PTC Announces Second Quarter FY’15 Results

PTC also provides information on “free cash flow” and “free cash flow return” 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 and free-cash flow return is the value of shares repurchased divided by free cash flow.

Forward-Looking Statements

Statements in this press release that are not historic facts, including statements about our third quarter and full fiscal 2015 targets and other future financial and growth expectations and anticipated tax rates, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks include the possibility that the macroeconomic and/or global manufacturing climates may not improve or may deteriorate, the possibility that customers may not purchase our solutions when or at the rates we expect, the possibility that our businesses, including our Internet of Things (IoT) and SLM businesses, may not expand and/or generate the revenue we expect, the possibility that market size and growth estimates may be incorrect and that we may be unable to grow our business at or in excess of market growth rates, the possibility that our pipeline of opportunities may not convert or generate the revenue we expect, the possibility that new products released and planned products, including IoT enabled core products, may not generate the revenue we expect or be released as we expect, the possibility that foreign currency exchange rates may vary from our expectations and thereby affect our reported revenue and expense, the possibility that we may not achieve the license and subscription solutions (L&SS), support or professional services revenue that we expect, which could result in a different mix of revenue between license & subscription solutions, support and professional services and could impact our EPS results, the possibility that our customers may purchase more of our solutions as subscriptions than we expect, which would adversely affect near-term revenue, operating margins, and EPS, the possibility that sales of our solutions as subscriptions may not have the longer-term effect on revenue that we expect, the possibility that we may be unable to leverage our products and customer relationships to increase sales, the possibility that sales personnel productivity may not increase as we expect, the possibility that we may be unable to expand our services partner ecosystem or improve services margins as we expect, the possibility that we may be unable to attain or maintain a technology leadership position or that any such leadership position may not generate the revenue we expect, the possibility that our workforce realignment may not improve operating margins as we expect and may adversely affect our operations, the possibility that our portfolio management measures may not drive the operating margin expansion we expect, the possibility that we may be unable to generate sufficient operating cash flow to return 40% of free cash flow to shareholders or that other uses of cash could preclude share repurchases, the possibility that we may incur additional acquisition-related and pension plan termination-related expenses and losses than we expect, and the possibility that fines and penalties may be assessed against PTC in connection with our previously announced investigation in China. 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 and loans and cash repatriations from foreign subsidiaries. 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 Report on Form 10-Q.

PTC and the PTC logo are trademarks or registered trademarks of PTC Inc. or its subsidiaries in the United States and in other countries.

About PTC

PTC (Nasdaq: PTC) enables manufacturers to achieve sustained product and service advantage. PTC’s technology solutions help customers transform the way they create, operate and service products for a smart, connected, world. Founded in 1985, PTC employs approximately 6,000 professionals serving more than 28,000 businesses in rapidly-evolving, globally distributed manufacturing industries worldwide. Get more information at www.ptc.com.

               
PTC Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
 
 
Three Months Ended Six Months Ended
April 4, March 29, April 4, March 29,
2015 2014 2015 2014
 
Revenue:
License and subscription solutions (L&SS) $ 85,952 $ 88,545 $ 164,923 $ 171,411
Support   168,727     166,249     350,356     336,391  
Total software revenue 254,679 254,794 515,279 507,802
Professional services   59,440     73,906     124,282     145,823  
Total revenue   314,119     328,700     639,561     653,625  
 
Cost of revenue:
Cost of L&SS revenue (1) 13,190 10,889 26,519 21,208
Cost of support revenue (1)   21,328     21,564     42,724     41,480  
Total cost of software revenue 34,518 32,453 69,243 62,688
Cost of professional services revenue (1)   51,536     61,344     109,753     124,065  
Total cost of revenue   86,054     93,797     178,996     186,753  
 
Gross margin   228,065     234,903     460,565     466,872  
 
Operating expenses:
Sales and marketing (1) 82,024 85,934 169,631 170,172
Research and development (1) 60,158 55,631 121,255 108,704
General and administrative (1) 34,235 34,140 71,242 65,071
Amortization of acquired intangible assets 9,173 7,985 18,586 15,774
Restructuring charges   38,487     -     38,232     1,067  
Total operating expenses   224,077     183,690     418,946     360,788  
 
Operating income 3,988 51,213 41,619 106,084
Other expense, net   (3,601 )   (2,692 )   (6,825 )   (4,446 )
Income before income taxes 387 48,521 34,794 101,638
Provision (benefit) for income taxes   (5,005 )   4,765     (882 )   18,225  
Net income $ 5,392   $ 43,756   $ 35,676   $ 83,413  
 
Earnings per share:
Basic $ 0.05 $ 0.37 $ 0.31 $ 0.70
Weighted average shares outstanding 114,944 118,978 115,147 118,973
 
Diluted $ 0.05 $ 0.36 $ 0.31 $ 0.69
Weighted average shares outstanding 115,922 120,698 116,479 120,916
 
