Attached files
| file | filename |
|---|---|
| EX-99.1 - PRESS RELEASE - PTC INC. | a20170117q117pressrelease.htm |
| 8-K - FORM 8-K - PTC INC. | form8-kq12017earnings.htm |
PTC
FIRST QUARTER FISCAL 2017
PREPARED REMARKS
JANUARY 18, 2017
Please
refer to the “Important Disclosures” section of these
prepared remarks for important information about our operating
metrics (including Subscription ACV, License and Subscription
Bookings, and Subscription % of Bookings), GAAP and non-GAAP
definitions, and other important disclosures. Additional financial
information is provided in the PTC Financial Data tables posted
with these prepared remarks to PTC’s Investor Relations
website at investor.ptc.com.
Q1’17 Results vs. October 26, 2016 Guidance
|
Operating Measures
|
Guidance
|
Results
|
||
|
In
millions
|
Q1’17Low
|
Q1’17High
|
Actual
|
Actual at Guidance Currency Rates(1)
|
|
Subscription ACV
|
$19
|
$22
|
$29
|
$30
|
|
License and Subscription Bookings
|
$70
|
$80
|
$90
|
$92
|
|
Subscription % of Bookings
|
55%
|
55%
|
65%
|
65%
|
|
Financial Measures
|
GAAP Guidance
|
GAAP Results
|
Non-GAAP Guidance
|
Non-GAAP Results
|
Non-GAAP at Guidance Mix(2)
|
Non-GAAP
at Guidance Mix and Currency Rates(3)
|
||
|
In
millions, except per share amounts
|
Q1’17
Low
|
Q1’17
High
|
|
Q1’17
Low
|
Q1’17
High
|
|
|
|
|
Subscription Revenue
|
$54
|
$54
|
$54
|
$54
|
$54
|
$55
|
$55
|
$55
|
|
Support Revenue
|
$153
|
$153
|
$151
|
$153
|
$153
|
$151
|
$151
|
$153
|
|
Perpetual License Revenue
|
$32
|
$37
|
$34
|
$32
|
$37
|
$34
|
$44
|
$44
|
|
Software Revenue
|
$239
|
$244
|
$240
|
$239
|
$244
|
$241
|
$250
|
$253
|
|
Professional Services Revenue
|
$46
|
$46
|
$46
|
$46
|
$46
|
$46
|
$46
|
$47
|
|
Total Revenue
|
$285
|
$290
|
$286
|
$285
|
$290
|
$287
|
$297
|
$300
|
|
Operating Expense
|
$192
|
$194
|
$200
|
$169
|
$171
|
$170
|
$170
|
$171
|
|
Operating Margin
|
3%
|
4%
|
2%
|
15%
|
16%
|
15%
|
18%
|
18%
|
|
Tax Rate
|
25%
|
25%
|
(41%)
|
12%
|
10%
|
8%
|
8%
|
8%
|
|
EPS(4)
|
($0.02)
|
$0.02
|
($0.08)
|
$0.23
|
$0.28
|
$0.26
|
$0.34
|
$0.35
|
(1)
Operating measure
that adjusts Subscription ACV and License and Subscription Bookings
to Guidance Fx rates of 1.10 U.S. Dollar to Euro and 104 Japanese
Yen to U.S. Dollar.
(2)
Operating measure
that adjusts Non-GAAP results to guidance mix of 55% vs. actual
Q1’17 mix of 65% and includes other adjustments as described
in “Important Disclosures” set forth
below.
(3)
Operating measure
that adjusts Non-GAAP results to guidance mix of 55% vs. actual
Q1’17 mix of 65%, adjusts Non-GAAP results to guidance Fx
rates of 1.10 U.S. Dollar to Euro and 104 Japanese Yen to U.S.
Dollar and includes other adjustments as described in
“Important Disclosures” set forth below.
(4)
Updated GAAP EPS
guidance was provided in an SEC Form 8-K published October 31,
2016.
Key
Highlights of Quarterly Operating Measures
|
In
millions
|
Q1’17
|
YoY
|
YoY CC
|
Management Comments
|
|
Subscription ACV
|
$29
|
177%
|
177%
|
● Subscription ACV
was well above the high end of our guidance of $19M to $22M due to
continued adoption of subscriptions, strong new bookings
performance, and conversions.
|
|
License and Subscription Bookings
|
$90
|
31%
|
31%
|
● New bookings were
well above the high end of our guidance range of $70M to $80M,
despite a $2M currency headwind, due to strong IoT results and
continued improvements in go-to-market execution and sales strategy
in our Solutions business. The quarter also benefitted from one
mega deal (>$5M in bookings).
● Solid execution
drove bookings growth within our Solutions business. CAD led the
way, with growth in the low-double-digits, followed by PLM. SLM
declined YoY primarily due to a number of large deals in
Q1’16 that created a tough comparison (Q1'16 grew
approximately 50% YoY).
● IoT bookings grew
significantly YoY, with expansions representing more than half of
bookings and the number of 6-figure deals more than doubling,
primarily expansions. Expansions in the quarter also included a
mega deal (booking >$5M) and a large deal (booking >$1M).
