Strong ARR and Cash Flow Results; Raising ARR and Cash Flow Guidance for FY'23
BOSTON, July 26, 2023 /PRNewswire/ -- PTC (NASDAQ: PTC) today reported financial results for its third fiscal quarter ended June 30, 2023.
"In our third fiscal quarter, we again delivered strong ARR and cash flow results that exceeded our guidance ranges. On both a reported and constant currency basis, our ARR growth was 25% – with organic growth of 14% and our ServiceMax® business contributing an additional 11 points of growth. In Q3, our cash from operations was $169 million, up 45% year over year, and our free cash flow was $164 million, up 46% year over year," said James Heppelmann, CEO, PTC.
"Our strong product portfolio, now increasingly differentiated with the addition of ServiceMax, and our industry-leading SaaS capabilities align well to the manufacturing industry's push for digital transformation. Our strong market position and solid execution, coupled with a subscription model, position PTC to deliver ARR and cash flow growth at peer-leading levels," concluded Heppelmann.
Third Quarter 2023 Highlights
Key operating and financial highlights are set forth below. For additional details, please refer to the Q3'23 earnings presentation and financial data tables that have been posted to the Investor Relations section of our website at investor.ptc.com. The definitions of our operating and non-GAAP financial measures and reconciliations of non-GAAP financial measures to comparable GAAP measures are included below and in the reconciliation tables at the end of this press release.
$ in millions
Q3'23
Q3'22
YoY Change
Guidance
ARR as reported
$1,929
$1,544
25 %
ARR at constant currency
$1,868
$1,496
$1,845 - $1,855
Organic ARR as reported
$1,762
14 %
Organic ARR at constant currency
$1,703
Cash from operations
$169
$117
45 %
~$160
Free cash flow
$164
$112
46 %
~$155
Revenue1
$542
$462
17 %
Operating margin1
20 %
~300 bps
Non-GAAP operating margin1
34 %
~40 bps
Earnings per share1
$0.512
$0.602
-14%2
Non-GAAP earnings per share1
$0.992
$0.972
2%2
Total cash and cash equivalents
$282
$322
-13 %
Gross debt
$2,3653
$1,434
65 %
1
In Q3'23, revenue growth was 21% year over year on a constant currency basis. Revenue and, as a result, operating margin, operating profit, and earnings per share are impacted by revenue recognition under ASC 606.
2
In Q3'23, both EPS and non-GAAP EPS benefitted from higher revenue, partially offset by higher cost of revenue, operating expenses, and interest expense. Q3'22 EPS included a $0.28 positive impact due to non-operational credits and a $0.13 positive impact due to a tax adjustment, both of which were primarily related to the sale of a portion of our PLM services business.
3
Q3'23 gross debt includes a deferred acquisition payment related to ServiceMax of $620 million, which will be paid in October 2023.
Fiscal 2023 and Q4'23 Guidance
"Despite a less than ideal macroeconomic backdrop, our financial results in the first nine months of our fiscal year were solid, driven by the resilience of our business model, consistent execution, operational discipline, and the actions we have taken to align our investments with our growth opportunities. Based on our performance in the first nine months of FY'23 and outlook for FY'23, we are raising our full year guidance midpoint for ARR and our guidance for cash flow, while investing in long-term growth opportunities," said Kristian Talvitie, CFO, PTC.
