UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from_ to_
Commission File Number:
(Exact name of registrant as specified in its charter)
|
||
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification Number) |
(Address of principal executive offices, including zip code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading symbol(s) |
Name of each exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
☑ |
|
Accelerated filer |
☐ |
|
Non-accelerated filer |
☐ |
|
Smaller reporting company |
|
||
|
|
|
|
|
|
|
|
|
Emerging growth company |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
There were
PTC Inc.
INDEX TO FORM 10-Q
For the Quarter Ended December 31, 2022
|
|
|
|
Page Number |
|
|
|||
Item 1. |
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2022 and September 30, 2022 |
|
|
|
|
|
||
|
|
|
||
|
|
|
||
|
|
|
||
|
|
|
||
Item 2. |
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
|
Item 3. |
|
|
||
Item 4. |
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|||
Item 1. |
|
|
||
Item 1A. |
|
|
||
Item 6. |
|
|
||
|
PART I—FINANCIAL INFORMATION
PTC Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
||
|
|
December 31, |
|
|
September 30, |
|
||
ASSETS |
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Accounts receivable, net of allowance for doubtful accounts of $ |
|
|
|
|
|
|
||
Prepaid expenses |
|
|
|
|
|
|
||
Other current assets |
|
|
|
|
|
|
||
Total current assets |
|
|
|
|
|
|
||
Property and equipment, net |
|
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
|
||
Acquired intangible assets, net |
|
|
|
|
|
|
||
Deferred tax assets |
|
|
|
|
|
|
||
Operating right-of-use lease assets |
|
|
|
|
|
|
||
Other assets |
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Accrued expenses and other current liabilities |
|
|
|
|
|
|
||
Accrued compensation and benefits |
|
|
|
|
|
|
||
Accrued income taxes |
|
|
|
|
|
|
||
Deferred revenue |
|
|
|
|
|
|
||
Short-term lease obligations |
|
|
|
|
|
|
||
Total current liabilities |
|
|
|
|
|
|
||
Long-term debt |
|
|
|
|
|
|
||
Deferred tax liabilities |
|
|
|
|
|
|
||
Deferred revenue |
|
|
|
|
|
|
||
Long-term lease obligations |
|
|
|
|
|
|
||
Other liabilities |
|
|
|
|
|
|
||
Total liabilities |
|
|
|
|
|
|
||
) |
|
|
|
|
|
|
||
Stockholders’ equity: |
|
|
|
|
|
|
||
Preferred stock, $ |
|
|
|
|
|
|
||
Common stock, $ |
|
|
|
|
|
|
||
Additional paid-in capital |
|
|
|
|
|
|
||
Retained earnings |
|
|
|
|
|
|
||
Accumulated other comprehensive loss |
|
|
( |
) |
|
|
( |
) |
Total stockholders’ equity |
|
|
|
|
|
|
||
Total liabilities and stockholders’ equity |
|
$ |
|
|
$ |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
1
PTC Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
|
|
Three months ended |
|
|||||
|
|
December 31, |
|
|
December 31, |
|
||
Revenue: |
|
|
|
|
|
|
||
License |
|
$ |
|
|
$ |
|
||
Support and cloud services |
|
|
|
|
|
|
||
Total software revenue |
|
|
|
|
|
|
||
Professional services |
|
|
|
|
|
|
||
Total revenue |
|
|
|
|
|
|
||
Cost of revenue: |
|
|
|
|
|
|
||
Cost of license revenue |
|
|
|
|
|
|
||
Cost of support and cloud services revenue |
|
|
|
|
|
|
||
Total cost of software revenue |
|
|
|
|
|
|
||
Cost of professional services revenue |
|
|
|
|
|
|
||
Total cost of revenue |
|
|
|
|
|
|
||
Gross margin |
|
|
|
|
|
|
||
Operating expenses: |
|
|
|
|
|
|
||
Sales and marketing |
|
|
|
|
|
|
||
Research and development |
|
|
|
|
|
|
||
General and administrative |
|
|
|
|
|
|
||
Amortization of acquired intangible assets |
|
|
|
|
|
|
||
Restructuring and other charges (credits), net |
|
|
( |
) |
|
|
|
|
Total operating expenses |
|
|
|
|
|
|
||
Operating income |
|
|
|
|
|
|
||
Interest and debt premium expense |
|
|
( |
) |
|
|
( |
) |
Other income (expense), net |
|
|
( |
) |
|
|
|
|
Income before income taxes |
|
|
|
|
|
|
||
Provision for income taxes |
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
||
Earnings per share—Basic |
|
$ |
|
|
$ |
|
||
Earnings per share—Diluted |
|
$ |
|
|
$ |
|
||
Weighted-average shares outstanding—Basic |
|
|
|
|
|
|
||
Weighted-average shares outstanding—Diluted |
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
2
PTC Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
|
|
Three months ended |
|
|||||
|
|
December 31, |
|
|
December 31, |
|
||
Net income |
|
$ |
|
|
$ |
|
||
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
||
Hedge gain (loss) arising during the period, net of tax of $ |
|
|
( |
) |
|
|
|
|
Foreign currency translation adjustment, net of tax of $ |
|
|
|
|
|
( |
) |
|
Amortization of net actuarial pension loss included in net income, net of tax of $ |
|
|
|
|
|
|
||
Change in unamortized pension gain (loss) during the period related to changes in foreign currency |
|
|
( |
) |
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
( |
) |
|
Comprehensive income |
|
$ |
|
|
$ |
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
PTC Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
Three months ended |
|
|||||
|
|
December 31, |
|
|
December 31, |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net income |
|
$ |
|
|
$ |
|
||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
|
||
Amortization of right-of-use lease assets |
|
|
|
|
|
|
||
Stock-based compensation |
|
|
|
|
|
|
||
Gain on investment |
|
|
|
|
|
( |
) |
|
Other non-cash items, net |
|
|
( |
) |
|
|
( |
) |
Changes in operating assets and liabilities, excluding the effects of acquisitions: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
|
|
|
|
||
Accounts payable and accrued expenses |
|
|
|
|
|
|
||
Accrued compensation and benefits |
|
|
( |
) |
|
|
|
|
Deferred revenue |
|
|
( |
) |
|
|
( |
) |
Accrued income taxes |
|
|
( |
) |
|
|
( |
) |
Other current assets and prepaid expenses |
|
|
|
|
|
( |
) |
|
Operating lease liabilities |
|
|
|
|
|
( |
) |
|
Other noncurrent assets and liabilities |
|
|
( |
) |
|
|
( |
) |
Net cash provided by operating activities |
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
|
||
Additions to property and equipment |
|
|
( |
) |
|
|
( |
) |
Purchase of intangible assets |
|
|
|
|
|
( |
) |
|
Settlement of net investment hedges |
|
|
( |
) |
|
|
|
|
Divestitures of businesses and assets, net |
|
|
( |
) |
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
( |
) |
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
||
Repurchases of common stock |
|
|
|
|
|
( |
) |
|
Payments of withholding taxes in connection with stock-based awards |
|
|
( |
) |
|
|
( |
) |
Payments of principal for financing leases |
|
|
( |
) |
|
|
( |
) |
Credit facility origination costs |
|
|
( |
) |
|
|
|
|
Net cash used in financing activities |
|
|
( |
) |
|
|
( |
) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
|
|
|
|
( |
) |
|
Net change in cash, cash equivalents, and restricted cash |
|
|
|
|
|
( |
) |
|
Cash, cash equivalents, and restricted cash, beginning of period |
|
|
|
|
|
|
||
Cash, cash equivalents, and restricted cash, end of period |
|
$ |
|
|
$ |
|
||
Supplemental disclosure of non-cash financing activities: |
|
|
|
|
|
|
||
Withholding taxes in connection with stock-based awards, accrued |
|
$ |
|
|
$ |
|
||
Repurchases of common stock, accrued |
|
$ |
|
|
$ |
( |
) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
PTC Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
|
|
Three months ended December 31, 2022 |
|
|||||||||||||||||||||
|
|
Common Stock |
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|||||||||
|
|
Shares |
|
|
Amount |
|
|
Additional |
|
|
Retained Earnings |
|
|
Other Comprehensive Loss |
|
|
Total |
|
||||||
Balance as of September 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Common stock issued for employee stock-based awards |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Shares surrendered by employees to pay taxes related to stock-based awards |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Compensation expense from stock-based awards |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Unrealized loss on net investment hedges, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Change in pension benefits, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance as of December 31, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2021 |
|
|||||||||||||||||||||
|
|
Common Stock |
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|||||||||
|
|
Shares |
|
|
Amount |
|
|
Additional |
|
|
Retained Earnings |
|
|
Other |
|
|
Total |
|
||||||
Balance as of September 30, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Common stock issued for employee stock-based awards |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Shares surrendered by employees to pay taxes related to stock-based awards |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Compensation expense from stock-based awards |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Repurchases of common stock |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Unrealized gain on net investment hedges, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Change in pension benefits, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Balance as of December 31, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
PTC Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
General
The accompanying unaudited condensed consolidated financial statements include the accounts of PTC Inc. and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. While we believe that the disclosures presented are adequate in order to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with our annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair statement of our financial position, results of operations and cash flows at the dates and for the periods indicated. The September 30, 2022 Consolidated Balance Sheet included herein is derived from our audited consolidated financial statements.