Even excluding the mega deal as well as Kepware (acquired in
Q2’16), IoT bookings grew over 90%.
|
|
Subscription % of Bookings
|
65%
|
136%
|
135%
|
● Our subscription
transition continues to exceed our expectations, with a
subscription mix of 65% in the quarter vs. our guidance of 55%. We
were pleased to see continued improvements in a number of areas,
including our partner channel. From a segment perspective, IoT led
the way with a subscription mix in the high-70% range, despite the
fact that Kepware is primarily all perpetual at this time, followed
by PLM with a subscription mix in the low-60% range, and CAD in the
mid-50% range. Direct business had a subscription mix in the
low-70% range, and our channel saw a 200 basis point improvement
sequentially to 43% led by the Americas where close to 2/3 of the
channel bookings were subscription.
|
Key Highlights of Quarterly Financial Measures
All
references to revenue are to GAAP revenue, unless otherwise
noted
|
In
millions, except per share amounts
|
Q1’17
|
YoY
|
YoY CC
|
Management Comments
|
|
Total Revenue
|
$286
|
(2%)
|
(2%)
|
● Total revenue was
within our guidance range of $285M to $290M despite exceeding our
guidance subscription mix by 10 percentage points and just over a
$3M negative impact from Fx relative to our Fx guidance
rates.
● We estimate that,
at our guidance subscription mix and currency rates, revenue would
have been $13M higher, or approximately $300M, above the high end
of our guidance range by $10M, representing 4% growth YoY
mix-adjusted, constant currency.
● Due to our fiscal
calendar, Q1’17 had 2 fewer days than Q1’16. This
negatively impacted our recurring software revenue growth, which
impacted our total revenue growth by about 160 basis
points.
|
|
|
||||
|
Software Revenue
|
$240
|
(1%)
|
(1%)
|
● Software revenue
was within our guidance range of $239M to $244M despite the higher
than guidance subscription mix and an approximately $3M negative
impact from Fx relative to our Fx guidance rates.
● We estimate that,
at our guidance subscription mix and currency rates, software
revenue would have been $13M higher, or approximately $253M, above
the high end of our guidance by $9M, representing 6% YoY growth
mix-adjusted, constant currency.
● Subscription
revenue increased 145% YoY, perpetual license revenue declined 28%
YoY and support revenue declined 12% YoY. The support decrease is
due to a higher mix of subscription bookings, support conversions
to subscription, 2 fewer days in the quarter, and fewer support
win-backs in the channel as we launched a new win-back program in
Q3’16 where customers return to PTC on a subscription basis.
Due to our fiscal calendar, Q1’17 had 2 fewer days than
Q1’16. This negatively impacted software revenue growth by
about 190 basis points.
|
|
EPS (GAAP)
(Non-GAAP)
|
($0.08)
$0.26
|
62%
(49%)
|
33%
(58%)
|
● Both GAAP and
non-GAAP EPS were negatively impacted relative to guidance by the
effect of the higher mix of subscription in the quarter and an
approximate $0.01 negative impact from Fx relative to our Fx
guidance rates.
● GAAP EPS was
further negatively impacted by $0.03 due to higher restructuring
charges.
● Despite the higher
subscription mix, non-GAAP EPS was within our guidance range of
$0.23 to $0.28.
● We estimate that,
on a license mix-adjusted basis, at our guidance rates, non-GAAP
EPS would have been $0.09 higher, or $0.35, above the high end of
our guidance range by $0.07.
|
Quarterly Software Revenue Performance by Group
All references to revenue are to GAAP revenue, unless otherwise
noted
|
In
millions
|
Q1’17
|
YoY
|
YoY CC
|
Management Comments
|
|
Solutions Software Revenue
|
$219
|
(4%)
|
(5%)
|
● The decline in
Solutions Group software revenue was driven by the higher than
expected subscription mix in the quarter.
● We estimate that,
on a license mix-adjusted basis, Solutions software revenue would
have declined 2% YoY in constant currency. Low-teens growth in CAD
and solid growth in PLM was offset by a decline in SLM due to a
tough compare with a number of large perpetual deals in Q1’16
when SLM grew approximately 50% YoY.
● In addition, given
the large support revenue base in the Solutions Group, the 2 fewer
days in the fiscal quarter had a negative impact on revenue
growth.
|
|
IoT Software Revenue
|
$21
|
64%
|
64%
|
● IoT revenue was
driven by record bookings from continued adoption and expansion of
the ThingWorx platform, Kepware, and Vuforia.
|
Quarterly Software Revenue Performance by Region
All
references to revenue are to GAAP revenue, unless otherwise
noted
|
In
millions
|
Q1’17
|
YoY
|
YoYCC
|
Management Comments
|
|
Americas Software Revenue
|
$107
|
(1%)
|
(1%)
|
● YoY CC bookings
grew 59% and subscription mix more than doubled YoY.
● We estimate that,
on a CC, license mix-adjusted basis, software revenue would have
grown 11% YoY.
● Subscription
revenue grew 108% YoY CC.
|
|
Europe Software Revenue
|
$84
|
(3%)
|
(1%)
|
● YoY CC bookings
grew 28% and subscription mix more than doubled YoY.
● We estimate that,
on a CC, license mix-adjusted basis, software revenue would have
grown 5% YoY.
● Subscription
revenue grew 144% YoY CC.
|
|
APAC Software Revenue
|
$50
|
4%
|
1%
|
● YoY CC bookings
declined 2% and subscription mix more than doubled
YoY.
● We estimate that,
on a CC, license mix-adjusted basis, software revenue would have
declined 3% YoY.
● Subscription
revenue grew 651% YoY CC.
