Strong Subscription Revenue Growth with Margins at High End of ASC 605 Guidance; Resets FY19 Outlook; Updates $850 Million Free Cash Flow Target to 2024
BOSTON--(BUSINESS WIRE)--Jul. 24, 2019-- PTC (NASDAQ: PTC) today reported financial results for its fiscal third quarter 2019.
Financial Summary - ASC 606 (1)
Financial Summary ASC 605 (1)
(1)We adopted ASC 606 on October 1, 2018, which impacted our reported financial results, including the timing and classification of revenue. For comparability purposes, and unless otherwise specified, the amounts included in the commentary below refer to results under ASC 605, as shown in our financial statements, including the notes thereto.
“We delivered solid third quarter financial performance reflecting the strength of our subscription model,” said James Heppelmann, President and CEO, PTC. “Momentum in our growth business continues to be strong where we had five deals with bookings of over $1 million, as customers increasingly leverage our IoT and AR offerings to enable digital transformation.”
Heppelmann added, “The transition to a subscription business model plus operational changes we have made this year, which are important elements to our long-term success, have created some short-term headwinds in the business, but the balance of the business is performing well. We remain excited about the growth opportunities in the market and our unparalleled competitive position, backed by important strategic alliances and partner relationships. PTC is well-positioned to continue creating substantial value for our customers and shareholders.”
Other third quarter 2019 results: Additional operating and financial highlights are set forth below. Information about our bookings and other reporting measures is provided below. For additional details, please refer to the prepared remarks and financial data tables that have been posted to the Investor Relations section of our website at investor.ptc.com.
Additional Operating Highlights:
License and subscription bookings: Q3’19 license and subscription bookings were $109 million, a decrease of 3% YoY or 1% in constant currency.
Software revenue: Q3’19 software revenue was $282 million, an increase of 3% year over year or 6% in constant currency.
Recurring Software revenue: Q3’19 recurring software revenue was $271 million, an increase of 9% year over year or 13% in constant currency.
IoT software revenue: Q3’19 IoT software revenue was $38 million, up 21% year over year or 24% on a constant currency basis, driven by subscription revenue growth of 35% year over year or 38% on a constant currency basis.
Annualized recurring revenue (ARR): Q3’19 ARR was $1,088 million, an increase of 9% year over year, or 13% in constant currency.
Deferred revenue: Billed deferred revenue in the third quarter increased 14% year over year to $551 million. Total deferred revenue – billed and unbilled - increased $105 million year over year. Billed deferred revenue primarily relates to software agreements invoiced to customers for which the revenue has not yet been recognized. Billed deferred revenue fluctuates quarterly based upon the contractual billing dates in our recurring revenue contracts, and the timing of our fiscal reporting periods. Additionally, total deferred revenue is impacted by changes in FX rates and the length of new and renewal contracts.
Operating cash flow and free cash flow: Operating cash flow in the third quarter was $68 million, up 37% over Q3’18, and free cash flow was $59 million, up 42% over Q3’18. Free cash flow in Q3’19 includes cash payments of approximately $3 million related to our restructuring plan, including the relocation of our headquarters.
Total cash, cash equivalents, and marketable securities: As of the end of the third quarter total cash, cash equivalents, and marketable securities was $322 million and total debt, net of deferred issuance costs, was $699 million. During the third quarter we used $25 million to repurchase 287,000 shares at an average price of $87. Additionally, we paid down $40 million towards our revolving credit facility. We also retired 3 million shares at no cost related to the ASR initiated in the fourth quarter of fiscal 2018.
Management's Financial Outlook: The Company's fourth quarter and fiscal year 2019 revenue and diluted earnings per share guidance is provided below. The revenue and diluted earnings per share guidance is provided on both a GAAP and a non-GAAP basis, and in accordance with both ASC 606 and ASC 605. Non-GAAP financial measures exclude the income statement effects of acquisition adjustments to deferred revenue, stock-based compensation, amortization of acquired intangible assets, acquisition-related transaction costs, restructuring charges and measurement-period adjustments related to the Tax Cuts and Jobs Act.
Kristian Talvitie, EVP and CFO, said, “Given our year-to-date performance and our revised outlook for the fourth fiscal quarter, we believe it is prudent to reset our long-term financial targets. We remain committed to delivering $850M in free cash flow, but now expect to achieve this target in fiscal 2024. We will provide more detail around our FY’20 and long-range targets under ASC 606 following the end of this fiscal year.”