 
 
(1) The amounts in the tables above include stock-based compensation as follows:
 
Three Months Ended Six Months Ended
April 4, March 29, April 4, March 29,
2015 2014 2015 2014
Cost of L&SS revenue $ 118 $ 82 $ 260 $ 147
Cost of support revenue 989 889 1,765 1,813
Cost of service revenue 1,504 1,349 3,193 2,886
Sales and marketing 3,081 3,019 5,953 5,518
Research and development 3,001 2,147 6,087 4,836
General and administrative   4,129     5,080     6,806     10,130  
Total stock-based compensation $ 12,822   $ 12,566   $ 24,064   $ 25,330  
 
               
PTC Inc.
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS (UNAUDITED)
(in thousands, except per share data)
   
Three Months Ended Six Months Ended
April 4, March 29, April 4, March 29,
2015 2014 2015 2014
 
GAAP revenue $ 314,119 $ 328,700 $ 639,561 $ 653,625
Fair value adjustment of acquired deferred L&SS revenue 590 - 1,272 -
Fair value adjustment of acquired deferred support revenue 265 - 730 -
Fair value adjustment of acquired deferred service revenue   278     -     535     -  
Non-GAAP revenue $ 315,252   $ 328,700   $ 642,098   $ 653,625  
 
GAAP gross margin $ 228,065 $ 234,903 $ 460,565 $ 466,872
Fair value adjustment of acquired deferred L&SS revenue 590 - 1,272 -
Fair value adjustment of acquired deferred support revenue 265 - 730 -
Fair value adjustment of acquired deferred service revenue 278 - 535 -
Fair value adjustment to deferred services cost (151 ) - (257 ) -
Stock-based compensation 2,611 2,320 5,218 4,846
Amortization of acquired intangible assets
included in cost of L&SS revenue   4,714     4,407     9,481     8,904  
Non-GAAP gross margin $ 236,372   $ 241,630   $ 477,544   $ 480,622  
 
GAAP operating income $ 3,988 $ 51,213 $ 41,619 $ 106,084
Fair value adjustment of acquired deferred L&SS revenue 590 - 1,272 -
Fair value adjustment of acquired deferred support revenue 265 - 730 -
Fair value adjustment of acquired deferred service revenue 278 - 535 -
Fair value adjustment to deferred services cost (151 ) - (257 ) -
Stock-based compensation 12,822 12,566 24,064 25,330
Amortization of acquired intangible assets
included in cost of L&SS revenue 4,714 4,407 9,481 8,904
Amortization of acquired intangible assets 9,173 7,985 18,586 15,774
Acquisition-related charges included in
general and administrative expenses 3,605 3,935 9,322 5,240
Restructuring charges   38,487     -     38,232     1,067  
Non-GAAP operating income (2) $ 73,771   $ 80,106   $ 143,584   $ 162,399  
 
GAAP net income $ 5,392 $ 43,756 $ 35,676 $ 83,413
Fair value adjustment of acquired deferred L&SS revenue 590 - 1,272 -
Fair value adjustment of acquired deferred support revenue 265 - 730 -
Fair value adjustment of acquired deferred service revenue 278 - 535 -
Fair value adjustment to deferred services cost (151 ) - (257 ) -
Stock-based compensation 12,822 12,566 24,064 25,330
Amortization of acquired intangible assets
included in cost of L&SS revenue 4,714 4,407 9,481 8,904
Amortization of acquired intangible assets 9,173 7,985 18,586 15,774
Acquisition-related charges included in
general and administrative expenses (3) 3,605 3,935 9,322 5,240
Restructuring charges 38,487 - 38,232 1,067
Income tax adjustments (4)   (13,757 )   (14,954 )   (17,243 )   (21,813 )
Non-GAAP net income $ 61,418   $ 57,695   $ 120,398   $ 117,915  
 
GAAP diluted earnings per share $ 0.05 $ 0.36 $ 0.31 $ 0.69
Fair value of acquired deferred revenue 0.01 - 0.02 -
Fair value adjustment to deferred services cost - - - -
Stock-based compensation 0.11 0.10 0.21 0.21
Amortization of acquired intangibles 0.12 0.10 0.24 0.20
Acquisition-related charges 0.03 0.03 0.08 0.04
Restructuring charges 0.33 - 0.33 0.01
Income tax adjustments   (0.12 )   (0.12 )   (0.15 )   (0.18 )
Non-GAAP diluted earnings per share $ 0.53   $ 0.48   $ 1.03   $ 0.98  
 
(2) Operating margin impact of non-GAAP adjustments:
 