● While bookings
performance in Japan has historically been lumpy due to large deal
exposure, we are closely monitoring the demand environment in
Japan, which may be negatively impacted by the rapid currency
appreciation in recent months.
|
Quarterly
Operating Performance
|
In
millions
|
Q1’17GAAP
|
Q1’17 Non-GAAP
|
Management Comments
|
|
Professional Services Gross Margin
|
15%
|
18%
|
● We delivered solid
professional services results for the quarter, with revenue in line
with guidance, margins above expectations and partner bookings
growing 30% YoY.
|
|
Operating Expense
|
$200
|
$170
|
● GAAP operating
expense was above the high end of our guidance range of $192
million to $194 million due in part to higher than planned
restructuring charges, partially due to facilities.
● Non-GAAP operating
expense was at the midpoint of our guidance range of $169 million
to $171 million. The Fx benefit was offset by higher incentive
compensation on bookings and subscription mix upside in the
quarter.
|
|
Operating Margin
|
2%
|
15%
|
● GAAP operating
margin was below our guidance range of 3% to 4%, partially due to
the higher than planned restructuring charges in the quarter as
well as lower revenue from a higher subscription mix.
● Despite the higher
subscription mix, non-GAAP operating margin was within our guidance
range of 15% to 16%. At our guidance subscription mix, we
estimate non-GAAP operating margin would have been 18%, and at last
year's subscription mix, we estimate our non-GAAP operating margin
would have been 24%.
|
|
Tax Rate
|
(41%)
|
8%
|
|
Other Highlights in Quarterly and Annual Operating
Performance
●
In Q1’17,
subscription bookings represented 65% of total bookings, above our
guidance of 55%, driven by an active program promoting the adoption
of our subscription offering in each of the regions in which we
operate, in both our direct and indirect channels, and due to our
support conversion program. The IoT subscription mega-deal closed
in the quarter contributed to the subscription mix outperformance;
however, excluding the mega-deal, subscription mix would have
exceeded guidance.
●
Annualized
recurring revenue (ARR), was approximately $819 million, which grew
9% compared to Q1’16 and 2% sequentially. Due to our
calculation methodology, quarterly variability in this metric
should be expected, primarily due to the linearity of support
billings during the year and the percentage of on-time renewals,
the amount of support win-backs in a quarter, and whether the
win-backs are traditional support, with immediate revenue
recognition of the past-due amount, or a conversion to
subscription, where all revenue is recognized over the future
period. Multiple other contractual factors including ramping of
committed monthly payments and other elements that may be sold with
the subscription or support contract can impact the timing of
revenue and the calculation of ARR.
●
Total Deferred
Revenue consists of Billed Deferred Revenue and Unbilled Deferred
Revenue. We define Unbilled Deferred Revenue as contractually
committed orders for license, subscription and support with a
customer for which the associated revenue has not been recognized
and the customer has not been invoiced. We do not record Unbilled
Deferred Revenue on our Consolidated Balance Sheet until we invoice
the customer. Billed Deferred Revenue primarily relates to software
agreements invoiced to customers for which the revenue has not yet
been recognized. Total Deferred Revenue increased 43%
year-over-year and 5% sequentially. Billed Deferred Revenue
declined sequentially and YoY due to the timing of fiscal quarter
ends and billing schedules. (Q1’17 ended on December 31, 2016
while Q1’16 ended on January 2, 2016.) Support and
subscription contractual billings for January 1st and 2nd, 2017 (after
Q1’17 quarter end) totaled $64 million.
|
(in millions)
|
Q1’17
12/31/16
|
Q4’16
9/30/16
|
Q1’16
1/2/16
|
Q/Q
% Change
|
Y/Y
% Change
|
|
Unbilled
deferred revenue
|
$450
|
$369
|
$188
|
22%
|
139%
|
|
Billed
Deferred revenue
|
$375
|
$414
|
$389
|
(9%)
|
(4%)
|
|
Total Deferred Revenue
|
$825
|
$783
|
$577
|
5%
|
43%
|
●
In keeping with our
strategy to grow our professional services partner ecosystem,
Q1’17 service partner bookings grew approximately 30% YoY,
with strong bookings growth among our large system integrator
partners.
●
For Q1’17,
approximately 86% of software revenue came from recurring revenue
streams, up from 80% in Q1’16.
●
Cash, cash
equivalents, and marketable securities totaled $223 million as of
December 31, 2016.
●
For Q1’17,
cash flow used in operations was ($48) million, and free cash flow
was ($55) million, both of which include restructuring payments of
$16 million. Cash flow from operations and free cash flow were both
impacted by payment of fiscal 2016 bonus and year-end commissions
of $64 million, restructuring payments of $16 million, and our
first bond interest payment of $15 million.
●
As of December 31,
2016, gross borrowings totaled $738 million, including $500 million
of senior notes and $238 million outstanding under our revolving
credit facility. During the quarter, we repaid a net $20 million
under the credit facility. Under our revolving credit facility, our
leverage covenant is limited to 4.0 times adjusted EBITDA. Further,
if our leverage covenant ratio exceeds 3.25 times adjusted EBITDA,
our stock repurchases are limited to $50 million in a year plus a
$100 million aggregate basket through June 30, 2018. Our leverage
ratio at the end of Q1’17 reflecting all current terms under
the credit facility is 3.45. Given the significant over-performance
of our subscription transition in FY’16, our operating profit
and EBIDTA were lower than in the past and lower than we had
planned as we started FY’16. As a result, we deferred stock
repurchases in FY’16. Returning capital to shareholders is a
fundamental element of our capital strategy, and based on our
current forecast, we intend to resume repurchases in the second
half of FY’17, when we expect cash and our borrowing capacity
to increase as we begin our expected exit of the subscription
trough.