Fiscal 2019 Business Outlook – ASC 606 For the fourth quarter and fiscal year ending September 30, 2019, the company expects:
In millions except per share amounts
Operating Measures (1)
Q4’19 Low
Q4’19
High
FY’19 Low
FY’19 High
Subscription ACV
$62
$67
$192
$197
License and Subscription Bookings
$135
$145
$458
$468
Subscription % of Bookings
93%
84%
(1) An explanation of the metrics included in this table is provided below.
Financial Measures(1)
Q4’19 High
Subscription Revenue
$181
$190
$601
$609
Perpetual Support Revenue
$97
$99
$412
$414
Total Recurring Software Revenue
$278
$289
$1,013
$1,024
Perpetual License Revenue
$9
$11
$70
$72
Total Software Revenue
$287
$300
$1,083
$1,096
Professional Services Revenue
$41
$43
$166
$168
Total Revenue
$328
$343
$1,249
$1,264
Operating Expense (GAAP)
$216
$218
$880
$882
Operating Expense (Non-GAAP)
$186
$188
$723
$725
Operating Margin (GAAP)
9%
12%
4%
5%
Operating Margin (Non-GAAP)
21%
24%
19%
20%
Tax Rate (GAAP)
0%
70%
Tax Rate (Non-GAAP)
16%
Shares Outstanding
116
118
EPS (GAAP)
$0.16
$0.28
$0.01
$0.05
EPS (Non-GAAP)
$0.42
$0.52
$1.43
$1.53
Free Cash Flow
$235
$245
Adjusted Free Cash Flow
$260
$270
(1) The fourth quarter and fiscal 2019 non-GAAP operating expense, non-GAAP operating margin and non-GAAP EPS guidance exclude the estimated items outlined in the table below, as well as any tax effects and discrete tax items (which are not known nor reflected). Adjusted free cash flow excludes $25 million of restructuring payments related to our workforce realignment and headquarters relocation.
In millions
FY’19
Effect of acquisition accounting on fair value of acquired deferred revenue
$0
$1
Acquisition-related charges
Restructuring and headquarters relocation charges (1)
$45
Intangible asset amortization expense
$13
$51
Stock-based compensation expense
$27
$98
Total Estimated Pre-Tax GAAP adjustments
$40
$196
(1) Includes $16 million related to our workforce realignment recorded in the first quarter of 2019 and $29 million recorded in the first and second quarters of 2019 related to lease commitments and accelerated depreciation expense associated with exiting the Needham headquarters facility and relocating to our new worldwide headquarters in the Boston Seaport District, which occurred in January 2019.
Fiscal 2019 Business Outlook – ASC 605 For the fourth quarter and fiscal year ending September 30, 2019, the company expects:
$183
$665
$670
$100
$410
$281
$288
$1,076
$10
$73
$74
$290
$298
$1,148
$1,156
$159
$330
$338
$1,307
$1,315
$219
$220
$897
$899
$189
$191
$740
$742
11%
7%
8%
22%
23%
50%
17%
18%
$0.09
$0.11
$0.23
$0.25
$0.47
$1.73
$1.78
PTC’s Fiscal Third Quarter Results Conference Call, Prepared Remarks and 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, July 24, 2019. To access the live webcast, please visit PTC’s Investor Relations website at investor.ptc.com at least 15 minutes before the scheduled start time to download any necessary audio or plug-in software. To participate in the live conference call, dial 773-799-3757 or 800-857-5592 and provide the passcode PTC. The call will be recorded, and a replay will be available for 10 days following the call by dialing 888-403-4669 and entering the passcode 8020. The archived webcast will also be available on PTC’s Investor Relations website.
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 and a subscription, we use bookings for internal planning, forecasting and reporting of new license and cloud services transactions (as subscription bookings includes cloud services bookings).
In order to normalize between perpetual and subscription licenses, we define subscription bookings as the subscription annualized contract value (subscription ACV) of new subscription contracts multiplied by a conversion factor of 2. We arrived at the conversion factor of 2 by considering a number of variables including pricing, support, length of term, and renewal rates. We define subscription ACV as the total value of a new subscription contract (which may include annual values that increase over time and without regard to contractual termination options) divided by the term of the contract (in days) multiplied by 365. If the term of the subscription contract is less than a year, and is not associated with an existing contract, the booking is equal to the total contract value. Beginning in Q3’18, minimum ACV commitments under our Strategic Alliance Agreement with Rockwell Automation are included in subscription ACV if the period-to-date minimum ACV commitment exceeds actual ACV sold under the Agreement.
