Revenue from Contracts with Customers

12 Months Ended

Sep. 30, 2019

Revenue from Contract with Customer [Abstract]

Upon adoption of ASC 606, we recorded a decrease in accumulated deficit of $432.2 million ($363.2 million, net of tax) due to the cumulative effect of the ASC 606 adoption, with the impact primarily

derived from revenue related to on-premise subscription software licenses, net of tax due to the cumulative effect of the ASC 606 adoption, with an impact from revenue adjustments of $366.8 million primarily derived from acceleration of revenue related to on-premise subscription software licenses. The revenue related adjustment was reflected on the adjusted opening balance sheet as an increase to unbilled receivables of $218.5 million, decrease to deferred revenue of $143.2 million and an increase to other assets of $5.1 million.

Contract Assets and Contract Liabilities



(in thousands)	As Reported		As Adjusted
	September 30, 2019		October 1, 2018
Contract asset	$	21,038	$	25,037
Deferred revenue	$	396,632	$	356,263

As of September 30, 2019, our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. Approximately $17.8 million of the October 1, 2018 contract asset balance was transferred to receivables during the year ended September 30, 2019 as a result of the right to payment becoming unconditional. The majority of both the contract asset balance and the amounts transferred to receivables relates to two large professional services contracts with invoicing terms based on performance milestones. Additions to contract assets of approximately $13.8 million related to revenue recognized in the period, net of billings. There were no impairments of contract assets during the year ended September 30, 2019.

During the year ended September 30, 2019, $333.7 million of revenue that was included in the deferred revenue opening balance was recognized, respectively. There were additional deferrals of $374.1 million, which were primarily related to new billings. Adjusted opening balance of total short- and long-term receivables as of October 1, 2018 under ASC 606 was $503.7 million, compared to total short- and long-term receivables as of September 30, 2019 under ASC 606 of $412.5 million.

Costs to Obtain or Fulfill a Contract

The new revenue recognition standard requires the capitalization of certain incremental costs of obtaining a contract, which impacts the period in which we record our commission expense. Prior to our adoption of the new revenue standard, we recognized commissions expense as incurred. Under the new revenue recognition standard, we are required to recognize these expenses over the period of benefit associated with these costs. This results in a deferral of certain commission expenses each period. Upon adoption, we reduced our accumulated deficit by $70.0 million and recognized an offsetting asset for deferred commission related to contracts that were not completed prior to October 1, 2018.

We recognize an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred costs are amortized proportionately related to revenue over five years, which is generally longer than the term of the initial contract because of anticipated renewals as commissions for renewals are not commensurate with commissions related to our initial contracts. As of September 30, 2019, deferred costs of $27.7 million were included in other current assets and $64.8 million were included in other assets (non-current).

As the revenue recognition pattern has changed under ASC 606, the recognition of costs to fulfill contracts has also changed to match this pattern of recognition. As of October 1, 2018, this resulted in a $2.8 million increase in our accumulated deficit with recognition of an offsetting current liability.

Remaining Performance Obligations

Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. The amounts include additional performance obligations that are not yet recorded in the consolidated balance sheets. As of September 30, 2019, amounts allocated to these additional contractual obligations are $1,021 million, of which we expect to recognize approximately 90% over the next 24 months, with the remaining amount thereafter.

Disaggregation of Revenue



	Year Ended September 30,
	As Reported ASC 606		ASC 605		As Reported ASC 605		As Reported ASC 605
Revenue (in thousands)	2019		2019		2018		2017
Subscription license	$	253,698
Subscription support & cloud services	348,452
Total subscription	602,150		$	667,597	$	482,027	$	279,246
Perpetual support	415,248		411,030		496,826		574,680
Total recurring revenue	1,017,398		1,078,627		978,853		853,926
Perpetual license	70,702		72,191		109,634		133,390
Total software revenue	1,088,100		1,150,818		1,088,487		987,316
Professional services	167,531		160,676		153,337		176,723
Total revenue	$	1,255,631	$	1,311,494	$	1,241,824	$	1,164,039

For further disaggregation of revenue by geographic region and product group see Note 18. Segment and Geographic Information.