Guidance and Long-Range Targets
Our Q2
and FY’17 guidance includes the following general
considerations:
●
When looking at the
full year, we suggest our FY’17 bookings guidance should be
compared to FY’16 excluding the $20 million SLM mega-deal
recorded in Q4’16 due to the unusual size of this
transaction. Excluding this from FY’16 results, and despite a
difficult macroeconomic environment and currency headwinds, we are
projecting bookings growth in FY’17.
●
A higher mix of
subscription bookings is expected to benefit us over the long term,
but results in lower revenue and lower earnings in the near
term.
●
Because we are only
a little more than one year into our strategic objective of
becoming a subscription company, it can be challenging to forecast
the rate of customer adoption, the pace of our subscription
transition and the overall impact to near-term reported financial
results.
●
We expect large
deals, which historically represented 30% to 50% of bookings, will
remain at the lower end of that range. This is based on the effect
of a more challenging global manufacturing economy on large deal
volumes in our Solutions Group business and the potential for
smaller average deal sizes as the subscription transition
continues.
●
Despite recent
improvements in certain global macroeconomic factors, we continue
to remain cautious of the global macroeconomic environment. This
caution has been factored into our guidance.
●
Our Fx assumptions
in our guidance assume dollar-to-euro at $1.05 and yen-to-dollar at
116, which is a significant change to the Fx guidance we provided
in October 2016. For the full year, relative to our previous Fx
guidance, we estimate that currency will negatively impact bookings
by approximately $12 million and total revenue by approximately $32
million. Due to the natural hedge afforded by our foreign expense
base, cost of revenue and operating expenses benefit by
approximately $17 million with the negative net effect on non-GAAP
EPS of approximately $0.12 for FY’17.
|
Q2’17 and FY’17 Operating Guidance
|
|
|
|
|
|
|
In
millions
|
Q2’17Low
|
Q2’17High
|
FY’17Low
|
FY’17High
|
Management Comments
|
|
Subscription ACV
|
$24
|
$27
|
$130
|
$136
|
● At the midpoint, Q2
guidance is up 9% YoY despite Fx headwinds, which we estimate to be
approximately $1M in the quarter.
● There is no change
to FY’17 guidance despite Fx headwinds, which we estimate to
be approximately $4M for the full year.
|
|
License and Subscription Bookings
|
$80
|
$90
|
$400
|
$420
|
● At the midpoint, Q2
guidance is just below Q2’16 bookings of $86M, yet we
estimate currency headwinds to be approximately $3M in the quarter.
Excluding the currency impact, we estimate bookings growth of
approximately 2% YoY at the midpoint and 8% at the high
end.
● Q2’16 was a
particularly strong quarter, with results of $86M above the
high-end of our Q2’16 guidance by $5M, creating a tough
compare for Q2’17.
● There is no change
to full-year FY’17 guidance despite Fx headwinds, which we
estimate to be approximately $12M. In constant currency, our full
year guidance represents 7-to-12% growth over FY’16,
excluding the $20 million mega deal from FY’16, due to its
unusual size.
|
|
Subscription % of Bookings
|
60%
|
60%
|
65%
|
65%
|
● For Q2’17, we
expect 60% of our bookings to be subscription, based on our current
view of the pipeline.
● There is no change
to full year FY’17 guidance.
|
|
Q2’17 and FY’17 Financial Guidance
|
|
|
|
|
|
|
In
millions
|
Q2’17 Low
|
Q2’17 High
|
FY’17 Low
|
FY’17 High
|
Management Comments
|
|
Subscription Revenue
|
$64
|
$64
|
$262
|
$267
|
● Q2 guidance is up
171% YoY despite Fx headwinds, which we estimate to be
approximately $2M in the quarter.
● We are raising our
FY’17 guidance, despite Fx headwinds, which we estimate to be
approximately $7M for the full year.
|
|
Support Revenue
|
$140
|
$140
|
$578
|
$578
|
● Q2 guidance is down
13% YoY as a growing proportion of our bookings are subscription,
and customers continue to convert from support to subscription. In
addition, we estimate Fx negatively impacts support revenue by
approximately $4M in the quarter. Excluding the currency impact, we
estimate a YoY decline of approximately 10%.
● We are lowering our
FY’17 guidance due to the combination of Fx, which we
estimate to be approximately a $15M headwind for the full year, and
an increasing shift in support revenue to subscription revenue as
customers convert to subscription.
|
|
Perpetual License Revenue
|
$31
|
$36
|
$140
|
$150
|
● At the midpoint, Q2
guidance is down 16% YoY as an increasing proportion of our
bookings are subscription. In addition, we estimate a negative Fx
impact of approximately $1M in the quarter. Excluding the currency
impact, we estimate a YoY decline of approximately
13%.
● There is no change
to FY’17 guidance despite Fx headwinds, which we estimate to
be approximately $4M for the full year.
|
|
Software Revenue
|
$235
|
$240
|
$980
|
$995
|
● At the midpoint, Q2
guidance is up 6% YoY despite Fx headwinds, which we estimate to be
approximately $7M in the quarter. Excluding the currency impact, we
estimate YoY growth of approximately 9%.
● We are lowering our
FY’17 guidance by $17M at the midpoint, which includes an
estimated $26M Fx impact, partially offset by higher expected
software revenue.
● At the midpoint of
FY’17 guidance, we estimate 5% software revenue growth YoY.
Excluding the currency impact, we estimate YoY growth of
approximately 7%.
|
|
Professional Services Revenue
|
$45
|
$45
|
$185
|
$185
|
● Q2 guidance is down
8% YoY as we continue to execute on our strategy of growing our
service partner ecosystem and expanding margins. In addition, we
estimate an Fx impact of approximately $2M in the
quarter.