Unless otherwise indicated, all references to a year mean our fiscal year, which ends on September 30.
Pending Accounting Pronouncements
Reference Rate Reform
In December 2022, the FASB issued ASU 2020-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The ASU provides an update to the previously issued ASU 2020-04 to defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. In conjunction with our new credit agreement in January 2023, we have transitioned off of rates subject to reference rate reform without a material impact from such transition.
2. Revenue from Contracts with Customers
Contract Assets and Contract Liabilities
(in thousands) |
|
December 31, |
|
|
September 30, |
|
||
Contract asset |
|
$ |
|
|
$ |
|
||
Deferred revenue |
|
$ |
|
|
$ |
|
As of December 31, 2022, $
6
During the three months ended December 31, 2022, we recognized $
Our multi-year, non-cancellable on-premises subscription contracts provide customers with an annual right to exchange software within the subscription with other software. As of December 31, 2022 and September 30, 2022, our total revenue liability was $
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. In determining the adequacy of the allowance for doubtful accounts, management specifically analyzes individual accounts receivable, historical bad debt, customer concentrations, customer credit-worthiness, current economic conditions, and accounts receivable aging trends. Our allowance for doubtful accounts on trade accounts receivable was $
Costs to Obtain or Fulfill a Contract
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 primarily related to commissions. As of December 31, 2022 and September 30, 2022, deferred costs of $
Remaining Performance Obligations
Our contracts with customers include transaction price amounts allocated to performance obligations that will be satisfied and recognized as revenue at a later date. As of December 31, 2022, the transaction price amounts include performance obligations of $
Disaggregation of Revenue
(in thousands) |
|
Three months ended |
|
|||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Recurring revenue(1) |
|
$ |
|
|
$ |
|
||
Perpetual license |
|
|
|
|
|
|
||
Professional services |
|
|
|
|
|
|
||
Total revenue |
|
$ |
|
|
$ |
|
For further disaggregation of revenue by geographic region see Note 10. Segment and Geographic Information.
7
3. Restructuring and Other Charges
Restructuring and other charges, net includes restructuring charges (credits) and impairment and accretion expense charges related to the lease assets of exited facilities.
Restructuring Charges (Credits)
In the first quarter of 2022, we committed to a plan to restructure our workforce and consolidate select facilities to align our customer facing and product-related functions with the SaaS industry best practices and accelerate the opportunity for our on-premises customers to move to the cloud. The restructuring plan resulted in charges of $
The following table summarizes restructuring accrual activity for the three months ended December 31, 2022:
(in thousands) |
|
Employee Severance and Related Benefits |
|
|
Facility Closures and Related Costs |
|
|
Total |
|
|||
Accrual, October 1, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Credits to operations, net |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Cash disbursements |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Other non-cash |
|
|
|
|
|
|
|
|
|
|||
Foreign exchange impact |
|
|
|
|
|
|
|
|
|
|||
Accrual, December 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
The following table summarizes restructuring accrual activity for the three months ended December 31, 2021:
(in thousands) |
|
Employee Severance and Related Benefits |
|
|
Facility Closures and Related Costs |
|
|
Total |
|
|||
Accrual, October 1, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Charges to operations, net |
|
|
|
|
|
|
|
|
|
|||
Cash disbursements |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Foreign exchange impact |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Accrual, December 31, 2021 |
|
$ |
|
|
$ |
|
|
$ |
|
The accrual for employee severance and related benefits is included in Accrued compensation and benefits in the Consolidated Balance Sheets.
The accrual for facility closures and related costs is included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets. In addition to the payments referenced above, In the three months ended December 31, 2022 and December 31, 2021, we made net payments of $
8
4. Stock-based Compensation
Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, restricted stock units (RSUs) and stock appreciation rights to employees, directors, officers and consultants. We award RSUs as our principal equity incentive awards.
The following table shows RSU activity for the three months ended December 31, 2022:
(in thousands, except grant date fair value data) |
|
Number of |
|
|
Weighted-Average |
|
||
Balance of outstanding restricted stock units, October 1, 2022 |
|
|
|
|
$ |
|
||
Granted(1) |
|
|
|
|
$ |
|
||
Vested |
|
|
( |
) |
|
$ |
|
|
Forfeited or not earned |
|
|
( |
) |
|
$ |
|
|
Balance of outstanding restricted stock units, December 31, 2022 |
|
|
|
|
$ |
|
The following table presents the number of RSU awards granted by award type:
(in thousands) |
|
Three months ended |
|
|
Performance-based RSUs(1) |
|
|
|
|
Service-based RSUs(2) |
|
|
|
|
Relative Total Shareholder Return RSUs(3) |
|
|
|
The weighted-average fair value of the rTSR RSUs was $
The significant assumptions used in the Monte Carlo simulation model were as follows:
Average volatility of peer group |
|
|
% |
|
Risk free interest rate |
|
|
% |
|
Dividend yield |
|
|
% |
Total value on vest date of RSUs vested are as follows:
(in thousands) |
|
Three months ended |
|
|||||
Value of stock option and stock-based award activity |
|
December 31, |
|
|
December 31, |
|
||
Total value of restricted stock unit awards at vest |
|
$ |
|
|
$ |
|
9
Compensation expense recorded for our stock-based awards is classified in our Consolidated Statements of Operations as follows:
(in thousands) |
|
Three months ended |
|
|||||
|
|
December 31, |
|
|
December 31, |
|
||
Cost of license revenue |
|
$ |
|
|
$ |
|
||
Cost of support and cloud services revenue |
|
|
|
|
|
|
||
Cost of professional services revenue |
|
|
|
|
|
|
||
Sales and marketing |
|
|
|
|
|
|
||
Research and development |
|
|
|
|
|
|
||
General and administrative |
|
|
|
|
|
|
||
Total stock-based compensation expense |
|
$ |
|
|
$ |
|
Stock-based compensation expense includes $
As of December 31, 2022, we had liability-classified awards related to stock-based compensation of $
5. Earnings per Share (EPS) and Common Stock
EPS
The following table presents the calculation for both basic and diluted EPS:
(in thousands, except per share data) |
|
Three months ended |
|
|||||
|
|
December 31, |
|
|
December 31, |
|
||
Net income |
|
$ |
|
|
$ |
|
||
Weighted-average shares outstanding—Basic |
|
|
|
|
|
|
||
Dilutive effect of restricted stock units |
|
|
|
|
|
|
||
Weighted-average shares outstanding—Diluted |
|
|
|
|
|
|
||
Earnings per share—Basic |
|
$ |
|
|
$ |
|
||
Earnings per share—Diluted |
|
$ |
|
|
$ |
|
There were
Common Stock Repurchases
Our Articles of Organization authorize us to issue up to
10
6. Acquisitions and Disposition of Business
Acquisition and transaction-related costs in the first quarter of 2023 totaled $
Acquisition and transaction-related costs include direct costs of potential and completed acquisitions and dispositions (e.g., investment banker fees and professional fees, including diligence, legal and valuation services), expenses related to acquisition integration activities (e.g., professional fees and severance), and third-party costs related to structuring transactions.
Our results of operations include the results of acquired or sold businesses beginning on their respective acquisition or sale date. Our results of operations for the reported periods if presented on a pro forma basis would not differ materially from our reported results.
Refer to Note 15. Subsequent Events for additional information regarding the acquisition of ServiceMax Inc. in January 2023.
Intland Software
On April 29, 2022, we acquired Intland Software, GmbH, and Eger Invest GmbH (together, “Intland Software”) pursuant to a Share Sale and Purchase Agreement. Intland Software developed and marketed the Codebeamer Application Lifecycle Management (ALM) family of software products. The purchase price of the acquisition was $
The acquisition of Intland Software has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
The purchase price allocation resulted in $
The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of
PLM Services Business Disposition
On June 1, 2022, we sold a portion of our PLM services business to ITC Infotech India Limited ("ITC Infotech") pursuant to the Strategic Partner Agreement dated as of April 20, 2022 by and among PTC and ITC Infotech India Limited. Consideration received from ITC Infotech for the sale was approximately $
11
We recognized a gain on the sale of $
Additional future contingent consideration of up to $
7. Goodwill and Intangible Assets
We have
As of December 31, 2022, goodwill and acquired intangible assets in the aggregate attributable to our Software Products segment was $
We completed our annual goodwill impairment review as of June 30, 2022, which consisted of a qualitative assessment of our Software Products segment and a quantitative assessment of our Professional Services segment. Our qualitative assessment for Software Products included company-specific (e.g., financial performance and long-range plans), industry, and macroeconomic factors, as well as consideration of the fair value of each reporting unit relative to its carrying value at the last valuation date (June 27, 2020). Our quantitative assessment for the Professional Services segment compared the fair value of the reporting unit to its carrying value. We estimated the fair value of the Professional Services reporting unit using a discounted cash flow valuation model. Based on our qualitative assessment for the Software Products segment and quantitative assessment for the Professional Services segment as of June 30, 2022, no impairment was required. Through December 31, 2022, there were no events or changes in circumstances that indicated that the carrying values of goodwill or acquired intangible assets may not be recoverable.