Transition Disclosures

In accordance with the modified retrospective method transition requirements, we will present the financial statement line items impacted and adjusted to compare to presentation under ASC 605 for each of the interim and annual periods during the first year of adoption of ASC 606.

Subsequent to the adoption of ASC 606 and the issuance of our unaudited Condensed Consolidated Financial Statements for the three-months ended December 29, 2018, six-months ended March 30, 2019 and nine-months ended June 29, 2019, PTC’s management identified errors in the application of ASC 606 for the calculation of the decrease in accumulated deficit upon adoption, as well as adoption balances for contract assets and deferred revenue as of October 1, 2018. The impact to our accumulated deficit was $0.3 million ($4.2 million, net of tax). The identified errors appeared only in the Notes to Condensed Consolidated Financial Statements and not in any of the individual Consolidated Financial Statements. Based on an analysis of the relevant quantitative and qualitative factors, we determined the impact was not material to any prior interim period. Therefore, management concluded that amendments of previously filed reports are not required.

We corrected the errors as of the adoption date by revising the following amounts presented in the Notes to Condensed Consolidated Financial Statements: 1) contract assets as of October 1, 2018 has been changed from $26.2 million to $25.0 million; 2) deferred revenue as of October 1, 2018 has been changed from $357.5 million to $356.3 million; 3) the decrease in accumulated deficit has been changed from $431.9 million ($367.4 million, net of tax) to $432.2 million ($363.2 million, net of tax).

The following tables present our Balance Sheets and Statements of Operations as reported under ASC 606 for the current period with comparative periods reported under ASC 605:



(in thousands)	September 30,
	As Reported ASC 606			ASC 605			As Reported ASC 605
	2019			2019			2018
ASSETS
Current assets:
Cash and cash equivalents	$	269,579		$	269,579		$	259,946
Short-term marketable securities	27,891			27,891			25,836
Accounts receivable⁽¹⁾	372,743			107,921			129,297
Prepaid expenses	52,701			54,384			48,997
Other current assets ⁽²⁾	59,707			199,513			169,708
Total current assets	782,621			659,288			633,784
Property and equipment, net	105,531			105,531			80,613
Goodwill	1,238,179			1,238,179			1,182,457
Acquired intangible assets, net	169,949			169,949			200,202
Long-term marketable securities	29,544			29,544			30,115
Deferred tax assets⁽³⁾	198,634			233,026			165,566
Other assets ⁽⁴⁾	140,130			36,391			36,285
Total assets	$	2,664,588		$	2,471,908		$	2,329,022
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	42,442		$	42,442		$	53,473
Accrued expenses and other current liabilities⁽⁵⁾	104,028			78,007			74,388
Accrued compensation and benefits	88,769			88,769			101,784
Accrued income taxes⁽³⁾	17,407			21,336			18,044
Deferred revenue⁽⁶⁾	385,509			569,171			487,590
Total current liabilities	638,155			799,725			735,279
Long-term debt	669,134			669,134			643,268
Deferred tax liabilities⁽³⁾	41,683			14,644			5,589
Deferred revenue⁽⁶⁾	11,123			9,577			11,852
Other liabilities	102,495			102,495			58,445
Total liabilities	1,462,590			1,595,575			1,454,433

Stockholders’ equity:
Preferred stock	—			—			—
Common stock	1,149			1,149			1,180
Additional paid-in capital	1,502,949			1,502,949			1,558,403
Accumulated deficit	(191,390		)	(524,169		)	(599,409		)
Accumulated other comprehensive loss	(110,710		)	(103,596		)	(85,585		)
Total stockholders’ equity	1,201,998			876,333			874,589
Total liabilities and stockholders’ equity	$	2,664,588		$	2,471,908		$	2,329,022

The changes in balance sheet accounts due to the adoption of ASC 606 are due primarily to the following:


(1)	Up front license recognition under our subscription contracts and billed but uncollected support and subscription receivables that had corresponding deferred revenue, which were included in other current assets prior to our adoption of ASC 606.