Three Months Ended Six Months Ended
April 4, March 29, April 4, March 29,
2015 2014 2015 2014
GAAP operating margin 1.3 % 15.6 % 6.5 % 16.2 %
Fair value of acquired deferred revenue 0.4 % 0.0 % 0.4 % 0.0 %
Fair value adjustment to deferred services cost 0.0 % 0.0 % 0.0 % 0.0 %
Stock-based compensation 4.1 % 3.8 % 3.8 % 3.9 %
Amortization of acquired intangibles 4.4 % 3.8 % 4.4 % 3.8 %
Acquisition-related charges 1.1 % 1.2 % 1.5 % 0.8 %
Restructuring charges   12.3 %   0.0 %   6.0 %   0.2 %
Non-GAAP operating margin   23.4 %   24.4 %   22.4 %   24.8 %
 
(3) Represents acquisition-related charges, as well as, expense related to a terminating U.S. pension plan of $1.7 million and $3.4 million in the three and six months ended April 4, 2015, respectively.
 
(4) Income tax adjustments for the three and six months ended April 4, 2014 and March 29, 2014 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, and also include any identified tax items. In the fourth quarter of 2012, a valuation allowance was established against our U.S. net deferred tax assets. Similarly, in the fourth quarter of 2014, valuation allowances were established against our foreign net deferred tax assets in two foreign jurisdictions. As the U.S. and the two foreign jurisdictions are profitable on a non-GAAP basis, the 2015 and 2014 non-GAAP tax provisions are being calculated assuming there is no valuation allowance in these jurisdictions. The following identified tax item has been excluded from the non-GAAP tax results: Q2'14 includes a non-cash tax benefit of $8.9 million related to the release of a portion of the valuation allowance as a result of deferred tax liabilities established for the acquisition of ThingWorx.
 
       
PTC Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
 
April 4, September 30,
2015 2014
 
ASSETS
 
Cash and cash equivalents $ 267,815 $ 293,654
Accounts receivable, net 201,379 235,688
Property and equipment, net 65,191 67,783
Goodwill and acquired intangible assets, net 1,286,396 1,349,400
Other assets 287,849 253,429
   
Total assets $ 2,108,630 $ 2,199,954
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Deferred revenue $ 420,827 $ 382,544
Borrowings under credit facility 530,625 611,875
Other liabilities 302,958 351,646
Stockholders' equity 854,220 853,889
   
Total liabilities and stockholders' equity $ 2,108,630 $ 2,199,954
 
 
PTC Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
               
 
Three Months Ended Six Months Ended
April 4, March 29, April 4, March 29,
2015 2014 2015 2014
 
Cash flows from operating activities:
Net income $ 5,392 $ 43,756 $ 35,676 $ 83,413
Stock-based compensation 12,822 12,566 24,064 25,330
Depreciation and amortization 20,968 19,173 42,205 38,273
Accounts receivable (3,089 ) (2,536 ) 22,711 16,737
Accounts payable and accruals 33,720 5,231 (17,198 ) (37,631 )
Deferred revenue 40,976 40,510 32,200 29,683
Income taxes (13,612 ) (1,514 ) (16,565 ) 5,879
Excess tax benefits from stock-based awards - (1,290 ) (163 ) (8,092 )
Other   (5,185 )   (5,174 )   (17,306 )   (6,628 )

Net cash provided by operating activities (5)

91,992 110,722 105,624 146,964
 
Capital expenditures (6,160 ) (4,568 ) (14,107 ) (10,342 )
Acquisitions of businesses, net of cash acquired (6) - (111,519 ) 180 (111,519 )
Proceeds (payments) on debt, net (75,000 ) (50,000 ) (81,250 ) 60,000
Proceeds from issuance of common stock 3 365 6 716
Payments of withholding taxes in connection with
vesting of stock-based awards (195 ) (2,274 ) (21,864 ) (21,637 )
Repurchases of common stock - (39,965 ) - (39,965 )
Excess tax benefits from stock-based awards - 1,290 163 8,092
Credit facility origination costs - (4,120 ) - (4,120 )
Other financing & investing activities - - (1,000 ) -
Foreign exchange impact on cash   (3,877 )   (838 )   (13,591 )   368  
 
Net change in cash and cash equivalents 6,763 (100,907 ) (25,839 ) 28,557
Cash and cash equivalents, beginning of period   261,052     371,377     293,654     241,913  
Cash and cash equivalents, end of period $ 267,815   $ 270,470   $ 267,815   $ 270,470  
 
 
(5) The three and six months ended April 4, 2015 includes $5 million and $15 million of voluntary contribution funding payments to a non-U.S. pension plan, respectively. The three and six months ended April 4, 2015 include $5 million and $23 million in restructuring payments, respectively. The three and six months ended March 29, 2014 include $5 million and $17 million in restructuring payments, respectively.
 
(6) We acquired ThingWorx on December 30, 2013 for $112 million (net of cash acquired) which was funded with $110 million borrowed under our revolving credit facility. We borrowed the funds in Q1'14 in contemplation of the acquisition closing.
 

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