License and subscription bookings equal subscription bookings (as described above) plus perpetual license bookings. Because subscription bookings is a metric we use to approximate the value of subscription sales if sold as perpetual licenses, it does not represent the actual revenue that will be recognized with respect to subscription sales or that would be recognized if the sales were perpetual licenses, nor does the annualized value of monthly software rental bookings represent the value of any such booking.
Total Deferred Revenue Total Deferred Revenue consists of Billed Deferred Revenue and Unbilled Deferred Revenue.
Billed Deferred Revenue primarily relates to software agreements invoiced to customers for which the revenue has not yet been recognized. Billed deferred revenue can fluctuate quarterly based upon the contractual billing dates in our recurring revenue contracts and the timing of our fiscal reporting periods. Additionally, total deferred revenue is impacted by changes in FX rates and the length of new and renewal contracts.
Unbilled Deferred Revenue is the aggregate of booked orders for license, support and subscription (including multi-year subscription contracts with start dates after October 1, 2018 that are subject to a limited annual cancellation right) for which the associated revenue has not been recognized and the customer has not been invoiced. We do not record unbilled deferred revenue on our Consolidated Balance Sheet; we record such amounts as deferred revenue when we invoice the customer.
Software 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. “Subscription revenue” includes cloud services revenue.
Navigate Allocation Revenue and bookings for our Navigate™ ThingWorx®-based IoT solution for PLM are allocated 50% to Solutions and 50% to IoT.
Annualized Recurring Revenue (ARR) To help investors understand and assess the success of our subscription transition, we provide an Annualized Recurring Revenue operating measure. Annualized Recurring Revenue (ARR) for a given quarter is calculated by dividing the portion of non-GAAP software revenue attributable to subscription and support for the quarter by the number of days in the quarter and multiplying by 365. (A related metric is Subscription ARR, which is calculated by dividing the portion of non-GAAP revenue attributable to subscriptions for the quarter by the number of days in the quarter and multiplying by 365.) ARR should be viewed independently of revenue and deferred revenue as it is an operating measure and is not intended to be combined with or to replace either of those items. ARR is not a forecast of future revenue, which can be impacted by contract expiration and renewal rates and does not include revenue reported as perpetual license or professional services revenue in our Consolidated Statement of Income. Subscription and support revenue and ARR disclosed in a quarter can be impacted by multiple factors, including but not limited to (1) the timing of the start of a contract or a renewal, including the impact of on-time renewals, support win-backs, and support conversions, which may vary by quarter, (2) the ramping of committed monthly payments under a subscription agreement over time, (3) multiple other contractual factors with the customer including other elements sold with the subscription or support contract, and (4) the impact of currency fluctuations. These factors can cause disclosed ARR to vary.
Foreign Currency Impacts on our 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.
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 our financial results and such items often recur. Management uses, and investors should consider, non-GAAP measures in conjunction with our GAAP results.
Non-GAAP revenue, non-GAAP operating expense, non-GAAP operating margin, non-GAAP gross profit, non-GAAP gross margin, non-GAAP net income and non-GAAP EPS exclude the effect of the following items: fair value of acquired deferred revenue, fair value adjustment to deferred services cost, stock-based compensation, amortization of acquired intangible assets, acquisition-related and other transactional charges included in general and administrative costs, restructuring and headquarters relocation charges, and income tax adjustments. Additional information about the items we exclude from our non-GAAP financial measures and the reasons we exclude them can be found in “Non-GAAP Financial Measures” beginning on page 35 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.
A reconciliation of non-GAAP measures to GAAP results is provided within this press release.
PTC also provides information on “free cash flow” and “adjusted free cash flow” to enable investors to assess our ability to generate cash without incurring additional external financings and to evaluate our performance against our announced long-term goal of returning approximately 40% of our free cash flow to shareholders via stock repurchases. Free cash flow is net cash provided by (used in) operating activities less capital expenditures; adjusted free cash flow is free cash flow excluding restructuring payments and certain identified non-ordinary course payments. Free cash flow and adjusted free cash flow are not measures of cash available for discretionary expenditures.