(2)

Support and subscription receivables previously included in other current assets described in note (1) above, offset by contract assets and capitalized commission costs. Under ASC 605, unearned billed deferred revenue, which is not yet paid is included in other current assets. Billed, but uncollected support and subscription amounts included in other current assets as of September 30, 2019 and 2018 were $185.7 million and $153.6 million, respectively.


(3)	The tax effect of the accumulated deficit impact related to the acceleration of revenue and deferral of costs (primarily commissions).


(4)	The long-term portion of unbilled receivables due to the acceleration of license revenue on multi-year subscription contracts and the long-term portion of capitalized commission costs.

(5) Refund liability, primarily associated with the annual right to exchange on-premise subscription software described above in Judgments and Estimates.

(6) The decrease in deferred revenue recorded to accumulated deficit upon adoption of ASC 606 primarily related to on-premise subscription software licenses.



(in thousands)	September 30,
	As Reported ASC 606			ASC 605			As Reported ASC 605			As Reported ASC 605
	2019			2019			2018			2017
Revenue:
License ⁽¹⁾	$	324,400		$	666,770		$	529,265		$	356,326
Support and cloud services⁽¹⁾	763,700			484,048			559,222			630,990
Total software revenue	1,088,100			1,150,818			1,088,487			987,316
Professional services	167,531			160,676			153,337			176,723
Total revenue	1,255,631			1,311,494			1,241,824			1,164,039
Cost of revenue:
Cost of license revenue	51,936			50,231			47,737			66,841
Cost of support and cloud services revenue	133,478			132,987			135,106			110,931
Total cost of software revenue	185,414			183,218			182,843			177,772
Cost of professional service revenue	139,964			134,936			143,659			150,730
Total cost of revenue: ⁽²⁾	325,378			318,154			326,502			328,502
Gross margin	930,253			993,340			915,322			835,537
Operating expenses:
Sales and marketing ⁽³⁾	417,449			441,958			414,764			372,702
Research and development	246,888			246,888			249,786			236,028
General and administrative	127,919			127,919			143,045			144,991
Amortization of acquired intangible assets	23,841			23,841			31,350			32,108
Restructuring and other charges, net	51,114			51,114			3,764			7,942
Total operating expenses	867,211			891,720			842,709			793,771
Operating income	63,042			101,620			72,613			41,766
Interest expense	(43,047		)	(43,047		)	(41,673		)	(42,400		)
Other income (expense), net	305			131			(2,284		)	(772		)
Income before income taxes	20,300			58,704			28,656			(1,406		)
Provision (benefit) for income taxes⁽⁴⁾	47,760			55,725			(23,331		)	(7,645		)
Net income (loss)	$	(27,460	)	$	2,979		$	51,987		$	6,239

(1)

The reduction in license revenue and increase in support revenue is a result of the support component of subscription licenses which is included in license revenue under ASC 605. For the year ended September 30, 2019, license revenue decreased by approximately $215.0 million as a result of the revenue recorded to accumulated deficit. This was partially offset by approximately $153.5 million as a result of revenue recognized in future fiscal periods.

(2) Cost of revenue under ASC 606 is higher than under ASC 605 due to the treatment of deferred professional services costs under the new accounting guidance, partially offset by the timing of revenue recognition under ASC 606 resulting in lower associated royalty costs.

(3) Sales and marketing costs are lower under ASC 606 due to the amortization of commissions costs capitalized upon adoption of ASC 606, offset by the deferral of ongoing commission expenses under the new accounting guidance.

(4) The benefit for income taxes under ASC 606 includes indirect effects of the adoption.