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.
Any
reference to “total recurring software revenue” or
“recurring software revenue” means the sum of
subscription revenue and support revenue. Any reference to
“total software revenue” or “software
revenue” means the sum of subscription revenue, support
revenue and perpetual license revenue. References to
“subscription revenue” include cloud services
revenue.
Operating measure
that adjusts Non-GAAP results to guidance mix of 60% vs. actual
Q2’17 mix of 71% and includes other adjustments as described
in “Important Disclosures” set forth
below.
Key Highlights of Quarterly Operating Measures
In
millions
Q2’17
YoY
YoY
CC
Management Comments
Subscription ACV
$34
43%
43%
● Subscription ACV
was well above the high end of our guidance of $24M to $27M due to
continued adoption of subscriptions, strong new bookings
performance, conversions, and our “Get Active”
re-activation program.
● On a YTD basis,
subscription ACV is up 85% over the first half of FY’16 both
as reported and in constant currency.
License and Subscription Bookings
$95
11%
11%
● New bookings were
well above the high end of our guidance range of $80M to $90M, due
to strong IoT results and continued improvements in go-to-market
execution in our Solutions business. Deal close timing may also
have benefited Q2 by a modest amount (low single-digit millions
$).
● Improved execution
drove bookings growth within our Solutions business, led by another
strong quarter from CAD, with double-digit bookings growth, and
solid performance in PLM.
● IoT bookings grew
faster than market growth, which we estimate at around 40%, with
expansions representing more than half of bookings and the number
of 6-figure bookings increasing over 60% YoY.
● On a YTD basis,
total bookings were up 20% (both as reported and in CC) over the
first half of FY’16; excluding Kepware, bookings were up 15%
YoY as reported and 16% YoY CC.
Subscription % of Bookings
71%
31%
31%
● Our subscription
transition continues to exceed our expectations, with a
subscription mix of 71% in the quarter vs. our guidance of 60%. We
were pleased to see continued improvements in a number of areas,
including our partner channel and APAC, which were both greater
than 55% subscription mix this quarter.
● From a segment
perspective, all businesses were over 60% subscription mix and from
a regional perspective, both the Americas and Europe were over 75%,
while APAC improved to over 55%.
● We announced today
the end-of-life of perpetual licenses in the Americas and Western
Europe as of January 1, 2018, for all of our products except
Kepware.
Key Highlights of Quarterly Financial Measures
All references to revenue are to GAAP revenue, unless otherwise
noted
In
millions, except per share amounts
Q2’17
YoY
YoY
CC
Management Comments
Total Revenue
$280
3%
3%
● Despite exceeding
our guidance subscription mix by 11 percentage points, total
revenue still achieved the low end of our guidance range of $280M
to $285M.
● Total revenue grew
YoY for the first time in nine quarters, evidencing that we have
exited the subscription trough.
● We estimate that,
at our guidance subscription mix, revenue would have been $10M
higher, or approximately $290M, above the high end of our guidance
range by $5M, representing 6% growth YoY.
Software Revenue
$235
5%
5%
● Despite exceeding
our guidance subscription mix by 11 percentage points, software
revenue still achieved the low end of our guidance range of $235M
to $240M.
● We estimate that,
at our guidance subscription mix software revenue would have been
$10M higher, or approximately $245M, above the high end of our
guidance by $5M, representing 9% growth YoY.
● Subscription
revenue increased 178% YoY, perpetual license revenue declined 31%
YoY and support revenue declined 12% YoY. The support decrease is
due to a higher mix of subscription bookings, support conversions
to subscription and fewer support win-backs in the channel as we
launched a new win-back program in Q3’16 where customers
continue to return to PTC on a subscription basis.
EPS (GAAP)
(Non-GAAP)
($0.01)
$0.30
(79%)
30%
(56%)
23%
● Both GAAP and
non-GAAP EPS were negatively impacted relative to guidance by the
effect of the higher mix of subscription in the
quarter.
● Despite the higher
subscription mix, non-GAAP EPS was near the higher end of our
guidance range of $0.26 to $0.31.
● We estimate that if
the license mix were adjusted to our guidance mix, non-GAAP EPS
would have been $0.08 higher, or $0.38, above
the high end of our guidance range by $0.07.
Quarterly Software Revenue Performance by Group
In
millions
Q2’17
YoY
YoY
CC
Management Comments
Solutions Software Revenue
$213
3%
3%
● CAD, PLM and SLM
all delivered software revenue growth in the quarter.
IoT Software Revenue
$22
26%
26%
● IoT software
revenue was driven by the continuation of a series of strong
bookings quarters coupled with continued adoption and expansion of
the ThingWorx platform.
● IoT revenue growth
in Q2’17 is largely organic as we completed the Kepware
acquisition in early Q2’16. With a higher subscription mix
than Q2’16, IoT revenue growth of 26% CC was lower than YoY
bookings growth. Virtually all ThingWorx bookings were subscription
this quarter.