FY'23 Previous
FY'23
FY'23 YoY Growth
Q4'23
ARR at Constant Currency
$1,925 - $1,950
$1,935 - $1,950
23% - 24%
Cash from Operations
~$600
~$605
~39%
~$44
Free Cash Flow
~$580
~$585
~41%
~$42
Revenue
$2,080 - $2,140
$2,090 - $2,120
8% - 10%
$540 - $570
Earnings per share
$2.14 - $2.45
(19%) - (7%)
$0.47 - $0.77
Non-GAAP earnings per share
$4.07 - $4.38
(11%) - (4%)
$0.95 - $1.25
Reconciliation of Cash from Operations Guidance to Free Cash Flow Guidance
In millions
Capital expenditures
(~$20)
(~$2)
Reconciliation of EPS Guidance to Non-GAAP EPS Guidance
$2.14 - $2.451
$0.47 - $0.772
Stock-based compensation expense
~$1.67
~$0.43
Intangible asset amortization expense
~$0.64
~$0.18
Acquisition and transaction-related expense
~$0.16
~$0.01
Other non-operating expenses
~$0.04
~$0.00
Income tax adjustments related to the reconciling items
~($0.58)
~($0.14)
Non-GAAP Earnings per share
$4.07 - $4.381
$0.95 - $1.252
Our FY'23 EPS and non-GAAP EPS guidance are both inclusive of an expected $120 million in interest expense ($95 million, net of tax) or $1.01 per share ($0.80 per share, net of tax). This compares to interest expense in FY'22 of $51 million ($40 million, net of tax) or $0.43 per share ($0.34 per share, net of tax) with the expected increase in FY'23 primarily due to an increase in debt.
Our Q4'23 EPS and non-GAAP EPS guidance are both inclusive of an expected $34 million in interest expense ($27 million, net of tax) or $0.29 per share ($0.23 per share, net of tax). This compares to interest expense in Q4'22 of $14 million ($11 million, net of tax) or $0.12 per share ($0.10 per share, net of tax) with the expected increase in Q4'23 primarily due to an increase in debt.
Our FY'23 and Q4'23 financial guidance include the assumptions below:
PTC's Fiscal Third Quarter Results Conference Call
The Company will host a conference call to discuss results at 5:00 pm ET on Wednesday, July 26, 2023. To participate in the live conference call, dial (888) 330-2508 or (240) 789-2735 and provide the passcode 7328695, or log in to the webcast, available on PTC's Investor Relations website. A replay will also be available.
PTC Announces CEO Succession Plan
Concurrent with the release of its fiscal 2023 third quarter results, PTC also announced its CEO succession plan. Neil Barua, President of PTC's Service Lifecycle Management business, will succeed James Heppelmann as Chief Executive Officer of PTC at the time of the Company's annual shareholder meeting in February 2024. Please read today's press release for additional information. Mr. Heppelmann and Mr. Barua will address the succession plan during today's webcast and conference call.
Important Information About Our Operating and Non-GAAP Financial Measures
Non-GAAP Financial Measures
PTC provides supplemental non-GAAP financial measures to its financial results. We use these non-GAAP financial measures, and we believe that they assist our investors, to make period-to-period comparisons of our operating performance because they provide a view of our operating results without items that are not, in our view, indicative of our operating results. These non-GAAP financial measures should not be construed as an alternative to GAAP results as the items excluded from the non-GAAP financial measures often have a material impact on our operating results, certain of those items are recurring, and others often recur. Management uses, and investors should consider, our non-GAAP financial measures only in conjunction with our GAAP results.
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: stock-based compensation; amortization of acquired intangible assets; acquisition and transaction-related charges included in general and administrative expenses; restructuring and other charges, net; certain non-operating charges and credits; 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" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Free Cash Flow: PTC provides information on 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 goals and intent to return approximately 50% of our free cash flow to shareholders via stock repurchases. Free cash flow is cash provided by (used in) operations net of capital expenditures. Free cash flow is not a measure of cash available for discretionary expenditures.
Constant Currency (CC): We present CC information to provide a framework for assessing how our underlying business performed excluding the effects of foreign currency rate fluctuations. To present CC information, FY'23 and comparative prior period results for entities reporting in currencies other than United States dollars are converted into United States dollars using the foreign exchange rate as of September 30, 2022, rather than the actual exchange rates in effect during that period. All discussion of FY'23 and comparative prior period ARR results (including FY'22 baseline amounts) are reflected using the foreign exchange rates as of September 30, 2022.