12
Goodwill and acquired intangible assets consisted of the following:
(in thousands) |
|
December 31, 2022 |
|
|
September 30, 2022 |
|
||||||||||||||||||
|
|
Gross |
|
|
Accumulated |
|
|
Net Book |
|
|
Gross |
|
|
Accumulated |
|
|
Net Book |
|
||||||
Goodwill (not amortized) |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
|
||||||
Intangible assets with finite lives (amortized): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Purchased software |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Capitalized software |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Customer lists and relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Trademarks and trade names |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total intangible assets with finite lives |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Total goodwill and acquired intangible assets |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
$ |
|
Goodwill
Changes in goodwill presented by reportable segments were as follows:
(in thousands) |
|
Software |
|
|
Professional |
|
|
Total |
|
|||
Balance, October 1, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|||
Balance, December 31, 2022 |
|
$ |
|
|
$ |
|
|
$ |
|
Amortization of Intangible Assets
The aggregate amortization expense for intangible assets with finite lives is classified in our Consolidated Statements of Operations as follows:
(in thousands) |
|
Three months ended |
|
|||||
|
|
December 31, |
|
|
December 31, |
|
||
Amortization of acquired intangible assets |
|
$ |
|
|
$ |
|
||
Cost of license revenue |
|
|
|
|
|
|
||
Total amortization expense |
|
$ |
|
|
$ |
|
8. Fair Value Measurements
Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. GAAP prescribes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There are three levels of inputs that may be used to measure fair value:
13
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Time deposits and corporate notes/bonds are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.
The principal market in which we execute our foreign currency derivatives is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large financial institutions. Our foreign currency derivatives’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
Our significant financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and September 30, 2022 were as follows:
(in thousands) |
|
December 31, 2022 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash equivalents (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Convertible note |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Options |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
(in thousands) |
|
September 30, 2022 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash equivalents (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Convertible note |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
(1) Money market funds and time deposits.
14
Level 3 Investments
Convertible Note
In the fourth quarter of 2021, we invested $
Equity Securities
During the first quarter of 2022, we recognized a gain of $
9. Derivative Financial Instruments
We enter into derivative transactions, specifically foreign currency forward contracts and options, to manage our exposure to foreign currency exchange risk in order to reduce earnings volatility. We do not enter into derivative transactions for trading or speculative purposes.
The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:
(in thousands) |
|
Fair Value of Derivatives Designated As Hedging Instruments |
|
|
Fair Value of Derivatives Not Designated As Hedging Instruments |
|
||||||||||
|
|
December 31, |
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
||||
Derivative assets(1): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Forward Contracts |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Options |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Derivative liabilities(2): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Forward Contracts |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
15
Non-Designated Hedges
We hedge our net foreign currency monetary assets and liabilities primarily resulting from foreign currency denominated receivables and payables with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These contracts have maturities of up to approximately months. Generally, we do not designate these foreign currency forward contracts as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in Other income (expense), net.
We hedge our forecasted U.S. Dollar cash flows with foreign exchange options to reduce the risk that they will be adversely affected by changes in Euro or Japanese Yen exchange rates. These contracts have maturities of up to approximately months. We do not designate these foreign currency options as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into options as an economic hedge, currency impacts on the Euro or Japanese Yen-denominated operations as compared to the forecasted plan rate may be partially offset by the gain on the put option. Gain on put options are included in Other income (expense), net.
As of December 31, 2022 and September 30, 2022, we had outstanding forward contracts and options with notional amounts equivalent to the following:
Currency Hedged (in thousands) |
|
December 31, |
|
|
September 30, |
|
||
Canadian / U.S. Dollar |
|
$ |
|
|
$ |
|
||
Euro / U.S. Dollar |
|
|
|
|
|
|
||
British Pound / U.S. Dollar |
|
|
|
|
|
|
||
Israeli Shekel / U.S. Dollar |
|
|
|
|
|
|
||
Japanese Yen / U.S. Dollar |
|
|
|
|
|
|
||
Swiss Franc / U.S. Dollar |
|
|
|
|
|
|
||
Swedish Krona / U.S. Dollar |
|
|
|
|
|
|
||
Singapore Dollar / U.S. Dollar |
|
|
|
|
|
|
||
Chinese Renminbi / U.S. Dollar |
|
|
|
|
|
|
||
New Taiwan Dollar / U.S. Dollar |
|
|
|
|
|
|
||
Korean Won/ U.S. Dollar |
|
|
|
|
|
|
||
Danish Krone/ U.S. Dollar |
|
|
|
|
|
|
||
Australian Dollar/ U.S. Dollar |
|
|
|
|
|
|
||
All other |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
The following table shows the effect of our non-designated hedges in the Consolidated Statements of Operations for the three months ended December 31, 2022 and December 31, 2021:
(in thousands) |
|
|
|
Three months ended |
|
|||||
|
|
Location of Gain (Loss) |
|
December 31, |
|
|
December 31, |
|
||
Net realized and unrealized loss, excluding the underlying foreign currency exposure being hedged |
|
Other income (expense), net |
|
$ |
( |
) |
|
$ |
( |
) |
16
In the three months ended December 31, 2022, foreign currency losses, net were $
Net Investment Hedges
We translate balance sheet accounts of subsidiaries with foreign functional currencies into the U.S. Dollar using the exchange rate at each balance sheet date. Resulting translation adjustments are reported as a component of accumulated other comprehensive loss on the Consolidated Balance Sheets. We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro and Japanese Yen functional subsidiaries. Net investment hedges partially offset the impact of foreign currency translation adjustment recorded in accumulated other comprehensive loss on the Consolidated Balance Sheets. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of net investment hedge foreign exchange forward contracts is approximately months.
Net investment hedge relationships are designated at inception, and effectiveness is assessed retrospectively on a quarterly basis using the net equity position of Euro and Japanese Yen functional subsidiaries. As the forward contracts are highly effective in offsetting exchange rate exposure, we record changes in these net investment hedges in accumulated other comprehensive loss and subsequently reclassify them to foreign currency translation adjustment in accumulated other comprehensive loss at the time of forward contract maturity. Changes in the fair value of foreign exchange forward contracts due to changes in time value are excluded from the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counterparties by trading among several counterparties and we review our counterparties’ credit at least quarterly.
As of December 31, 2022 and September 30, 2022, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:
Currency Hedged (in thousands) |
|
December 31, |
|
|
September 30, |
|
||
Euro / U.S. Dollar |
|
$ |
|
|
$ |
|
||
JPY/ U.S Dollar |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
The following table shows the effect of our derivative instruments designated as net investment hedges in the Consolidated Statements of Operations for the three months ended December 31, 2022 and December 31, 2021:
(in thousands) |
|
|
|
Three months ended |
|
|||||
|
|
Location of Gain (Loss) |
|
December 31, |
|
|
December 31, |
|
||
Loss recognized in OCI |
|
OCI |
|
$ |
( |
) |
|
$ |
( |
) |
Gain (loss) reclassified from OCI |
|
OCI |
|
$ |
|
|
$ |
( |
) |
|
, excluded portion |
|
Other income (expense), net |
|
$ |
|
|
$ |
|
As of December 31, 2022, we estimate that all amounts reported in accumulated other comprehensive loss will be applied against exposed balance sheet accounts upon translation within the next three months.
17
Offsetting Derivative Assets and Liabilities
We have entered into master netting arrangements for our forward contracts that allow net settlements under certain conditions. Although netting is permitted, it is currently our policy and practice to record all derivative assets and liabilities on a gross basis in the Consolidated Balance Sheets.