Forward-Looking Statements Statements in this press release that are not historic facts, including statements about our future financial and growth expectations and targets, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks include: the macroeconomic and/or global manufacturing climates may deteriorate due to, among other factors, the geopolitical environment, including the focus on technology transactions with non-U.S. entities and potential expanded prohibitions, and ongoing trade tensions and tariffs; customers may not purchase our solutions or convert existing support contracts to subscription when or at the rates we expect; our businesses, including our Internet of Things (IoT), and Augmented Reality businesses, may not expand and/or generate the revenue we expect; foreign currency exchange rates may vary from our expectations and thereby affect our reported revenue and expense; the mix of revenue between license & subscription solutions, support and professional services could be different than we expect, which could impact our EPS results; our transition to subscription-only licensing could adversely affect sales and revenue; sales of our solutions as subscriptions may not have the longer-term effect on revenue and earnings that we expect; bookings associated with minimum ACV commitments under our Strategic Alliance Agreement with Rockwell Automation may not result in subscription contracts sold through to end-user customers; our strategic initiatives and investments may not generate the revenue we expect; we may be unable to expand our partner ecosystem as we expect and our partners may not generate the revenue we expect; we may be unable to generate sufficient operating cash flow to return 40% of free cash flow to shareholders and other uses of cash or our credit facility limits or other matters could preclude share repurchases. In addition, our assumptions concerning our future GAAP and non-GAAP effective income tax rates are based on estimates and other factors that could change, including the geographic mix of our revenue, expenses and profits. Other risks and uncertainties that could cause actual results to differ materially from those projected are detailed from time to time in reports we file with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.
About PTC (NASDAQ: PTC) PTC unleashes industrial innovation with award-winning, market-proven solutions that enable companies to differentiate their products and services, improve operational excellence, and increase workforce productivity. With PTC, and its partner ecosystem, manufacturers can capitalize on the promise of today’s new technology to drive digital transformation.
PTC.com@PTCBlogs
2019
2018
$
53,705
90,159
143,864
171,631
126,712
100,328
99,664
121,127
244,192
271,295
247,839
9,213
10,644
25,780
253,405
281,939
273,619
42,081
40,471
41,158
295,486
322,410
314,777
47,092
46,604
46,273
35,613
34,629
35,360
82,705
81,233
81,633
212,781
241,177
233,144
108,202
113,533
107,801
60,590
61,221
28,773
33,098
5,920
7,850
(9
)
1,627
203,476
208,807
211,597
9,305
32,370
21,547
(9,790
(10,080
(11,576
(485
22,290
9,971
14,273
10,585
(7,026
(14,758
11,705
16,997
(0.13
0.10
0.15
116,133
115,774
0.14
117,019
117,500
(1) See supplemental financial data for revenue by license, support, and professional services. (2) See supplemental financial data for additional information about stock-based compensation. (3) Periods prior to 2019 reflect immaterial expense reclassifications in connection with the adoption of new pension accounting prescribed in Accounting Standards Update 2017-07.
PTC Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Nine Months Ended
June 29,
June 30,
ASC 606
ASC 605
168,762
250,811
419,573
482,114
339,651
315,242
312,453
379,007
734,815
794,567
718,658
61,354
63,661
82,604
796,169
858,228
801,262
124,457
118,438
128,041
920,626
976,666
929,303
136,601
134,803
139,078
103,360
99,593
109,298
239,961
234,396
248,376
680,665
742,270
680,927
316,142
330,258
305,566
182,774
187,390
102,008
101,487
17,786
23,566
45,464
1,846
664,174
678,290
619,855
16,491
63,980
61,072
(29,974
(30,126
(33,085
(13,483
33,854
27,987
23,803
14,931
(10,809
(37,286
18,923
38,796
(0.32
0.16
0.33
117,636
115,915
118,664
117,687
(1
See supplemental financial data for revenue by license, support, and professional services.
(2
See supplemental financial data for additional information about stock-based compensation.
(3
Periods prior to 2019 reflect immaterial expense reclassifications in connection with the adoption of new pension accounting prescribed in Accounting Standards Update 2017-07.
(4
Our 2018 year-to-date tax rate includes a benefit of $7 million relating to the enactment of the Tax Cuts and Jobs Act.