Operating Measures
ARR: ARR (Annual Run Rate) represents the annualized value of our portfolio of active subscription software, cloud, SaaS, and support contracts as of the end of the reporting period. We calculate ARR as follows:
We believe ARR is a valuable operating measure to assess the health of a subscription business because it is aligned with the amount that we invoice the customer on an annual basis. We invoice customers annually for the current year of the contract. A customer with a one-year contract will typically be invoiced for the total value of the contract at the beginning of the contractual term, while a customer with a multi-year contract will be invoiced for each annual period at the beginning of each year of the contract.
ARR increases by the annualized value of active contracts that commence in a reporting period and decreases by the annualized value of contracts that expire in the reporting period.
As ARR is not annualized recurring revenue, it is not calculated based on recognized or unearned revenue and is not affected by variability in the timing of revenue under ASC 606, particularly for on-premises license subscriptions where a substantial portion of the total value of the contract is recognized at a point in time upon the later of when the software is made available, or the subscription term commences.
ARR should be viewed independently of recognized and unearned revenue and is not intended to be combined with, or to replace, either of those items. Investors should consider our ARR operating measure only in conjunction with our GAAP financial results.
Organic Constant Currency ARR: We provide an organic constant currency ARR measure to help investors understand and assess the performance of our business without the distorting effects of ARR from acquisitions in the comparative period and foreign exchange rate fluctuations.
Forward-Looking Statements
Statements in this press release that are not historic facts, including statements about our future financial and growth expectations, guidance, and targets, and potential stock repurchases, 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, supply chain disruptions, increasing interest rates and inflation, volatile foreign exchange rates and the relative strength of the U.S. dollar, tightening of credit standards and availability, the effects of the Russia/Ukraine conflict, including the effect on energy supplies to Europe, and growing tensions with China, any of which could cause customers to delay or reduce purchases of new software, reduce the number of subscriptions they carry, or delay payments to us, which would adversely affect ARR and/or our financial results, including cash flow; our businesses, including our ServiceMax and SaaS businesses, may not expand and/or generate the ARR and/or cash flow we expect if customers are slower to adopt those technologies than we expect or if they adopt competing technologies; our strategic initiatives and investments, including our accelerated investments in our transition to SaaS and the acquisition of ServiceMax, may not deliver the results when or as we expect; we may be unable to integrate the ServiceMax technology when or as we expect; we may be unable to generate sufficient operating cash flow to return 50% of free cash flow to shareholders via share repurchases, and other uses of cash or our credit facility limits could preclude such repurchases; and foreign exchange rates may differ materially from those we expect. 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 (NASDAQ: PTC) is a global software company that enables industrial and manufacturing companies to digitally transform how they engineer, manufacture, and service the physical products that the world relies on. Headquartered in Boston, Massachusetts, PTC employs over 7,000 people and supports more than 25,000 customers globally. For more information, please visit www.ptc.com.
PTC.com @PTC Blogs
PTC Investor Relations Contact
Matt ShimaoSVP, Investor Relationsmshimao@ptc.cominvestor@ptc.com
PTC Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Three Months Ended
Nine Months Ended
June 30,
2023
2022
Revenue:
Recurring revenue
$
498,410
415,197
1,407,662
1,273,032
Perpetual license
8,251
8,203
30,417
26,211
Professional services
35,681
39,074
112,354
126,179
Total revenue (1)
542,342
462,474
1,550,433
1,425,422
Cost of revenue (2)
115,854
101,995
325,150
290,450
Gross margin
426,488
360,479
1,225,283
1,134,972
Operating expenses:
Sales and marketing (2)
145,083
124,325
392,673
366,209
Research and development (2)
103,819
88,170
292,345
250,639
General and administrative (2)
57,055
54,618
173,949
154,027
Amortization of acquired intangible assets
10,670
8,931
29,352
25,865
Restructuring and other charges (credits), net
(39)
4,458
(376)
36,887
Total operating expenses
316,588
280,502
887,943
833,627
Operating income
109,900
79,977
337,340
301,345
Other income (expense), net
(33,374)
20,801
(93,321)
(41,625)
Income before income taxes
76,526
100,778
244,019
259,720
Provision for income taxes
15,128
30,302
44,082
53,476
Net income
61,398
70,476
199,937
206,244
Earnings per share:
Basic
0.52
0.60
1.69
1.76
Weighted average shares outstanding
118,483
117,073
118,186
117,114
Diluted
0.51
1.68
1.75
119,392
117,968
119,072
118,097
(1) See supplemental financial data for revenue by license, support and cloud services, and professional services.