The following table sets forth the offsetting of derivative assets as of December 31, 2022:
(in thousands) |
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|
|
|
||||||||||||
As of December 31, 2022 |
|
Gross |
|
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
Net Amounts of |
|
|
Financial |
|
|
Cash |
|
|
Net |
|
||||||
Forward Contracts |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
The following table sets forth the offsetting of derivative liabilities as of December 31, 2022:
(in thousands) |
|
Gross Amounts Offset in the Consolidated Balance Sheets |
|
|
|
|
|
Gross Amounts Not Offset in the Consolidated Balance Sheets |
|
|
|
|
||||||||||||
As of December 31, 2022 |
|
Gross |
|
|
Gross |
|
|
Net Amounts of |
|
|
Financial |
|
|
Cash |
|
|
Net |
|
||||||
Forward Contracts |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
18
10. Segment and Geographic Information
We operate within a single industry segment – computer software and related services. Operating segments as defined under GAAP are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer. We have
The revenue and profit attributable to our operating segments are summarized below. We do not produce asset information by reportable segment; therefore, it is not reported.
(in thousands) |
|
Three months ended |
|
|||||
|
|
December 31, |
|
|
December 31, |
|
||
Software Products |
|
|
|
|
|
|
||
Revenue |
|
$ |
|
|
$ |
|
||
Operating costs(1) |
|
|
|
|
|
|
||
Profit |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Professional Services |
|
|
|
|
|
|
||
Revenue |
|
|
|
|
|
|
||
Operating costs(2) |
|
|
|
|
|
|
||
Profit |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Total segment revenue |
|
|
|
|
|
|
||
Total segment costs |
|
|
|
|
|
|
||
Total segment profit |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Unallocated operating expenses: |
|
|
|
|
|
|
||
Sales and marketing expenses |
|
|
|
|
|
|
||
General and administrative expenses |
|
|
|
|
|
|
||
Restructuring and other charges (credits), net |
|
|
( |
) |
|
|
|
|
Intangibles amortization |
|
|
|
|
|
|
||
Stock-based compensation |
|
|
|
|
|
|
||
Other unallocated operating expenses(3) |
|
|
|
|
|
|
||
Total operating income |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Interest and debt premium expense |
|
|
( |
) |
|
|
( |
) |
Other income (expense), net |
|
|
( |
) |
|
|
|
|
Income before income taxes |
|
$ |
|
|
$ |
|
19
Our international revenue is presented based on the location of our customer. Revenue for the geographic regions in which we operate is presented below.
(in thousands) |
|
Three months ended |
|
|||||
|
|
December 31, |
|
|
December 31, |
|
||
Americas |
|
$ |
|
|
$ |
|
||
Europe |
|
|
|
|
|
|
||
Asia Pacific |
|
|
|
|
|
|
||
Total revenue |
|
$ |
|
|
$ |
|
11. Income Taxes
(in thousands) |
|
Three months ended |
|
|||||
|
|
December 31, |
|
|
December 31, |
|
||
Income before income taxes |
|
$ |
|
|
$ |
|
||
Provision for income taxes |
|
$ |
|
|
$ |
|
||
Effective income tax rate |
|
|
% |
|
|
% |
In the first quarter of 2023 and 2022, our effective tax rate differed from the statutory federal income tax rate of
In 2023 and 2022, in addition to the foreign rate differential, the effective tax rate was impacted by the net effects of the Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) regimes and the excess tax benefit related to stock-based compensation.
We reassess our valuation allowance requirements each financial reporting period. We assess available positive and negative evidence to estimate whether sufficient future taxable income will be generated to use our existing deferred tax assets. In the assessment for the period ended December 31, 2022, we maintain our conclusion that it is more likely than not that our deferred tax assets related to U.S. federal and state income will be realizable.
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service in the U.S. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, limitations on net operating losses and tax credits.
As of December 31, 2022 and September 30, 2022, we had unrecognized tax benefits of $
Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $
20
12. Debt
At December 31, 2022 and September 30, 2022, we had the following long-term debt obligations:
(in thousands) |
|
December 31, |
|
|
September 30, |
|
||
4.000% Senior notes due 2028 |
|
$ |
|
|
$ |
|
||
3.625% Senior notes due 2025 |
|
|
|
|
|
|
||
Credit facility revolver(1) |
|
|
|
|
|
|
||
Total debt |
|
|
|
|
|
|
||
Unamortized debt issuance costs for the senior notes(2) |
|
|
( |
) |
|
|
( |
) |
Total debt, net of issuance costs |
|
$ |
|
|
$ |
|
(1) Unamortized debt issuance costs related to the credit facility were $
(2) Unamortized debt issuance costs are included in Long-term debt on the Consolidated Balance Sheets.
Senior Unsecured Notes
In February 2020, we issued $
As of December 31, 2022, the total estimated fair value of the 2028 and 2025 notes was approximately $
We were in compliance with all the covenants for all of our senior notes as of December 31, 2022. Any failure to comply with such covenants could constitute a default that could cause all amounts outstanding to become due and payable immediately.
Terms of the 2028 and 2025 Notes
Interest on the 2028 and 2025 notes is payable semi-annually on February 15 and August 15. The debt indenture for the 2028 and 2025 notes includes covenants that limit our ability to, among other things, incur additional debt, grant liens on our properties or capital stock, enter into sale and leaseback transactions or asset sales, and make capital distributions.
We may, on one or more occasions, redeem the 2028 and 2025 notes in whole or in part at specified redemption prices. In certain circumstances constituting a change of control, we will be required to make an offer to repurchase the notes at a purchase price equal to
21
Credit Agreement
We were party to the Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, from February 2020 through January 3, 2023 (the "Prior Credit Facility"). We used the Prior Credit Facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements.
On January 3, 2023, subsequent to the end of Q1’23, we terminated the Prior Credit Facility and repaid all amounts outstanding and entered into a new credit agreement for the purpose of funding the payment of the closing purchase price of ServiceMax. Refer to Note 15. Subsequent Events for additional discussion regarding the new credit agreement and acquisition of ServiceMax.
The Prior Credit Facility, in effect as of December 31, 2022, consisted of a $
Loans under the Prior Credit Facility bore interest at variable rates which reset every
Under the Prior Credit Facility PTC and its subsidiaries were required to maintain the following financial ratios:
As of December 31, 2022, our total leverage ratio was
In the first quarters of 2023 and 2022, we paid $
22
13. Leases
Our operating leases expire at various dates through 2037 and are primarily for office space, automobiles, servers, and office equipment.
Our headquarters are located at 121 Seaport Boulevard, Boston, Massachusetts. In February 2019, we subleased a portion of our headquarters through June 30, 2022, and received approximately $
The components of lease cost reflected in the Consolidated Statement of Operations for the three months ended December 31, 2022 and December 31, 2021 were as follows:
(in thousands) |
|
Three months ended |
|
|||||
|
|
December 31, |
|
|
December 31, |
|
||
Operating lease cost |
|
$ |
|
|
$ |
|
||
Short-term lease cost |
|
|
|
|
|
|
||
Variable lease cost |
|
|
|
|
|
|
||
Sublease income |
|
|
( |
) |
|
|
( |
) |
Total lease cost |
|
$ |
|
|
$ |
|
Supplemental cash flow and right-of-use assets information for the three months ended December 31, 2022 and December 31, 2021 was as follows:
(in thousands) |
|
Three months ended |
|
|||||
|
|
December 31, |
|
|
December 31, |
|
||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
||
Operating cash flows from operating leases |
|
$ |
|
|
$ |
|
||
Financing cash flows from financing leases |
|
$ |
|
|
$ |
|
||
Right-of-use assets obtained in exchange for new lease obligations: |
|
|
|
|
|
|
||
Operating leases |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
(1) Subsequent to filing our first quarter 2022 Form 10-Q, we identified an immaterial error in the above disclosure. Right-of-use assets obtained in exchange for new lease obligations for the three months ended December 31,2021 was incorrect. Amount presented above for the three months ended December 31, 2021 reflect the corrected amount. |
|
Supplemental balance sheet information related to the leases as of December 31, 2022 was as follows:
Weighted-average remaining lease term - operating leases |
|
||
Weighted-average remaining lease term - financing leases |
|
||
Weighted-average discount rate - operating leases |
|
% |
|
Weighted-average discount rate - financing leases |
|
% |
Maturities of lease liabilities as of December 31, 2022 are as follows:
(in thousands) |
|
|
|
|
Remainder of 2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
|
|
Total future lease payments |
|
$ |
|
|
Less: imputed interest |
|
|
( |
) |
Total lease liability |
|
$ |
|
As of December 31, 2022, we had an operating lease that had not yet commenced. The lease will commence in FY'23 with a lease term of
23
14. Commitments and Contingencies
As December 31, 2022 and December 31, 2021, we had letters of credit and bank guarantees outstanding of $
Legal and Regulatory Matters
Legal Proceedings
With respect to legal proceedings and claims, we record an accrual for a contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
401(k) Plan
On
Other Legal Proceedings
In addition to the matter listed above, we are subject to legal proceedings and claims against us in the ordinary course of business. As of December 31, 2022, we estimate that the range of possible outcomes for such matters is immaterial and we do not believe that resolving them will have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal proceedings and claims be resolved against us, the operating results for a reporting period could be adversely affected.