● Sequential IoT
software revenue was up 1%, despite a higher subscription mix and
lower perpetual bookings / revenue. Recurring IoT software revenue
grew 10% sequentially.
All references to revenue are to GAAP revenue, unless otherwise
noted
Quarterly Software Revenue Performance by Region
In
millions
Q2’17
YoY
YoY
CC
Management Comments
Americas Software Revenue
$107
8%
8%
● YoY CC bookings
growth of 15% and subscription mix of greater than
75%.
● Subscription
revenue grew 164% YoY CC.
Europe Software Revenue
$82
2%
5%
● YoY CC bookings
growth of 24% and subscription mix of greater than
75%.
● Subscription
revenue grew 153% YoY CC.
APAC Software Revenue
$47
3%
0%
● YoY CC bookings
declined 6% YoY, with weakness in Japan, while subscription mix
increased to greater than 55%.
● Subscription
revenue grew 493% YoY CC.
All references to revenue are to GAAP revenue, unless otherwise
noted
Quarterly Operating Performance
In
millions
Q2’17
GAAP
Q2’17
Non-GAAP
Management Comments
Professional Services Gross Margin
14%
18%
● We delivered solid
professional services results for the quarter, with revenue in line
with guidance, margins in line with expectations and partner
bookings growing 32% YoY.
Operating Expense
$191
$163
● GAAP operating
expense was above the high end of our guidance range of $184
million to $188 million due to higher stock-based compensation
expense.
● Non-GAAP operating
expense was just below the midpoint of our guidance range of $161
million to $166 million.
Operating Margin
3%
16%
● GAAP operating
margin was just below our guidance range of 4% to 5%, primarily due
to higher subscription mix and higher stock-based compensation
expense.
● Despite the
higher-than-guidance subscription mix in the quarter, non-GAAP
operating margin was within our guidance range of 16% to 17%. At
our guidance subscription mix, we estimate non-GAAP operating
margin would have been 19%, and at the subscription mix from the
year ago period, we estimate our non-GAAP operating margin would
have been 21%.
Tax Rate
(5%)
8%
Other Highlights in Quarterly and Annual Operating
Performance
●
In Q2’17,
subscription bookings represented 71% of total bookings, above our
guidance of 60%, driven by programs 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 and “Get Active” program.
●
Annualized
recurring revenue (ARR), was approximately $834 million, which grew
12% compared to Q2’16 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 grew 34% year-over-year and
7% sequentially. Billed Deferred Revenue grew $45 million
year-over-year and $117 million sequentially. Please note that we
believe that Total Deferred Revenue is the most relevant indicator,
as billed deferred revenue fluctuates throughout the year based
upon the seasonality of our recurring revenue billings and the
timing of our fiscal quarter ends.
(in millions)
Q2’17
4/1/17
Q1’17
12/31/16
Q2’16
4/2/16
Q/Q
% Change
Y/Y
% Change
Billed
Deferred Revenue
$492
$375
$447
31%
10%
Unbilled
Deferred Revenue
$389
$450
$211
-14%
84%
Total Deferred Revenue
$881
$825
$658
7%
34%
●
In keeping with our
strategy to grow our professional services partner ecosystem,
Q2’17 service partner bookings grew approximately 32% YoY,
with strong bookings growth among our large system integrator
partners.
●
For Q2’17,
approximately 88% of software revenue came from recurring revenue
streams, up from 82% in Q2’16.
●
Cash, cash
equivalents, and marketable securities totaled $292 million as of
April 1, 2017.
●
For Q2’17,
cash flow provided by operating activities was $76 million, and
free cash flow was $69 million, both of which include restructuring
payments of $13 million.
●
As of April 1,2017, gross borrowings totaled $718 million, including $500 million
of senior notes and $218 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 4.5 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 Q2’17 reflecting all current terms under
the credit facility was 3.34. As of April 1, 2017, we had
approximately $260 million available
to borrow under the
credit facility. 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 third quarter of
FY’17.
Guidance and Long-Range Targets
Our Q3
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 booking
recorded in Q4’16 due to the unusual size of this
transaction. Excluding this from FY’16 bookings results, and
despite a mixed 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
18 months 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 mixed 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 approximate current spot rates. Fx changes since
our guidance in January 2017 in total have been relatively minor,
and as such, do not significantly impact our prior full year
guidance.
Q3’17 and FY’17 Operating Guidance
In
millions
Q3’17
Low
Q3’17
High
FY’17
Low
FY’17
High
Management Comments
Subscription ACV
$32
$36
$136
$143
● At the midpoint, Q3
guidance is up 12% YoY.
● At the midpoint,
FY’17 guidance is up 22% YoY. We are raising guidance $6.5M
or 5% at the midpoint due to higher expected subscription mix for
the full year.
License and Subscription Bookings
$95
$105
$400
$420
● There is no change
to our full year bookings guidance, which implies growth of 7% to
12% YoY CC (excluding the $20M SLM booking in
Q4’16).