(2) See supplemental financial data for additional information about stock-based compensation.
SUPPLEMENTAL FINANCIAL DATA FOR REVENUE AND STOCK-BASED COMPENSATION
Revenue by license, support and services is as follows:
License revenue (1)
192,940
175,163
562,631
562,646
Support and cloud services revenue
313,721
248,237
875,448
736,597
Professional services revenue
Total revenue
(1) License revenue includes the portion of subscription revenue allocated to license.
The amounts in the income statement include stock-based compensation as follows:
Cost of revenue
5,847
8,429
15,668
18,665
Sales and marketing
14,513
14,029
39,554
38,556
Research and development
14,801
11,002
41,839
30,682
General and administrative
18,657
15,960
50,507
45,380
Total stock-based compensation
53,818
49,420
147,568
133,283
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS (UNAUDITED)
GAAP gross margin
Stock-based compensation
Amortization of acquired intangible assets included in cost of revenue
9,841
6,596
25,817
19,010
Non-GAAP gross margin
442,176
375,504
1,266,768
1,172,647
GAAP operating income
20,511
15,527
55,169
44,875
Acquisition and transaction-related charges
795
6,355
18,484
11,308
Non-GAAP operating income (1)
184,985
155,737
558,185
527,698
GAAP net income
Non-operating charges (credits), net (2)
-
(32,801)
5,147
2,046
Income tax adjustments (3)
(18,830)
1,052
(52,506)
(43,617)
Non-GAAP net income
117,653
114,487
373,423
391,026
GAAP diluted earnings per share
0.45
0.42
1.24
1.13
Amortization of acquired intangibles
0.17
0.13
0.46
0.38
0.01
0.05
0.16
0.10
(0.00)
0.04
0.31
(0.28)
0.02
(0.16)
(0.44)
(0.37)
Non-GAAP diluted earnings per share
0.99
0.97
3.14
3.31
(1) Operating margin impact of non-GAAP adjustments:
GAAP operating margin
20.3
%
17.3
21.8
21.1
9.9
10.7
9.5
9.4
3.8
3.4
3.6
3.1
0.1
1.4
1.2
0.8
0.0
1.0
2.6
Non-GAAP operating margin
34.1
33.7
36.0
37.0
(2) In the nine months ended June 30, 2023, we recognized $4.2 million of financing charges for a debt commitment agreement associated with our acquisition of ServiceMax. Credits for Q3'22 include a $29.8 million gain on the sale of a portion of our PLM services business, and a $3.0 million gain on sale of an investment. Net charges for the nine months ended June 30, 2022 include a $34.8 million expense recognized due to the reduction in value of an equity investment in a publicly-traded company, offset by a $29.8 million gain on the sale of a portion of our PLM services business, and a $3.0 million gain on sale of an investment.