Guarantees and Indemnification Obligations
We enter into standard indemnification agreements with our customers and business partners in the ordinary course of our business. Under such agreements, we typically indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our products. Indemnification may also cover other types of claims, including claims relating to certain data breaches. Except for intellectual property infringement indemnification, these agreements typically limit our liability with respect to other indemnification claims. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and, accordingly, we believe the estimated fair value of liabilities under these agreements is immaterial.
We warrant that our software products will perform in all material respects in accordance with our standard published specifications during the term of the license/subscription. Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry standards and, in the case of fixed price services, the agreed-upon specifications. In most cases, liability for these warranties is capped. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, we have not incurred significant cost under our product or services warranties. As a result, we believe the estimated fair value of these liabilities is immaterial.
24
15. Subsequent Events
Acquisition of ServiceMax Inc.
On January 3, 2023, we acquired ServiceMax, Inc. pursuant to the Share Purchase Agreement dated November 17, 2022 by and among PTC, ServiceMax, Inc., and ServiceMax JV, LP. The preliminary purchase price is $
Entry into the Fourth Amended and Restated Credit Agreement; Termination of the Third Amended and Restated Credit Agreement
On January 3, 2023, we entered into the Fourth Amended and Restated Credit Agreement by and among PTC, PTC (IFSC) Limited, JPMorgan Chase Bank, N.A., as Administrative Agent, and the lenders party thereto (the “New Credit Facility”). The New Credit Facility consists of a $
In connection with entry into the New Credit Facility, PTC terminated the Third Amended and Restated Credit Agreement dated February 13, 2020 by and among PTC, PTC (IFSC) Limited, JPMorgan Chase Bank, N.A., as Administrative Agent, and the lenders party thereto. Approximately $
Borrowings under the Fourth Amended and Restated Credit Agreement
On January 3, 2023, PTC borrowed $
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Overview
PTC is a global software company that provides a portfolio of innovative digital solutions that work together to transform how physical products are engineered, manufactured, and serviced.
Our software portfolio includes award-winning offerings that enable companies to author product data (our CAD portfolio solutions) and manage product data management and orchestrate processes (our PLM portfolio solutions). Our software can be delivered on premises, in the cloud, or in a hybrid model.
Our customer base includes some of the world's most innovative companies in the aerospace and defense, automotive, electronics and high tech, industrial machinery and equipment, life sciences, retail and consumer products industries.
We generate revenue through the sale of software subscriptions, which include license access and support (technical support and software updates); support for perpetual licenses; cloud services (hosting for our software and software-as-a-service (SaaS)); perpetual licenses; and professional services (consulting, implementation, and training).
Forward-Looking Statements
Statements in this document that are not historic facts, including statements about our future financial and growth expectations and targets, the expected effect of the ServiceMax acquisition on our business and future results, 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 sooner or to a greater extent than we expect due to, among other factors, the effects of the COVID-19 pandemic, including supply chain disruptions, increasing interest rates and inflation, volatile foreign exchange rates and the current strength of the U.S. dollar, and the effects of the Russia/Ukraine conflict, including the effect on energy supplies to Europe, all 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 revenue, cash flow, or ARR 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, 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, as well as other risks and uncertainties described below throughout or referenced in Part II, Item 1A. Risk Factors of this report.
26
Operating and Non-GAAP Financial Measures
Our discussion of results includes discussion of our ARR (Annual Run Rate) operating measure, non-GAAP financial measures, and disclosure of our results on a constant currency basis. ARR and our non-GAAP financial measures, including the reasons we use those measures, are described below in Results of Operations - Operating Measure and Results of Operations - Non-GAAP Financial Measures, respectively. The methodology used to calculate constant currency disclosures is described in Results of Operations - Impact of Foreign Currency Exchange on Results of Operations. You should read those sections to understand our operating measure, non-GAAP financial measures, and constant currency disclosures.
Executive Overview
ARR of $1.66 billion at the end of Q1’23 represents 11% growth (15% on a constant currency basis) compared to Q1’22, including contribution from the Codebeamer business that we acquired in Q3’22. Organic constant currency ARR growth year over year was 14%. Although ARR grew in Q1’23 due to new bookings and churn improvement, we saw some incremental signs of a softening economy as new bookings came in below our expectations.
We generated $181 million of cash from operations in Q1’23 compared to $138 million in Q1’22, with the increase driven by strong operational execution based on a foundation of top line growth, solid collections and cost discipline. Free cash flow of $172 million in Q1'23 increased from $134 million in Q1'22, which includes capital expenditures of $9 million in Q1'23 and $3 million in Q1'22.
During Q1'23, we entered into an agreement to purchase ServiceMax, Inc. for $1.5 billion. The transaction subsequently closed in early Q2'23 and we made the first installment payment of $835 million, funded by new a new credit agreement that we entered into in connection with the closing of the acquisition. Refer to Note 15. Subsequent Events for additional discussion regarding the acquisition and the new credit agreement.
Results of Operations
The following table shows the financial measures that we consider the most significant indicators of our business performance. In addition to providing operating income, operating margin, diluted earnings per share and cash from operations as calculated under GAAP, we provide non-GAAP operating income, non-GAAP operating margin, non-GAAP diluted earnings per share, and free cash flow for the reported periods. We also provide a view of our actual results on a constant currency basis. These non-GAAP financial measures exclude the items described in Non-GAAP Financial Measures below. Investors should use these non-GAAP financial measures only in conjunction with our GAAP results.
27
(Dollar amounts in millions, except per share data) |
|
Three months ended |
|
|
Percent Change |
|
||||||||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
|
Actual |
|
|
Constant |
|
||||
ARR |
|
$ |
1,662.6 |
|
|
$ |
1,496.3 |
|
|
|
11 |
% |
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total recurring revenue(2) |
|
$ |
417.1 |
|
|
$ |
405.1 |
|
|
|
3 |
% |
|
|
10 |
% |
Perpetual license |
|
|
13.2 |
|
|
|
8.5 |
|
|
|
56 |
% |
|
|
65 |
% |
Professional services |
|
|
35.6 |
|
|
|
44.1 |
|
|
|
(19 |
)% |
|
|
(13 |
)% |
Total revenue |
|
|
465.9 |
|
|
|
457.7 |
|
|
|
2 |
% |
|
|
9 |
% |
Total cost of revenue |
|
|
95.8 |
|
|
|
95.1 |
|
|
|
1 |
% |
|
|
6 |
% |
Gross margin |
|
|
370.1 |
|
|
|
362.6 |
|
|
|
2 |
% |
|
|
10 |
% |
Operating expenses |
|
|
265.2 |
|
|
|
300.4 |
|
|
|
(12 |
)% |
|
|
(8 |
)% |
Operating income |
|
$ |
104.9 |
|
|
$ |
62.2 |
|
|
|
69 |
% |
|
|
116 |
% |
Non-GAAP operating income(1) |
|
$ |
166.0 |
|
|
$ |
158.1 |
|
|
|
5 |
% |
|
|
16 |
% |
Operating margin |
|
|
22.5 |
% |
|
|
13.6 |
% |
|
|
|
|
|
|
||
Non-GAAP operating margin(1) |
|
|
35.6 |
% |
|
|
34.5 |
% |
|
|
|
|
|
|
||
Diluted earnings per share |
|
$ |
0.63 |
|
|
$ |
0.39 |
|
|
|
|
|
|
|
||
Non-GAAP diluted earnings per share(1) |
|
$ |
0.99 |
|
|
$ |
0.95 |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash flow from operations(3) |
|
$ |
180.9 |
|
|
$ |
137.7 |
|
|
|
|
|
|
|
||
Capital expenditures |
|
|
(9.2 |
) |
|
|
(3.4 |
) |
|
|
|
|
|
|
||
Free cash flow |
|
$ |
171.7 |
|
|
$ |
134.4 |
|
|
|
|
|
|
|
Impact of Foreign Currency Exchange on Results of Operations
Approximately 50% of our revenue and 30% of our expenses are transacted in currencies other than the U.S. Dollar. Because we report our results of operations in U.S. Dollars, currency translation, particularly changes in the Euro, Yen, Shekel, and Rupee relative to the U.S. Dollar, affects our reported results. Our constant currency disclosures are calculated by multiplying the results in local currency for the quarterly periods for FY’23 and FY’22 by the exchange rates in effect on September 30, 2022. Changes in foreign currency exchange rates were a headwind to reported results in Q1'23, compared to Q1'22, but were a tailwind for Q1'23 compared to the exchange rates in effect on September 30, 2022.
If reported results for Q1’23 were converted into U.S. dollars based on September 30, 2022 exchange rates, ARR would have been lower by $60 million, revenue would have been lower by $5 million and expenses would have been lower by $2 million. If reported results for Q1’22 were converted into U.S. dollars based on September 30, 2022 exchange rates, ARR would have been lower by $107 million, revenue would have been lower by $35 million and expenses would have been lower by $18 million.
