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Aug. 8, 2019, 4:35 p.m. EDT

10-Q: PTC INC.

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Business Overview PTC is a global software and services company that delivers solutions to enable our industrial customers' digital transformations, helping them to better design, manufacture, operate, and service their products. Our Internet of Things (IoT) and Augmented Reality (AR) solutions are focused on Smart Connected Processes, Smart Connected Products and Smart Connected People that enable companies to connect factories and plants, smart products, and enterprise systems, bridging the physical, digital and human worlds, to transform their businesses. Our Solutions portfolio of innovative Computer-Aided Design (CAD) and Product Lifecycle Management (PLM) solutions enable manufacturers to create, innovate, operate, and service products. Our Solutions portfolio also includes certain businesses that are managed to focus on providing great solutions for a set of targeted customers, verticals and use cases, but for which our strategy is not for broader market penetration (our productivity zone businesses). Forward-Looking Statements Statements in this Quarterly Report on Form 10-Q 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 U.S. Administration's focus on technology transactions with non-U.S. entities and potential expanded prohibitions, and ongoing trade tensions and tariffs; customers may not purchase our solutions or convert existing support contracts to subscription when or at the rates we expect; our businesses, including our Internet of Things (IoT) business, and Augmented Reality business, may not expand and/or generate the revenue we expect; foreign currency exchange rates may vary from our expectations and thereby affect our reported revenue and expense; the mix of revenue between license and subscription solutions, support and professional services could be different than we expect, which could impact our EPS results; 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, as well as other risks and uncertainties described below throughout or referenced in Part II, Item 1 A. Risk Factors of this report. Our 2019 Strategic Goals Our 2019 strategic goals are to deliver sustainable growth, expand subscription licensing and expand our margins. [[Image Removed: sustainablegrowtha08.jpg]] We are focused on continuing to drive bookings growth both in the high-growth Industrial IoT Sustainable Growth and AR markets and in our core CAD and PLM markets. We expect that IoT and AR adoption rates will continue to expand and will be the most significant drivers of growth.







             [[Image Removed: expandsubscriptiona08.jpg]]       Expand            Our goal is to continue to increase the
                                                                Subscription      percentage of licenses sold as subscriptions to
                                                                Licensing         increase our recurring revenue. Effective January
                                                                                  1, 2019, new software licenses for our core
                                                                                  solutions and ThingWorx solutions are available
                                                                                  only by subscription worldwide. Kepware will
                                                                                  continue to be available under perpetual license.
        


Operating and Non-GAAP Financial Measures Our discussion of results includes discussion of our operating measures (including "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 those operating and non-GAAP financial measures.

and cloud services for which revenue is generally recognized ratably over the term of the contract is included in subscription revenue and has been immaterial to date.







        Summary Revenue and Earnings Results
                        [[Image Removed: chart-f642291d077651468c9.jpg]]
                                                                           Three months ended
                                                                                                          Percent Change
                                       As Reported ASC                        As Reported ASC
                                             606               ASC 605              605                       ASC 605
                                                                                                   Change
        Revenue                         June 29, 2019       June 29, 2019      June 30, 2018                    Constant Currency
                                                            (in millions)
        Subscription license           $         53.7
        Subscription support & cloud             90.2
        services
        Total Subscription                      143.9     $         171.6     $        126.7         35  %              39  %
        Perpetual support                       100.3                99.7              121.1        (18 )%             (15 )%
        Total recurring revenue                 244.2               271.3              247.8          9  %              13  %
        Perpetual license                         9.2                10.6               25.8        (59 )%             (57 )%
        Total software revenue (1)              253.4               281.9              273.6          3  %               6  %
        Professional services                    42.1                40.5               41.2         (2 )%               2  %
        Total revenue                  $        295.5     $         322.4     $        314.8          2  %               6  %
        (1) Total software revenue
        includes:
        License                        $         62.9     $         163.2     $        136.6         20  %              23  %
        Support and cloud services              190.5               118.7              137.1        (13 )%             (10 )%
        Total software revenue                  253.4               281.9              273.6          3  %               6  %
        