(3) 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. In Q3'22, adjustments include tax expense of $15.5 million related to the sale of a portion of our PLM service business, of which $8.1 million pertains to the basis difference on goodwill.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30,
ASSETS
Cash and cash equivalents
281,513
272,182
Accounts receivable, net
625,471
636,556
Property and equipment, net
89,180
98,101
Goodwill and acquired intangible assets, net
4,336,439
2,736,372
Lease assets, net
144,860
137,780
Other assets
730,186
806,277
Total assets
6,207,649
4,687,268
LIABILITIES AND STOCKHOLDERS' EQUITY
Deferred revenue
650,427
520,333
Debt, net of deferred issuance costs
1,738,241
1,350,628
Deferred acquisition payments (1)
620,040
Lease obligations
194,819
189,575
Other liabilities
405,458
330,698
Stockholders' equity
2,598,664
2,296,034
Total liabilities and stockholders' equity
(1) Deferred acquisition payments represent the fair value of the $650 million payment to be made in Q1'24 associated with
the ServiceMax, Inc. acquisition.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Depreciation and amortization
27,906
21,987
76,943
65,456
Amortization of right-of-use lease assets
8,141
8,612
24,705
26,149
Loss (gain) on investment
(2,993)
31,854
Gain on divestiture of business
(29,808)
Operating lease liability
(6,345)
(7,184)
(1,360)
(10,544)
Accounts receivable
13,043
12,918
99,521
25,228
Accounts payable and accruals
18,726
23,165
11,368
(16,768)
(17,396)
(28,975)
18,696
18,038
Income taxes
2,259
12,403
(9,910)
6,124
Other
7,673
(13,255)
(6,376)
(58,429)
Net cash provided by operating activities
169,223
116,766
561,092
396,827
(5,085)
(4,470)
(18,035)
(9,979)
Acquisition of businesses, net of cash acquired (1)
(274,974)
(828,271)
Purchase of intangible assets
(999)
(5,453)
Borrowings (payments) on debt, net (2)
(180,000)
159,000
386,000
(16,000)
Repurchases of common stock
(125,000)
Net proceeds associated with issuance of common stock
10,592
10,857
Payments of withholding taxes in connection with vesting of stock-based awards
(19,467)
(12,261)
(75,489)
(62,856)
Net proceeds from marketable securities
Net proceeds from sale (purchases) of investments (3)
349
4,213
(5,474)
46,906
Credit facility origination costs
(13,355)
Divestiture of business, net (4)
32,518
(154)
Other financing & investing activities
(1,660)
6,736
(14,421)
17,804
Foreign exchange impact on cash
(2,346)
(10,915)
6,835
(14,654)
Net change in cash, cash equivalents, and restricted cash
(38,986)
15,614
9,320
(4,004)
Cash, cash equivalents, and restricted cash, beginning of period
321,194
307,428
272,888
327,046
Cash, cash equivalents, and restricted cash, end of period
282,208
323,042
Supplemental cash flow information:
Cash paid for interest
22,576
2,079
51,946
25,907
(1) In Q2'23, we acquired ServiceMax Inc. for $1,448 million, net of cash acquired. We paid $828 million in Q2'23 with the remaining $650 million to be paid in Q1'24. Of the $650 million to be paid, $620 million will be a financing outflow and $30 million of imputed interest will be an operating cash outflow. In Q3'22, we acquired Intland for approximately $275.0 million, net of cash acquired.
(2) In FY'23, net borrowings were related to funds borrowed under our credit facility to fund the ServiceMax acquisition.
(3) In Q2'22, we sold an equity investment in a publicly-traded company for $42.7 million.
(4) In Q3'22, we sold a portion of our PLM services business.
Cash provided by operating activities (1)
Free cash flow (1)
164,138
112,296
543,057
386,848
(1) In the three and nine months ended June 30, 2023, we made $2.8 million and $9.3 million of acquisition and transaction-related payments, respectively, and $0.0 million and $1.4 million of restructuring payments, respectively. In the three and nine months ended June 30, 2022, we made $9.7 million and $10.1 million acquisition and transaction-related payments, respectively, and $10.2 million and $38.5 million of restructuring payments, respectively. These payments are included within cash provided by operating activities and free cash flow.
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SOURCE PTC Inc.