● We are lowering our
FY’17 guidance due to the combination of the focus on growing
our service partner ecosystem and the impact of Fx, which we
estimate to be approximately a $6M headwind for the full
year.
|
|
Total Revenue
|
$280
|
$285
|
$1,165
|
$1,180
|
● At the midpoint, Q2
guidance is up 4% YoY despite Fx headwinds, which we estimate to be
approximately $9M in the quarter. Excluding the currency impact, we
estimate YoY growth of approximately 7%.
● We are lowering our
FY’17 guidance by $27M at the midpoint which includes an
estimated $32M negative Fx impact, partially offset by higher
expected revenue from stronger constant currency bookings
performance.
● At the midpoint of
FY’17 guidance, we estimate 3% revenue growth YoY. Excluding
the currency impact, we estimate YoY growth of approximately
6%.
|
Q2’17 and FY’17 Financial Guidance
Continued
|
In
millions
|
Q2’17Low
|
Q2’17High
|
FY’17Low
|
FY’17High
|
Management Comments
|
|
Operating Expense (GAAP)
(Non-GAAP)
|
$184
$161
|
$188
$166
|
$768
$670
|
$778
$680
|
● At the midpoint, Q2
GAAP operating expense guidance is down 3% YoY and FY’17 is
down 9% YoY primarily due to lower restructuring charges and
continued expense discipline.
● At the midpoint, Q2
non-GAAP operating expense guidance is flat YoY. Excluding an Fx
benefit of approximately $3M, we estimate YoY non-GAAP opex growth
of approximately 1%.
● At the midpoint,
FY’17 non-GAAP operating expense guidance is down 1% YoY.
Excluding an Fx impact benefit of approximately $11M, we estimate
YoY non-GAAP opex growth of approximately 1%.
|
|
Operating
Margin(GAAP)
|
4%
|
5%
|
5%
|
6%
|
● FY’17 GAAP
operating margin guidance is up approximately 850 basis points YoY
primarily due to lower restructuring charges and continued cost
discipline.
|
|
(Non-GAAP)
|
16%
|
17%
|
17%
|
18%
|
● Despite Fx
headwinds of approximately $9M on revenue in the quarter and $32M
for the full year, we expect non-GAAP operating margin expansion
YoY of 200-300 basis points in Q2 and are maintaining our
FY’17 guidance of 17-18%, which is an increase of 200-300
basis points over FY’16.
|
|
Tax
Rate(GAAP)
|
35%
|
35%
|
60%
|
60%
|
|
|
(Non-GAAP)
|
10%
|
8%
|
10%
|
8%
|
|
|
Shares Outstanding
|
117
|
117
|
117
|
117
|
● The increase in our
stock price drives a slightly higher share count due to how stock
compensation expense is accounted for in the fully diluted share
count calculation.
|
|
EPS(GAAP)
|
$0.01
|
$0.04
|
$0.06
|
$0.09
|
● We are lowering our
Q2 and FY’17 GAAP EPS guidance primarily due to a higher
expected tax rate and negative impact from Fx.
● Despite Fx
headwinds of approximately $0.03 in the quarter, we expect Q2
non-GAAP EPS growth of approximately $0.06 YoY, or 24%, at the
midpoint of guidance. |
|
(Non-GAAP)
|
$0.26
|
$0.31
|
$1.20
|
$1.30
|
● We are lowering our
FY’17 non-GAAP EPS guidance by just under $0.03 at the
midpoint, which includes an estimated $0.12 negative impact from
Fx. Excluding the currency impact, we estimate YoY non-GAAP EPS
growth of approximately $0.18 or 18%.
|
|
Free Cash Flow
Adjusted FCF
|
|
|
$127
$170
|
$137
$180
|
● We exclude
restructuring and litigation payments from our adjusted free cash
flow guidance.
|
Our
guidance above assumes 60% mix of subscription bookings in
Q2’17 and 65% for the full-year FY’17. If subscription
bookings mix varies from our guidance, it will affect our income
statement and cash flow results. Assuming bookings of equal value,
we estimate that every 1% change in subscription mix will impact
annual revenue by approximately $4 million, annual non-GAAP
operating margin by approximately 30 basis points and annual
non-GAAP EPS by approximately $0.03. (We cannot estimate the effect
on GAAP operating margin and EPS due to the number of unknown
items, including tax items, included in GAAP operating margin and
EPS.) Of course, the higher mix of subscription bookings is
expected to ultimately benefit our financial performance over the
long-term.
The
second quarter and full year FY’17 revenue, non-GAAP
operating margin and non-GAAP EPS guidance exclude the estimated
items outlined below, as well as any tax effects and discrete tax
items that occur (which are not known or reflected).
|
In
millions
|
Q2’17
|
FY’17
|
|
Effect of acquisition accounting on fair value of acquired deferred
revenue
|
$
1
|
$
3
|
|
Restructuring charges
|
-
|
6
|
|
Intangible asset amortization expense
|
14
|
57
|
|
Stock-based compensation expense
|
17
|
71
|
|
Total Estimated GAAP adjustments
|
$ 33
|
$ 138
|
Long-Range Targets (Non-GAAP)
Our
long-range target model we presented in November 2016 is available
on our investor relations website at investor.ptc.com.
Important Disclosures
Reporting metrics and non-GAAP definitions –
Management believes certain operating measures and non-GAAP
financial measures provide additional meaningful information that
should be considered when assessing our performance. These measures
should be considered in addition to, not as a substitute for, the
reported GAAP results.