                                                                            Nine months ended
                                                                                                          Percent Change
                                       As Reported ASC                        As Reported ASC
                                             606               ASC 605              605                       ASC 605
                                                                                                   Change
        Revenue                         June 29, 2019       June 29, 2019      June 30, 2018                    Constant Currency
                                                            (in millions)
        Subscription license           $        168.8
        Subscription support & cloud            250.8
        services
        Total Subscription                      419.6     $         482.1     $        339.7         42  %              45  %
        Perpetual support                       315.2               312.5              379.0        (18 )%             (15 )%
        Total recurring revenue                 734.8               794.6              718.7         11  %              13  %
        Perpetual license                        61.4                63.7               82.6        (23 )%             (20 )%
        Total software revenue (1)              796.2               858.2              801.3          7  %              10  %
        Professional services                   124.5               118.4              128.0         (7 )%              (4 )%
        Total revenue                  $        920.6     $         976.7     $        929.3          5  %               8  %
        (1) Total software revenue
        includes:
        License                        $        230.1     $         493.3     $        376.6         31  %              34  %
        Support and cloud services              566.1               365.0              424.7        (14 )%             (12 )%
        Total software revenue                  796.2               858.2              801.3          7  %               8  %
                                               Three months ended                                     Nine months ended
                               As Reported ASC                    As Reported ASC    As Reported ASC                    As Reported ASC
                                     606            ASC 605             605                606            ASC 605             605
        Earnings Measures         June 29,         June 29,          June 30,           June 29,         June 29,          June 30,
                                    2019             2019              2018               2019             2019              2018
        Operating Margin               3.1 %            10.0 %            6.8 %              1.8 %             6.6 %            6.6 %
        Earnings (Loss) Per
        Share                  $     (0.13 )     $      0.10     $       0.14        $     (0.32 )     $      0.16     $       0.33
        Non-GAAP Operating            12.8 %            18.9 %           17.9 %             18.8 %            22.6 %           17.3 %
        Margin(1)
        Non-GAAP Earnings Per  $      0.23       $      0.36     $       0.36        $      1.01       $      1.31     $       1.00
        Share(1)
        


(1) Non-GAAP measures are reconciled to GAAP results under Results of Operations

License and Subscription Bookings

License and subscription bookings for the third quarter and first nine months of 2019 were $109 million, down 3% (1% on a constant currency basis) and $323 million, up 2% (6% on a constant currency basis), respectively, from the year-ago periods primarily due to the impacts described above. Subscription ACV

[[Image Removed: chart-398a59aeea8b5d278e7.jpg]]







                                               As Reported ASC                                                 As Reported ASC
                                                   606 (1)            ASC 605          As Reported ASC 605           605
                                                June 29, 2019      June 29, 2019       September 30, 2018       June 30, 2018
                                                                        (Dollar amounts in millions)
        Deferred revenue (billed)              $         383     $           551     $                 499     $         484
        Unbilled deferred revenue (2)                    623                 764                       911               726
        Total                                  $       1,006     $         1,315     $               1,410     $       1,210
        


(1) Upon adoption of ASC 606, approximately $366 million of total deferred revenue was recorded as a decrease to accumulated deficit with an offsetting $218 million increase to unbilled accounts receivable, a $142 million decrease to deferred revenue and a $6 million increase in other assets net of liabilities, primarily as a result of the acceleration of subscription license revenue under ASC 606.

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 operating income, operating margin, and

diluted earnings per share as calculated under GAAP, we provide non-GAAP operating income, non-GAAP operating margin, and non-GAAP diluted earnings per share for the reported periods. These non-GAAP financial measures exclude the items described in Non-GAAP Financial Measures below. These non-GAAP financial measures provide investors a view of our operating results that is aligned with management budgets and with performance measures in our incentive compensation plans. Investors should use these non-GAAP financial measures only in conjunction with our GAAP results.







                                                                            Three months ended
                                                                                                                Percent Change
                                    As Reported ASC 606         ASC 605        As Reported ASC 605                  ASC 605
                                       June 29, 2019         June 29, 2019        June 30, 2018          Actual       Constant Currency
                                          (Dollar amounts in millions, except per share data)
        Subscription               $            143.9       $       171.6     $            126.7           35  %              39  %
        Perpetual support                       100.3                99.7                  121.1          (18 )%             (15 )%
        Total recurring revenue                 244.2               271.3                  247.8            9  %              13  %
        Perpetual license                         9.2                10.6                   25.8          (59 )%             (57 )%
        Total software revenue                  253.4               281.9                  273.6            3  %               6  %
        Professional services                    42.1                40.5                   41.2           (2 )%               2  %
        Total revenue                           295.5               322.4                  314.8            2  %               6  %
        Total cost of revenue                    82.7                81.2                   81.6            -  %
        Gross margin                            212.8               241.2                  233.1            3  %
        Operating expenses                      203.5               208.8                  211.6           (1 )%
        Total costs and expenses                286.2               290.0                  293.2           (1 )%               1  %
        Operating income                          9.3                32.4                   21.5           50  %              67  %
        Non-GAAP operating
        income (1)                 $             37.8       $        60.9     $             56.3            8  %              16  %
        Operating margin                          3.1 %              10.0 %                  6.8 %
        Non-GAAP operating
        margin (1)                               12.8 %              18.9 %                 17.9 %
        Diluted earnings (loss)
        per share                  $            (0.13 )     $        0.10     $             0.14
        Non-GAAP diluted earnings
        per share (2)              $             0.23       $        0.36     $             0.36
        Cash flow from operations  $             67.6       $        67.6     $             49.0
        


Aug 08, 2019

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