28
Revenue
Under ASC 606, the volume, mix, and duration of contract types (support, SaaS, on-premises subscription) starting or renewing in any given period may have a material impact on revenue in the period, and as a result can impact the comparability of reported revenue period over period. We recognize revenue for the license portion of on-premises subscription contracts up front when we deliver the licenses to the customer, typically on the start date, and we recognize revenue on the support portion of on-premises subscription contracts and stand-alone support contracts ratably over the term. We continue to convert existing support contracts to on-premises subscriptions, resulting in a shift to up-front recognition of on-premises subscription license revenue in the period converted compared to ratable recognition for a perpetual support contract. Revenue from our cloud services (primarily SaaS) contracts is recognized ratably. We expect that over time a higher portion of our revenue will be recognized ratably as we expand our SaaS offerings, release additional cloud functionality into our products, and customers migrate from on-premises subscriptions to SaaS. Given the different mix, duration and volume of new and renewing contracts in any period, year-over-year or sequential revenue comparisons can vary significantly.
Revenue by Line of Business
(Dollar amounts in millions) |
|
Three months ended |
|
|
Percent Change |
|
||||||||||
|
|
December 31, |
|
|
December 31, |
|
|
Actual |
|
|
Constant |
|
||||
License |
|
$ |
172.7 |
|
|
$ |
169.1 |
|
|
|
2 |
% |
|
|
9 |
% |
Support and cloud services |
|
|
257.7 |
|
|
|
244.5 |
|
|
|
5 |
% |
|
|
13 |
% |
Software revenue |
|
|
430.4 |
|
|
|
413.6 |
|
|
|
4 |
% |
|
|
11 |
% |
Professional services |
|
|
35.6 |
|
|
|
44.1 |
|
|
|
(19 |
)% |
|
|
(13 |
)% |
Total revenue |
|
$ |
465.9 |
|
|
$ |
457.7 |
|
|
|
2 |
% |
|
|
9 |
% |
Software revenue growth in Q1’23 was negatively impacted by the value of foreign currencies compared to the U.S. Dollar. Constant currency revenue growth was driven by our Windchill, IIoT, and Arena products.
Professional services revenue decreased in Q1’23 from Q1’22 as we continue to execute on our strategy of leveraging partners to deliver services rather than contracting to deliver services ourselves, including the Q3'22 sale of a portion of our PLM services business to ITC Infotech. Foreign currency exchange rates also represented a headwind to revenue in Q1'23 compared to Q1'22, as a majority of our professional services are in Europe and Asia.
Our expectation is that professional services revenue will continue to trend down over time as we execute on our partner strategy and deliver products that require less consulting and training services.
29
Software Revenue by Product Group
(Dollar amounts in millions) |
|
Three months ended |
|
|
Percent Change |
|
||||||||||
|
|
December 31, |
|
|
December 31, |
|
|
Actual |
|
|
Constant |
|
||||
PLM |
|
|
245.4 |
|
|
|
227.2 |
|
|
|
8 |
% |
|
|
15 |
% |
CAD |
|
|
185.0 |
|
|
|
186.4 |
|
|
|
(1 |
)% |
|
|
7 |
% |
Software revenue |
|
$ |
430.4 |
|
|
$ |
413.6 |
|
|
|
4 |
% |
|
|
11 |
% |
PLM software revenue growth in Q1’23 was negatively impacted by the value of foreign currencies compared to the U.S. Dollar. Constant currency revenue growth was driven by our Windchill, IIoT, and Arena products. Additionally, Q1’23 revenue benefited from the contribution from our Codebeamer business, which we acquired in Q3’22.
ARR for the PLM product group grew 16% (20% constant currency) from Q1’22 to Q1’23, driven by Windchill.
CAD software revenue in Q1’23 was negatively impacted by the value of foreign currencies compared to the U.S. Dollar. Constant currency revenue growth was driven by Creo.
ARR for the CAD product group grew 5% (10% constant currency) from Q1’22 to Q1’23, driven by Creo.
Software Revenue by Geographic Region
A significant portion of our software revenue is generated outside the U.S. In the first three months of FY'23 and FY'22 approximately 50% of software revenue was generated in the Americas, 35% in Europe, and 15% in Asia Pacific.
(Dollar amounts in millions) |
|
Three months ended |
|
|
Percent Change |
|
||||||||||
|
|
December 31, |
|
|
December 31, |
|
|
Actual |
|
|
Constant |
|
||||
Americas |
|
$ |
215.0 |
|
|
$ |
196.8 |
|
|
|
9 |
% |
|
|
9 |
% |
Europe |
|
|
149.0 |
|
|
|
140.8 |
|
|
|
6 |
% |
|
|
20 |
% |
Asia Pacific |
|
|
66.4 |
|
|
|
76.0 |
|
|
|
(13 |
)% |
|
|
2 |
% |
Software revenue |
|
$ |
430.4 |
|
|
$ |
413.6 |
|
|
|
4 |
% |
|
|
11 |
% |
Americas software revenue growth in Q1’23 was driven by sales of IIoT, Creo and Arena products.
Americas ARR was up 16% actual and constant currency, driven by Windchill and Creo.
Europe software revenue growth in Q1'23 was negatively impacted by the value of foreign currencies compared to the U.S. Dollar. On a constant currency basis, year-over-year revenue growth was driven by the Windchill product group and contribution from the Codebeamer business (which we acquired in Q3’22).
Europe ARR was up 9% (15% constant currency), driven by Windchill, Codebeamer and Creo.
Asia Pacific software revenue in Q1’23 was negatively impacted by the value of foreign currencies compared to the U.S. Dollar. On a constant currency basis, year-over-year revenue growth was driven by Creo, offset by a decline in Windchill and IIoT revenue. For both Windchill and IIoT, the average duration of on-premises subscriptions starting in the period decreased from Q1'22 to Q1'23, resulting in a reduction of on-premises subscription revenue recognized in Q1’23.
Asia Pacific ARR was up 2% (12% constant currency), driven by Creo and Windchill.
30
Gross Margin
(Dollar amounts in millions) |
|
Three months ended |
|
|
|
|
||||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
|
Percent Change |
|
|||
License gross margin |
|
$ |
159.9 |
|
|
$ |
159.3 |
|
|
|
0 |
% |
License gross margin percentage |
|
|
93 |
% |
|
|
94 |
% |
|
|
|
|
Support and cloud services gross margin |
|
$ |
207.4 |
|
|
$ |
198.6 |
|
|
|
4 |
% |
Support and cloud services gross margin percentage |
|
|
81 |
% |
|
|
81 |
% |
|
|
|
|
Professional services gross margin |
|
$ |
2.7 |
|
|
$ |
4.7 |
|
|
|
(41 |
)% |
Professional services gross margin percentage |
|
|
8 |
% |
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total gross margin |
|
$ |
370.1 |
|
|
$ |
362.6 |
|
|
|
2 |
% |
Total gross margin percentage |
|
|
79 |
% |
|
|
79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Non-GAAP gross margin(1) |
|
$ |
380.3 |
|
|
$ |
375.1 |
|
|
|
1 |
% |
Non-GAAP gross margin percentage(1) |
|
|
82 |
% |
|
|
82 |
% |
|
|
|
(1) Non-GAAP financial measures are reconciled to GAAP results under Non-GAAP Financial Measures below.
License gross margin increased in Q1’23 compared to Q1’22 due to a $3.6 million increase in license revenue, partially offset by a $3.0 million increase in cost of license revenue, which was driven by higher royalty expenses.
Support and cloud services gross margin increased in Q1’23 compared to Q1’22 due to increases in support and cloud services revenue of $13.2 million, partially offset by increases in cost of support and cloud services of $4.3 million, which were driven by higher hosting, travel and maintenance costs.
Professional services gross margin decreased in Q1’23 compared to Q1’22, primarily due to decrease in professional services revenue of $8.6 million, partially offset by decrease in professional services costs of $6.6 million.