Software licensing model – A majority of our software
sales to date have been perpetual licenses, where customers own the
software license. Typically, our customers choose to pay for
ongoing support, which includes the right to software upgrades and
technical support, and attach rates on support are in the high 90%
range with retention rates also in the 90% range. A growing
percentage of our business consists of ratably recognized
subscriptions. Under a subscription, customers pay a periodic fee
for the continuing right to use our software, including access to
technical support. They may also elect to use our cloud services
and have us manage the application. We began offering subscription
pricing as an option for most PTC products in Q1 FY’15. We
believe this additional purchase option will prove attractive to
customers over time as it: (1) increases customer flexibility and
opportunity to change their mix of licenses; (2) lowers the initial
purchase commitment; and (3) allows customers to use operating
rather than capital budgets. Over a three to five-year period we
believe the net present value (NPV) of a subscription is likely to
exceed that of a perpetual license, assuming similar seat counts.
However, initial revenue, operating margin, and EPS will be lower
as revenue is recognized ratably in a subscription, rather than up
front.
Bookings Metrics – We offer both perpetual and
subscription licensing options to our customers, as well as monthly
software rentals for certain products. Given the difference in
revenue recognition between the sale of a perpetual software
license (revenue is recognized at the time of sale) and a
subscription (revenue is deferred and recognized ratably over the
subscription term), we use bookings for internal planning,
forecasting and reporting of new license and cloud services
transactions. In order to normalize between perpetual and
subscription licenses, we define subscription bookings as the
subscription annualized contract value (subscription ACV) of new
subscription bookings multiplied by a conversion factor of 2. We
arrived at the conversion factor of 2 by considering a number of
variables including pricing, support, length of term, and renewal
rates. We define subscription ACV as the total value of a new
subscription booking divided by the term of the contract (in days)
multiplied by 365. If the term of the subscription contract is less
than a year, the ACV is equal to the total contract value. Note
that in FY’16, the weighted average contract length of our
subscription bookings was approximately 2 years.
License
and subscription bookings equal subscription bookings (as described
above) plus perpetual license bookings plus any monthly software
rental bookings during the period. Total ACV equals subscription
ACV (as described above) plus the annualized value of incremental
monthly software rental bookings during the period.
Because
subscription bookings is a metric we use to approximate the value
of subscription sales if sold as perpetual licenses, it does not
represent the actual revenue that will be recognized with respect
to subscription sales or that would be recognized if the sales were
perpetual licenses, nor does the annualized value of monthly
software rental bookings represent the value of any such
booking.
License Mix-Adjusted Metrics - These metrics assume that all
new software and cloud services bookings since the start of
FY’14 were perpetual license sales that included support in
subsequent periods. The license mix-adjusted amount is calculated
by converting the ACV (as defined above) of a new subscription
solutions booking in the period to an assumed perpetual license
equivalent by multiplying the ACV by a conversion factor of 2 (as
defined above), and adding that amount to the perpetual license
revenue amounts recognized in that period. Support calculated at
20% of the annual value of the converted amount is added to support
revenue in future periods, beginning the quarter after the
converted booking is assumed to be recognized. The assumed support
revenue is spread ratably over a 12-month period and is assumed to
renew in subsequent years.
Annualized Recurring Revenue (ARR) – We currently
offer our solutions on premise and in the cloud as SaaS offerings.
Our on premise solutions can be licensed either as perpetual with
annual support contracts or through a subscription, which is a
combination of license and support. Beginning in FY’16, we
launched a number of initiatives designed to incentivize more of
our customers to purchase our solutions on a subscription basis. If
successful, these initiatives will cause an increasing percentage
of our revenue to come from subscriptions, which is expected to
grow our recurring software revenue.
To help
investors understand and assess the success of this expected
revenue transition, we are providing an Annualized Recurring
Revenue operating measure. Annualized Recurring Revenue (ARR)
attributable to a given quarter is calculated by dividing the
portion of non-GAAP software revenue attributable to subscription
and support for the quarter from our consolidated statement of
income by the number of days in the quarter and multiplying by 365.
ARR should be viewed independently of revenue and deferred revenue
as it is an operating measure and is not intended to be combined
with or to replace either of those items. ARR is not a forecast and
does not include revenue reported as perpetual license or
professional services revenue in our consolidated statement of
income. Subscription and support revenue and ARR disclosed in a
quarter can be impacted by multiple factors, including but not
limited to (1) the timing of the start of a contract or a renewal,
including the impact of on-time renewals, support win-backs, and
support conversions, which may vary by quarter, (2) the ramping of
committed monthly payments under a subscription agreement over
time, and (3) multiple other contractual factors with the customer
including other elements sold with the subscription or support
contract, and these elements can result in variability in disclosed
ARR.
Non-GAAP Revenue – Excludes the fair value adjustment
for acquired deferred revenue. In Q1’15, we began including
cloud services revenue, which was formerly reported in services,
within license & subscription solutions.
Navigate Allocation -- In FY’16, we launched Navigate,
a ThingWorx-based IoT solution for PLM. In FY’17, revenue and
bookings for Navigate are being allocated 50% to Solutions and 50%
to IoT. FY’16 reported amounts have been reclassified to
conform with the current presentation. The impact of the
reclassification on FY’16 revenue was
immaterial.