62,918
163,220
136,568
190,487
118,719
137,051
230,116
493,256
376,591
566,053
364,972
424,671
1,219
948
1,345
1,471
5,870
4,910
4,761
3,283
2,039
6,046
15,234
16,658
3,722
3,267
5,065
4,846
25,114
14,827
14,851
9,626
22,856
19,449
71,608
52,015
-
75
124
225
295,610
322,534
315,077
300
(58
(93
2,564
2,419
6,873
6,798
222,284
250,680
242,568
424
1,578
37,813
60,878
56,265
13,121
1,683
(9,657
26,871
41,896
42,058
0.13
0.11
0.12
0.01
0.02
(0.08
0.23
0.36
886
3.1
%
10.0
6.8
0.0
0.1
5.2
4.7
5.3
4.3
4.0
0.5
12.8
18.9
17.9
66
266
529
706
921,221
977,261
930,275
595
972
(220
(293
8,787
8,113
20,432
20,029
710,259
771,864
709,748
1,215
1,718
173,371
220,860
160,925
403
(20,857
(20,738
119,997
154,946
117,911
0.60
0.44
0.32
0.37
0.38
(0.18
1.01
1.31
1.00
1,028
(1) Operating margin impact of non-GAAP adjustments:
1.8
6.6
7.8
7.3
5.6
4.2
3.9
0.2
5.0
18.8
22.6
17.3
(2) We have recorded a full valuation allowance against our U.S. net deferred tax assets. As we are profitable on a non-GAAP basis, the 2019 and 2018 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. We have also excluded a tax charge of $0.9M relating to the change in the functional currency of a wholly owned foreign subsidiary.
267,862
259,946
54,626
55,951
321,426
111,165
129,297
107,752
80,613
1,428,423
1,382,659
468,500
478,928
420,556
2,648,589
2,448,756
2,329,022
382,579
550,933
499,442
698,916
643,268
351,499
292,409
311,723
1,215,595
906,498
874,589
(1) The adoption of ASC 606 resulted in up front license recognition under our subscription contracts, resulting in unbilled receivables, and an increase in receivables previously included in other current assets under ASC 605 related to billed but uncollected support and subscription receivables that had corresponding deferred revenue. The adoption also resulted in a decrease in deferred revenue primarily due to the up front license recognition to accumulated deficit at the time of adoption related to on-premise subscription software licenses.
(2) Our consolidated balance sheet as of June 29, 2019 under ASC 606 is preliminary, pending final adjustments required as a result of our adoption of ASC 606 in the first quarter of 2019. We expect the adjustments to be finalized prior to the filing of our Form 10-Q for the third quarter of 2019.
19,076
22,576
58,634
65,303
33,753
(10,832
88,254
21,195
8,550
243
(19,318
(38,887
(11,622
23,767
25,325
82,794
2,900
(15,871
(12,777
(30,005
14,452
(4,344
55,489
(5,419
67,585
49,194
229,929
185,792
(8,311
(7,527
(59,579
(18,666
(17,284
(86,737
(3,000
(40,000
50,000
55,000
(20,000
4,158
7,472
(25,001
(100,000
(89,995
(9,700
(10,855
(44,191
(44,797
(1,000
(7,500
(4,574
(1,575
(7,750
1,960
1,131
1,727
(4,423
4,395
4,509
(94
(9,446
2,143
(3,609
(26,450
(33,077
7,889
(12,981
295,432
301,305
261,093
281,209
268,982
268,228
(1) In the first quarter of fiscal 2019, we adopted Accounting Standards Update (ASU) 2016-18 - Statement of Cash Flows (Topic 230). In accordance with this guidance, we excluded the $0.1 million increase and $0.5 million increase related to the change in restricted cash from the change in other current assets for the three months and nine months ended June 30, 2018, respectively.
(2) On December 29, 2018, we acquired Frustum for $70 million, net of cash acquired.
(3) Our consolidated cash flows as of June 29, 2019 under ASC 606 is preliminary, pending final balance sheet adjustments required as a result of our adoption of ASC 606 in the first quarter of 2019, which will impact components of operating cash flow, but not total cash from operating activities. We expect the adjustments to be finalized prior to the filing of our Form 10-Q for the third quarter of 2019.
View source version on businesswire.com: https://www.businesswire.com/news/home/20190724005812/en/
Source: PTC
Tim Fox, 781-370-5961 tifox@ptc.com
Noelle Faris, 781-370-6899 nfaris@ptc.com