Operating Expenses
(Dollar amounts in millions) |
|
Three months ended |
|
|
|
|
||||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
|
Percent Change |
|
|||
Sales and marketing |
|
$ |
118.4 |
|
|
$ |
125.5 |
|
|
|
(6 |
)% |
% of total revenue |
|
|
25 |
% |
|
|
27 |
% |
|
|
|
|
Research and development |
|
$ |
88.2 |
|
|
$ |
80.5 |
|
|
|
9 |
% |
% of total revenue |
|
|
19 |
% |
|
|
18 |
% |
|
|
|
|
General and administrative |
|
$ |
51.0 |
|
|
$ |
51.9 |
|
|
|
(2 |
)% |
% of total revenue |
|
|
11 |
% |
|
|
11 |
% |
|
|
|
|
Amortization of acquired intangible assets |
|
$ |
8.0 |
|
|
$ |
8.5 |
|
|
|
(5 |
)% |
% of total revenue |
|
|
2 |
% |
|
|
2 |
% |
|
|
|
|
Restructuring and other charges (credits), net |
|
$ |
(0.3 |
) |
|
$ |
34.0 |
|
|
|
(101 |
)% |
% of total revenue |
|
|
(0 |
)% |
|
|
7 |
% |
|
|
|
|
Total operating expenses |
|
$ |
265.2 |
|
|
$ |
300.4 |
|
|
|
(12 |
)% |
31
Headcount increased 2% in Q1'23 compared to Q1'22, primarily driven by our acquisition of the Codebeamer business.
Operating expenses in Q1'23 compared to operating expenses in Q1'22 decreased primarily due to the following:
partially offset by:
Interest Expense
(Dollar amounts in millions) |
|
Three months ended |
|
|
|
|
||||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
|
Percent Change |
|
|||
Interest and debt premium expense |
|
$ |
(16.4 |
) |
|
$ |
(13.0 |
) |
|
|
26 |
% |
Interest expense includes interest on our credit facility and senior notes. We had $1.4 billion of total debt at the end of Q1'23, compared to $1.5 billion at the end of Q1'22. The average interest rate on borrowings outstanding was 4.2% for Q1'23, compared to 3.2% for Q1'22.
We expect that interest expense will increase over the remainder of the year, driven by incremental debt incurred in connection with the ServiceMax acquisition in Q2'23 and increasing interest rates under our variable-rate revolving credit facility.
32
Other Income (Expense)
(Dollar amounts in millions) |
|
Three months ended |
|
|
|
|
||||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
|
Percent Change |
|
|||
Interest income |
|
$ |
1.0 |
|
|
$ |
0.5 |
|
|
|
104 |
% |
Other income (expense), net |
|
|
(3.1 |
) |
|
|
5.7 |
|
|
|
(154 |
)% |
Other income (expense), net |
|
$ |
(2.1 |
) |
|
$ |
6.2 |
|
|
|
(134 |
)% |
Interest income represents earnings on the investment of our available cash and marketable securities.
The $8.3 million decrease in Other income (expense), net, for Q1'23 compared to Q1'22 was driven by a $9.8 million unrealized gain related to an equity investment in a publicly-traded company recorded in Q1’22.
Income Taxes
(Dollar amounts in millions) |
|
Three months ended |
|
|
|
|
||||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
|
Percent Change |
|
|||
Income before income taxes |
|
$ |
86.4 |
|
|
$ |
55.4 |
|
|
|
56 |
% |
Provision for income taxes |
|
$ |
11.4 |
|
|
$ |
9.3 |
|
|
|
23 |
% |
Effective income tax rate |
|
|
13 |
% |
|
|
17 |
% |
|
|
|
In Q1’23 and Q1’22, our effective tax rate differed from the statutory federal income tax rate of 21% due to U.S. tax reform, our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate and the excess tax benefit related to stock-based compensation. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and the Cayman Islands. In Q1’23 and Q1’22, the foreign rate differential predominantly relates to these earnings.
In Q1’23 and Q1’22, in addition to the foreign rate differential, the effective tax rate was impacted by the net effects of the Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) regimes and the excess tax benefit related to stock-based compensation.
Critical Accounting Policies and Estimates
The financial information included in Item 1 reflects no material changes in our critical accounting policies and estimates as set forth under the heading Critical Accounting Policies and Estimates in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2022 Annual Report on Form 10-K.
Recent Accounting Pronouncements
In accordance with recently issued accounting pronouncements, we will be required to comply with certain changes in accounting rules and regulations. Refer to Note 1. Basis of Presentation to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for all recently issued accounting pronouncements.
Liquidity and Capital Resources
(in millions) |
|
December 31, 2022 |
|
|
September 30, 2022 |
|
||
Cash and cash equivalents |
|
$ |
387.6 |
|
|
$ |
272.2 |
|
Restricted cash |
|
|
0.7 |
|
|
|
0.7 |
|
Total |
|
$ |
388.3 |
|
|
$ |
272.9 |
|
|
|
|
|
|
|
|
||
(in millions) |
|
Three months ended |
|
|||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Net cash provided by operating activities |
|
$ |
180.9 |
|
|
$ |
137.7 |
|
Net cash (used in) provided by investing activities |
|
$ |
(20.1 |
) |
|
$ |
2.7 |
|
Net cash used in financing activities |
|
$ |
(54.0 |
) |
|
$ |
(169.1 |
) |
33
Cash, Cash Equivalents and Restricted Cash
We invest our cash with highly rated financial institutions. Cash and cash equivalents include highly liquid investments with original maturities of three months or less. At December 31, 2022, cash and cash equivalents totaled $388 million, compared to $272 million at September 30, 2022.
A significant portion of our cash is generated and held outside the U.S. As of December 31, 2022, we had cash and cash equivalents of $125 million in the U.S., $95 million in Europe, $142 million in Asia Pacific (including India) and $26 million in other non-U.S. countries. We have substantial cash requirements in the U.S., but we believe that the combination of our existing U.S. cash and cash equivalents, our ability to repatriate cash to the U.S., future U.S. operating cash flows and cash available under our credit facility will be sufficient to meet our ongoing U.S. operating expenses and known capital requirements.
Cash Provided by Operating Activities
Cash provided by operating activities was $181 million in Q1'23, compared to $138 million in Q1'22. The increase in cash from operations in Q1'23 compared to Q1'22 was primarily driven by an increase in collections as our ARR (which generates customer billings) has grown year-over-year and lower salary-related payments. Cash from operations for Q1'23 included $0.6 million of restructuring payments, compared to $10.5 million of restructuring payments in Q1'22. In Q1'23 cash from operations also included $4.3 million of acquisition-related payments.
Cash (Used In) Provided by Investing Activities
(in millions) |
|
Three months ended |
|
|||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Additions to property and equipment |
|
$ |
(9.2 |
) |
|
$ |
(3.4 |
) |
Settlement of net investment hedges |
|
|
(10.8 |
) |
|
|
6.5 |
|
Other |
|
|
(0.1 |
) |
|
|
(0.4 |
) |
Net cash (used in) provided by investing activities |
|
$ |
(20.1 |
) |
|
$ |
2.7 |
|
Cash (used in) provided by investing activities in Q1’23 reflects settlement of net investment hedges of $10.8 million and additions to property and equipment of $9.2 million. Cash provided by investing activities in Q1’22 reflects settlement of net investment hedges of $6.5 million, offset by additions to property and equipment of $3.4 million.
34
Cash Used in Financing Activities
(in millions) |
|
Three months ended |
|
|||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
Repurchases of common stock |
|
$ |
— |
|
|
$ |
(119.7 |
) |
Payments of withholding taxes in connection with stock-based awards |
|
|
(52.4 |
) |
|
|
(49.2 |
) |
Credit facility origination costs |
|
|
(1.4 |
) |
|
|
— |
|
Payment of principal for financing leases |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
Net cash used in financing activities |
|
$ |
(54.0 |
) |
|
$ |
(169.1 |
) |
Cash used in financing activities in Q1'23 reflects payments of withholding taxes related to stock-based awards of $52 million and credit facility origination costs of $1.4 million. Cash used in financing activities in Q1'22 include the repurchase of common stock of $120 million and payments of withholding taxes related to stock-based awards of $49 million.
Outstanding Debt
(in millions) |
|
December 31, 2022 |
|
|
4.000% Senior notes due 2028 |
|
$ |
500.0 |
|
3.625% Senior notes due 2025 |
|
|
500.0 |
|
Credit facility revolver |
|
|
359.0 |
|
Total debt |
|
$ |
1,359.0 |
|
Unamortized debt issuance costs for the senior notes |
|
|
(7.8 |
) |
Total debt, net of issuance costs |
|
$ |
1,351.2 |
|
|
|
|
|
|
Undrawn under credit facility revolver |
|
$ |
641.0 |
|
Undrawn under credit facility revolver available to borrow |
|
$ |
625.3 |
|
As of December 31, 2022, we were in compliance with all financial and operating covenants of our then existing credit facility and the note indentures.
At the beginning of Q2'23, we entered into a new credit agreement which consisted of a $500 million term loan and a $1.25 billion credit facility revolver, which replaced our previous $1.0 billion credit facility revolver. Refer to Note 15. Subsequent Events and Note 12. Debt to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for additional discussion of our credit agreements.
Future Expectations
We believe that existing cash and cash equivalents, together with cash generated from operations and amounts available under the credit facility, will be sufficient to meet our working capital and capital expenditures requirements (which we expect to be approximately $20 million in FY’23) through at least the next twelve months and to meet our known long-term capital requirements.
