Bookings Exceed High End of Guidance; Business Model Transition Accelerates with 58% Subscription Bookings Mix

NEEDHAM, Mass. — (BUSINESS WIRE) — July 20, 2016 — PTC (NASDAQ: PTC) today reported financial results for the third quarter ended July 2, 2016.

Q3 Fiscal 2016 Overview
Third quarter FY’16 GAAP revenue was $289 million; non-GAAP revenue was $290 million. GAAP net income was $3 million or $0.03 per share; non-GAAP net income was $30 million or $0.26 per share.

“We are very pleased with our third quarter performance,” said James Heppelmann, President and CEO, PTC. “Customers are rapidly adopting our subscription offering, accelerating our business model transition, and our improved execution led to a strong bookings performance, beating the high end of our guidance for the quarter.” Heppelmann added, “While a higher subscription mix negatively impacts near-term reported revenue and earnings, we are creating significant long-term value for our customers and shareholders by transitioning to a subscription model. Importantly, we remain committed to our track record of financial discipline and margin expansion.”

Operational Overview
Q3 FY’16 operational highlights are set forth 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 ptc.com. Information about our bookings and other reporting measures is provided on page 4.

• License and subscription bookings were $105 million; above the guidance range of $90 million to $100 million.
• Subscription bookings were approximately 58% of total bookings, above our guidance assumption of 48% and up from 16% a year ago. We estimate that this higher than guidance mix of subscription in the quarter, while positive in the long-term, reduced revenue by approximately $11 million, and reduced non-GAAP EPS by approximately $0.09 as compared to our guidance, and by approximately $0.35 as compared to Q3’15 mix.
• Total subscription annualized contract value (ACV) was $30 million; above our guidance of $22 to $24 million.
• Software revenue, which reflects a higher mix of subscription than last year, was down approximately $11 million, or 5%, on a year-over-year, constant currency basis. We estimate that the higher mix of subscription than last year lowered Q3’16 software revenue by approximately $38 million.
• Annualized recurring revenue (ARR) was approximately $780 million at the end of the third quarter of fiscal 2016.
• GAAP operating expenses were approximately $199 million; non-GAAP operating expenses were approximately $175 million. These results were above the GAAP and non-GAAP guidance ranges primarily due to incremental sales incentive expense incurred related to the accelerated subscription transition, as well as the achievement of bookings performance above expectations.
• Q3’16 GAAP operating margin was 3% and non-GAAP operating margin was 14%. Q3’15 GAAP operating margin was 7% and non-GAAP operating margin was 24%. We estimate that the higher mix of subscription in Q3’16 reduced GAAP and non-GAAP operating margin by approximately 300 basis points as compared to guidance, and by 1,150 basis points as compared to Q3’15 mix.
• For Q3’16, we recorded a GAAP income tax benefit of $4 million, or $0.03 per share, and a non-GAAP income tax expense of $2 million, or $0.02 per share. The GAAP tax rate for the quarter was 537% and the non-GAAP tax rate for the quarter was 7%.
• Cash flow from operations was $59 million, and free cash flow was $52 million, both of which include cash payments for restructuring of $8 million.
• We ended the quarter with total cash, cash equivalents, and marketable securities of $339 million and total debt of $778 million.

Workforce Realignment
In October 2015, reflecting a realignment of resources toward higher growth opportunities and our commitment to operating margin improvement, we announced a plan to repurpose or eliminate approximately 8% of worldwide positions and to consolidate select facilities. This is expected to result in a restructuring charge of up to $50 million; of which $37 million was recorded in Q1’16, $5 million was recorded in Q2’16, and $3 million recorded in Q3’16. The remainder is expected to be recorded in Q4 of FY’16. Substantially all of the charges are attributable to termination benefits, most of which will be paid in FY’16.