional services
16
%
 
16
%
 
6
%
 
15
%
 
 
 
 
Gross margin as a % of total revenue
74
%
 
76
%
 
74
%
 
72
%
 
 
 
 
Non-GAAP gross margin as a % of total non-GAAP revenue
77
%
 
79
%
 
77
%
 
75
%
 
 
 
 
Under ASC 605, the increase in total gross margin in 2019 compared to 2018 reflects higher software revenue driven by the increase in recurring subscription revenue. Margins for license and subscription are beginning to expand as the subscription model matures and revenue that has been deferred begins to contribute to each quarterly period. Under ASC 605, support gross margins are down in 2019 compared 2018 due to the decrease in perpetual support revenue due to conversions of support to subscription and the end of life of perpetual licenses.
Professional services revenue in 2018 reflects the $14.5 million revenue write-down associated with the customer dispute described above. Without the revenue write-down, professional services gross margin would have been 17% in 2018.



24



Total Costs and Expenses
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(Dollar amounts in millions)
Year ended September 30,
 
As Reported ASC 606
 
ASC 605
 
As Reported ASC 605
 
As Reported ASC 605
 
Percent
Change
 
 
 
 
 
 
 
 
 
ASC 605
 
2019
 
2019
 
2018
 
2017
 
2019 vs. 2018
 
2018 vs. 2017
Cost of license revenue
51.9

 
50.2

 
47.7

 
66.8

 
5
 %
 
 
(29
)%
 
Cost of support and cloud services revenue
133.5

 
133.0

 
135.1

 
110.9

 
(2
)%
 
 
22
 %
 
Cost of professional services revenue
140.0

 
134.9

 
143.7

 
150.7

 
(6
)%
 
 
(5
)%
 
Sales and marketing
417.4

 
442.0

 
414.8

 
372.7

 
7
 %
 
 
11
 %
 
Research and development
246.9

 
246.9

 
249.8

 
236.0

 
(1
)%
 
 
6
 %
 
General and administrative
127.9

 
127.9

 
143.0

 
145.0

 
(11
)%
 
 
(1
)%
 
Amortization of acquired intangible assets
23.8

 
23.8

 
31.4

 
32.1

 
(24
)%
 
 
(2
)%
 
Restructuring and other charges, net
51.1

 
51.1

 
3.8

 
7.9

 
1,258
 %
 
 
(53
)%
 
Total costs and expenses
$
1,192.6

 
$
1,209.8

 
$
1,169.2

 
$
1,122.3

 
3
 %
(1)
 
4
 %
(1)
Total headcount at end of period
6,055

 
6,055

 
6,110

 
6,041

 
(1
)%
 
 
1
 %
 

(1)
On a constant currency basis from the prior period, total costs and expenses increased 5% from 2018 to 2019 and increased 2% from 2017 to 2018.

2019 compared to 2018
ASC 605 costs and expenses in 2019 compared to 2018 increased primarily due to the following:

25


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