On January 3, 2023, in conjunction with the ServiceMax acquisition, we terminated and repaid our prior credit facility and borrowed $630 million under the revolving credit line of the new credit facility and $500 million under a new term loan portion of the new credit facility. By the end of Q2’23, we anticipate reducing the amounts owed under the new credit facility revolver to approximately $450 million. During the remainder of FY'23 and FY'24, we expect to use a substantial portion of our cash generated from operating activities to repay debt outstanding under our new credit facility revolver, and expect that we will not repurchase shares in those periods as we seek to reduce our debt.
Our expected uses and sources of cash could change, our cash position could be reduced, and we could incur additional debt obligations if we decide to retire debt, engage in strategic transactions, or repurchase shares, any of which could be commenced, suspended or completed at any time. Any such repurchases or retirement of debt will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved in any debt retirement or issuance, share repurchases, or strategic transactions may be material.
35
Operating Measure
ARR
We provide an ARR (Annual Run Rate) operating measure to help investors understand and assess the performance of our business as a SaaS and on-premises subscription company. ARR 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 believe ARR is a valuable operating metric to measure the health of a subscription business because it captures expected subscription and support cash generation from customers.
Non-GAAP Financial Measures
Our non-GAAP financial measures and the reasons we use them and the reasons we exclude the items identified below are described in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, 2022.
The non-GAAP financial measures presented in the discussion of our results of operations and the respective most directly comparable GAAP measures are:
We provide 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 flow from operations net of capital expenditures, which are expenditures for property and equipment and consist primarily of facility improvements, office equipment, computer equipment, and software.
The non-GAAP financial measures other than free cash flow exclude, as applicable, stock-based compensation expense; amortization of acquired intangible assets; acquisition and transaction-related charges included in general and administrative expenses; restructuring and other charges, net; non-operating charges (credits), including those associated with the sale of a portion of our PLM services business and gains or losses on equity investments; and income tax adjustments as defined in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
We use these non-GAAP financial measures, and we believe that they assist our investors, to make period-to-period comparisons of our operational performance because they provide a view of our operating results without items that are not, in our view, indicative of our core operating results. We believe that these non-GAAP financial measures help illustrate underlying trends in our business, and we use the measures to establish budgets and operational goals (communicated internally and externally) for managing our business and evaluating our performance. We believe that providing non-GAAP financial measures also affords investors a view of our operating results that may be more easily compared to the results of other companies in our industry that use similar financial measures to supplement their GAAP results.
36
The items excluded from the non-GAAP financial measures often have a material impact on our financial results, certain of those items are recurring, and other such items often recur. Accordingly, the non-GAAP financial measures included in this Quarterly Report on Form 10-Q should be considered in addition to, and not as a substitute for or superior to, the comparable measures prepared in accordance with GAAP. The following tables reconcile each of these non-GAAP financial measures to its most closely comparable GAAP measure on our financial statements.
(in millions, except per share amounts) |
|
Three months ended |
|
|||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
GAAP gross margin |
|
$ |
370.1 |
|
|
$ |
362.6 |
|
Stock-based compensation |
|
|
4.1 |
|
|
|
6.0 |
|
Amortization of acquired intangible assets included in cost of revenue |
|
|
6.1 |
|
|
|
6.5 |
|
Non-GAAP gross margin |
|
$ |
380.3 |
|
|
$ |
375.1 |
|
GAAP operating income |
|
$ |
104.9 |
|
|
$ |
62.2 |
|
Stock-based compensation |
|
|
41.5 |
|
|
|
45.9 |
|
Amortization of acquired intangible assets |
|
|
14.2 |
|
|
|
15.0 |
|
Acquisition and transaction-related charges |
|
|
5.8 |
|
|
|
1.1 |
|
Restructuring and other charges (credits), net |
|
|
(0.3 |
) |
|
|
34.0 |
|
Non-GAAP operating income |
|
$ |
166.0 |
|
|
$ |
158.1 |
|
GAAP net income |
|
$ |
75.0 |
|
|
$ |
46.1 |
|
Stock-based compensation |
|
|
41.5 |
|
|
|
45.9 |
|
Amortization of acquired intangible assets |
|
|
14.2 |
|
|
|
15.0 |
|
Acquisition and transaction-related charges |
|
|
5.8 |
|
|
|
1.1 |
|
Restructuring and other charges (credits), net |
|
|
(0.3 |
) |
|
|
34.0 |
|
Non-operating charges (credits), net (1) |
|
|
0.5 |
|
|
|
(9.8 |
) |
Income tax adjustments (2) |
|
|
(18.7 |
) |
|
|
(19.2 |
) |
Non-GAAP net income |
|
$ |
118.0 |
|
|
$ |
113.1 |
|
GAAP diluted earnings per share |
|
$ |
0.63 |
|
|
$ |
0.39 |
|
Stock-based compensation |
|
|
0.35 |
|
|
|
0.39 |
|
Amortization of acquired intangible assets |
|
|
0.12 |
|
|
|
0.13 |
|
Acquisition and transaction-related charges |
|
|
0.05 |
|
|
|
0.01 |
|
Restructuring and other charges (credits), net |
|
|
(0.00 |
) |
|
|
0.29 |
|
Non-operating charges (credits), net (1) |
|
|
0.00 |
|
|
|
(0.08 |
) |
Income tax adjustments (2) |
|
|
(0.16 |
) |
|
|
(0.16 |
) |
Non-GAAP diluted earnings per share |
|
$ |
0.99 |
|
|
$ |
0.95 |
|
|
|
|
|
|
|
|
||
Cash provided by operating activities |
|
$ |
180.9 |
|
|
$ |
137.7 |
|
Capital expenditures |
|
|
(9.2 |
) |
|
|
(3.4 |
) |
Free cash flow |
|
$ |
171.7 |
|
|
$ |
134.4 |
|
Operating margin impact of non-GAAP adjustments:
|
|
Three months ended |
|
|||||
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
||
GAAP operating margin |
|
|
22.5 |
% |
|
|
13.6 |
% |
Stock-based compensation |
|
|
8.9 |
% |
|
|
10.0 |
% |
Amortization of acquired intangible assets |
|
|
3.0 |
% |
|
|
3.3 |
% |
Acquisition and transaction-related charges |
|
|
1.2 |
% |
|
|
0.2 |
% |
Non-operating charges (credits), net |
|
|
(0.1 |
)% |
|
|
7.4 |
% |
Non-GAAP operating margin |
|
|
35.6 |
% |
|
|
34.5 |
% |
37
There have been no significant changes in our market risk exposure as described in Item 7A. Quantitative and Qualitative Disclosures about Market Risk of our 2022 Annual Report on Form 10-K.
Evaluation of Effectiveness of Disclosure Controls and Procedures
Our management maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), as appropriate, to allow for timely decisions regarding required disclosure.
We evaluated, under the supervision and with the participation of management, including our principal executive and principal financial officers, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2022.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a or 15(d) of the Exchange Act that occurred during the period ended December 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information on legal proceedings can be found in Note 14. Commitments and Contingencies – Legal Proceedings – 401(k) Plan of Notes to Consolidated Financial Statements in this Form 10-Q, which information is incorporated herein by reference.
ITEM 1A. RISK FACTORS
In addition to other information set forth in this report, you should carefully consider the risk factors described in Part I. Item 1A. Risk Factors in our 2022 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
38
ITEM 6. EXHIBITS
2 |
|
|
|
|
|
3.1 |
|
|
|
|
|
3.2 |
|
|
|
|
|
4.1 |
|
|
|
|
|
4.2 |
|
|
|
|
|
4.3 |
|
|
|
|
|
10 |
|
|
|
|
|
31.1 |
|
Certification of the Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a). |
|
|
|
31.2 |
|
Certification of the Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a). |
|
|
|
32* |
|
Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350. |
|
|
|
101 |
|
The following materials from PTC Inc.'s Quarterly Report on Form 10-Q for the quarter ended December 31, 2022 ("Q1 Form 10-Q") formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of December 31, 2022 and September 30, 2022; (ii) Condensed Consolidated Statements of Operations for the three months ended December 31, 2022 and December 31, 2021; (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended December 31, 2022 and December 31, 2021; (iv) Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2022 and December 31, 2021; (v) Consolidated Statements of Stockholders’ Equity for the three months ended December 31, 2022 and December 31, 2021; and (vi) Notes to Condensed Consolidated Financial Statements. |
|
|
|
104 |
|
The cover page of this Q1'23 Form 10-Q formatted in Inline XBRL (included in Exhibit 101). |
* Indicates that the exhibit is being furnished, not filed, with this report.
39
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
PTC Inc. |
|||
|
|
|
|
|
|
By: |
|
/S/ KRISTIAN TALVITIE |
|
|
|
|
Kristian Talvitie Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
Date: February 9, 2023
40