Foreign Currency Impacts on our Business – We have a
global business, with Europe and Asia historically representing
approximately 60% of our revenue, and fluctuation in foreign
currency exchange rates can significantly impact our results. We do
not forecast currency movements; rather we provide detailed
constant currency commentary. We do employ a hedging strategy to
limit our exposure to currency risk.
Constant Currency Change Measure (YoY CC) –
Year-over-year changes in revenue on a constant currency basis
compare reported results excluding the effect of any hedging
converted into U.S. dollars based on the corresponding prior
year’s foreign currency exchange rates to reported results
for the comparable prior year period.
Important Information about Non-GAAP References
PTC
provides non-GAAP supplemental information to its financial
results. We use these non-GAAP 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 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 measures affords investors a view of our
operating results that may be more easily compared to the results
of peer companies. In addition, compensation of our executives is
based in part on the performance of our business based on these
non-GAAP measures. However, non-GAAP information should not be
construed as an alternative to GAAP information as the items
excluded from the non-GAAP measures often have a material impact on
our financial results and such items often recur. Management uses,
and investors should consider, non-GAAP measures in conjunction
with our GAAP results.
Non-GAAP
revenue, non-GAAP operating expenses, non-GAAP operating margin,
non-GAAP gross profit, non-GAAP gross margin, non-GAAP net income
and non-GAAP EPS exclude the effect of the following
items:
●
Fair value of acquired deferred
revenue is a purchase accounting adjustment recorded to
reduce acquired deferred revenue to the fair value of the remaining
obligation, so our GAAP revenue after an acquisition does not
reflect the full amount of revenue that would have been reported if
the acquired deferred revenue was not written down to fair value.
We believe excluding these adjustments to revenue from these
contracts (and associated costs in fair value adjustment to deferred services
cost) is useful to investors as an additional means to
assess revenue trends of our business.
●
Stock-based compensation is a non-cash
expense relating to stock-based awards issued to executive
officers, employees and outside directors and to our employee stock
purchase plan. We exclude this expense as it is a non-cash expense
and we assess our internal operations excluding this expense and
believe it facilitates comparisons to the performance of other
companies in our industry.
●
Amortization of acquired intangible
assets is a non-cash expense that is impacted by the
timing and magnitude of our acquisitions. We believe the assessment
of our operations excluding these costs is relevant to our
assessment of internal operations and comparisons to the
performance of other companies in our industry.
●
Acquisition-related charges included in
general and administrative costs are direct costs of potential and
completed acquisitions and expenses related to acquisition
integration activities, including transaction fees, due diligence
costs, severance and professional fees. In addition, subsequent
adjustments to our initial estimated amount of contingent
consideration associated with specific acquisitions are included
within acquisition-related charges. These costs are not considered
part of our normal operations as the occurrence and amount will
vary depending on the timing and size of acquisitions.
●
Restructuring charges include
severance costs and excess facility restructuring charges resulting
from reductions of personnel driven by modifications to our
business strategy and not considered part of our normal operations.
These costs may vary in size based on our restructuring
plan.
●
Non-operating credit facility refinancing
costs are non-operating charges we record as a result of the
refinancing of our credit facility. We assess our internal
operations excluding these costs and believe it facilitates
comparisons to the performance of other companies in our
industry.
●
Income tax adjustments include the tax
impact of the items above and assumes that we are profitable on a
non-GAAP basis in the U.S. and one foreign jurisdiction, and
eliminates the effect of the valuation allowance recorded against
our net deferred tax assets in those jurisdictions.
Additionally, we exclude other material tax items that we view as
non-ordinary course.
PTC
also provides information on “free cash flow” and
“adjusted 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 goal of returning approximately 40% of our free cash flow
to shareholders via stock repurchases. Free cash flow is net cash
provided by (used in) operating activities less capital
expenditures; adjusted free cash flow is free cash flow excluding
restructuring payments and certain identified non-ordinary course
payments. Free cash flow and adjusted free cash flow are not
measures of cash available for discretionary
expenditures.
Forward-Looking Statements
Statements
in this press release that are not historic facts, including
statements about our second quarter and full fiscal 2017 targets
and other future financial and growth expectations, and anticipated
tax rates, are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially
from those projected. These risks include: the macroeconomic and/or
global manufacturing climates may not improve or may deteriorate;
customers may not purchase our solutions when or at the rates we
expect; our businesses, including our Internet of Things (IoT)
business, may not expand and/or generate the revenue we expect;
foreign currency exchange rates may vary from our expectations and
thereby affect our reported revenue and expense; the mix of revenue
between license & subscription solutions, support and
professional services could be different than we expect, which
could impact our EPS results; our customers may purchase more of
our solutions as subscriptions than we expect, which would
adversely affect near-term revenue, operating margins, and EPS;
customers may not purchase subscriptions at the rate we expect,
which could impact our ability to achieve expected subscription
bookings and delay our exit from the subscription trough; sales of
our solutions as subscriptions may not have the longer-term effect
on revenue that we expect; our workforce realignment may not
achieve the expense savings we expect and may adversely affect our
operations; we may be unable to generate sufficient operating cash
flow to return 40% of free cash flow to shareholders and other uses
of cash or our credit facility limits could preclude share
repurchases, any of which would mean we may be unable to repurchase
shares when or as we expect; and a significant portion of our cash
is held overseas and could be subject to significant taxes if
repatriated. In addition, our assumptions concerning our future
GAAP and non-GAAP effective income tax rates are based on estimates
and other factors that could change, including the geographic mix
of our revenue, expenses and profits and loans and cash
repatriations from foreign subsidiaries. Other risks and
uncertainties that could cause actual results to differ materially
from those projected are detailed from time to time in reports we
file with the Securities and Exchange Commission, including our
most recent Annual Report on Form 10K.
PTC Inc.
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS
(UNAUDITED)
(in thousands, except per share data)
|
|
Three Months Ended
|
|
|
|
December 31,
|
January 2,
|
|
|
2016
|
2016
|
|
|
|
|
|
GAAP
revenue
|
$286,327
|
$291,017
|
|
Fair
value adjustment of acquired deferred subscription
revenue
|
646
|
188
|
|
Fair
value adjustment of acquired deferred services revenue
|
268
|
309
|
|
Non-GAAP
revenue
|
$287,241
|
$291,514
|
|
|
|
|
|
GAAP
gross margin
|
$204,212
|
$210,870
|
|
Fair
value adjustment of acquired deferred revenue
|
914
|
497
|
|
Fair
value adjustment to deferred services cost
|
(113)
|
(132)
|
|
Stock-based
compensation
|
2,894
|
3,356
|
|
Amortization
of acquired intangible assets included in cost of software
revenue
|
6,388
|
5,127
|
|
Non-GAAP
gross margin
|
$214,295
|
$219,718
|
|
|
|
|
|
GAAP
operating income (loss)
|
$4,561
|
$(13,292)
|
|
Fair
value adjustment of acquired deferred revenue
|
914
|
497
|
|
Fair
value adjustment to deferred services cost
|
(113)
|
(132)
|
|
Stock-based
compensation
|
17,988
|
23,189
|
|
Amortization
of acquired intangible assets included in cost of software
revenue
|
6,388
|
5,127
|
|
Amortization
of acquired intangible assets
|
8,067
|
8,350
|
|
Acquisition-related
charges included in general and administrative costs
|
169
|
1,207
|
|
Restructuring
charges
|
6,285
|
37,147
|
|
Non-GAAP operating income
(1)
|
$44,259
|
$62,093
|
|
|
|
|
|
GAAP
net income (loss)
|
$(9,141)
|
$(23,892)
|
|
Fair
value adjustment of acquired deferred revenue
|
914
|
497
|
|
Fair
value adjustment to deferred services cost
|
(113)
|
(132)
|
|
Stock-based
compensation
|
17,988
|
23,189
|
|
Amortization
of acquired intangible assets included in cost of software
revenue
|
6,388
|
5,127
|
|
Amortization
of acquired intangible assets
|
8,067
|
8,350
|
|
Acquisition-related
charges included in general and administrative costs
|
169
|
1,207
|
|
Restructuring
charges
|
6,285
|
37,147
|
|
Non-operating
credit facility refinancing costs
|
-
|
2,359
|
|
Income tax adjustments
(2)
|
148
|
4,930
|
|
Non-GAAP
net income
|
$30,705
|
$58,782
|
|
|
|
|
|
GAAP
diluted earnings (loss) per share
|
$(0.08)
|
$(0.21)
|
|
Fair
value of acquired deferred revenue
|
0.01
|
-
|
|
Stock-based
compensation
|
0.15
|
0.20
|
|
Amortization
of acquired intangibles
|
0.12
|
0.12
|
|
Acquisition-related
charges
|
-
|
0.01
|
|
Restructuring
charges
|
0.05
|
0.32
|
|
Non-operating
credit facility refinancing costs
|
-
|
0.02
|
|
Income
tax adjustments
|
-
|
0.04
|
|
Non-GAAP
diluted earnings per share
|
$0.26
|
$0.51
|
|
|
|
|
|
GAAP
diluted weighted average shares outstanding
|
115,290
|
114,151
|
|
Dilutive
effect of stock based compensation plans
|
1,735
|
1,088
|
|
Non-GAAP
diluted weighted average shares outstanding
|
117,025
|
115,239
|
(1)
Operating margin impact of non-GAAP adjustments:
|
|
Three Months Ended
|
|
|
|
December 31,
|
January 2,
|
|
|
2016
|
2016
|
|
GAAP
operating margin
|
1.6%
|
-4.6%
|
|
Fair
value of acquired deferred revenue
|
0.3%
|
0.2%
|
|
Fair
value adjustment to deferred services cost
|
0.0%
|
0.0%
|
|
Stock-based
compensation
|
6.3%
|
8.0%
|
|
Amortization
of acquired intangibles
|
5.0%
|
4.6%
|
|
Acquisition-related
charges
|
0.1%
|
0.4%
|
|
Restructuring
charges
|
2.2%
|
12.8%
|
|
Non-GAAP
operating margin
|
15.4%
|
21.3%
|
(2)
We have recorded a full valuation allowance against our U.S. net
deferred tax assets and a valuation allowance against net deferred
tax assets in certain foreign jurisdictions. As we are profitable
on a non-GAAP basis, the 2017 and 2016 non-GAAP tax provisions are
being calculated assuming there is no valuation allowance. Income
tax adjustments for the three months ended January 2, 2016 reflect
the tax effects of non-GAAP adjustments which are calculated by
applying the applicable tax rate by jurisdiction to the non-GAAP
adjustments listed above. Additionally, our non-GAAP tax provision
for the three months ended January 2, 2016 excludes a $1.6 million
tax provision related to a legal settlement accrual. Beginning in
the second quarter of 2016, we changed our methodology to adopt a
method that is more reflective of our full year expected non-GAAP
tax rate. For the three months ended December 31, 2016, our
non-GAAP tax provision is based on our annual expected non-GAAP tax
rate applied to our year-to-date non-GAAP earnings.