● Please recall that
we raised our constant currency guidance in Q1’17 by $12
million.
● The Q3 guidance
range represents constant currency growth of (8%) to 1% on a tough
compare with an exceptionally strong Q3’16. Please recall
that in Q3’16 we exceeded the high end of our guidance range
and delivered $105M in bookings (32% YoY growth). In addition, deal
close timing may have benefited Q2 by a modest amount (low
single-digit millions $), negatively impacting
Q3’17.
Subscription % of Bookings
68%
68%
68%
68%
● For Q3, we expect
68% of our bookings to be subscription, based on our current view
of the pipeline.
● For FY’17, we
are raising guidance from 65% to 68% based on the outlook for the
second half of the year.
Q3’17 and FY’17 Financial Guidance
In
millions
Q3’17
Low
Q3’17
High
FY’17
Low
FY’17
High
Management Comments
Subscription Revenue
$74
$75
$275
$280
● At the midpoint, Q3
guidance is up more than 130% YoY as the subscription transition
continues to accelerate.
● We are raising our
FY’17 guidance by $13M or 5% at the midpoint due to YTD
subscription bookings performance, an increase in expected
subscription mix for the year, and continued success with our
conversion program.
Support Revenue
$140
$140
$575
$575
● Q3 guidance is down
14% YoY as a growing proportion of our bookings are
subscription-based and more customers continue to convert from
support to subscription.
● We are lowering our
FY’17 guidance by $3M or 1% based on the continuing trends
noted above.
Perpetual License Revenue
$29
$33
$130
$135
● At the midpoint, Q3
guidance is down 31% YoY as an increasing proportion of our
customers purchase software as a subscription.
● We are lowering our
FY’17 guidance by $12M or 9% at the midpoint based on the
continuing trends noted above.
Software Revenue
$243
$248
$980
$990
● At the midpoint, Q3
guidance is up 3% YoY due to the increase in subscription revenue
more than offsetting the decline in both support and perpetual
license revenue.
● We are lowering our
FY’17 guidance by $2.5M at the midpoint due to an increase in
expected subscription mix for the year.
● At the midpoint,
FY’17 guidance is up 4% YoY.
Professional Services Revenue
$45
$45
$182
$182
● Q3 guidance is down
11% YoY with fewer large services engagements as we emphasize more
standard implementations of our products and as we continue to
execute on our strategy of growing our service partner ecosystem
and expanding margins.
● We are lowering our
FY’17 guidance by $3M or 2% due to the continued success in
the strategy stated above.
Total Revenue
$288
$293
$1,162
$1,172
● At the midpoint, Q3
guidance is up 1% YoY.
● We are lowering our
FY’17 guidance by $5.5M at the midpoint due to an increase in
expected subscription mix for the year and lower professional
services revenue.
● At the midpoint,
FY’17 guidance is up 2% YoY.
Page
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Q3’17 and FY’17 Financial Guidance
Continued
In
millions
Q3’17
Low
Q3’17
High
FY’17
Low
FY’17
High
Management Comments
Operating Expense (GAAP)
(Non-GAAP)
$195
$168
$200
$173
$780
$673
$790
$683
● At the midpoint, Q3
GAAP operating expense guidance is down 1% YoY and FY’17 is
down 8% YoY primarily due to lower restructuring charges and
continued expense discipline.
● At the midpoint, Q3
non-GAAP operating expense guidance is down 3% YoY and up QoQ due
to LiveWorx and a modest impact from Fx.
● At the midpoint,
FY’17 non-GAAP operating expense guidance is flat YoY due to
continued expense discipline.
Operating Margin(GAAP)
2%
4%
4%
4%
● FY’17 GAAP
guidance is up over 700 basis points YoY primarily due to lower
restructuring charges, progress in our subscription transition, and
continued cost discipline.
● We expect non-GAAP
operating margin expansion of 100-200 basis points YoY in
Q3.
● We are lowering our
FY’17 non-GAAP operating margin guidance by 100 basis points
on both the high and low end due to higher expected subscription
mix for the full year.
● With our current
guidance, we expect full year non-GAAP operating margin expansion
of 100-200 basis points over FY’16.
(Non-GAAP)
15%
16%
16%
17%
Tax Rate(GAAP)
5%
5%
75%
75%
● GAAP guidance
updated for current estimates. No change to FY’17 non-GAAP
guidance.
(Non-GAAP)
10%
8%
10%
8%
Shares Outstanding
(GAAP)
(Non-GAAP)
116
117
117
117
116
117
117
117
● GAAP guidance
updated for current estimates. No change to FY’17 non-GAAP
guidance.
EPS(GAAP)
($0.04)
$0.00
$0.00
$0.02
● We are lowering our
FY’17 GAAP guidance due to higher than expected subscription
mix for the full year and a higher than expected tax
rate.
● At the midpoint, we
expect Q3 non-GAAP EPS to be up 2% YoY.
● We are lowering our
FY’17 non-GAAP EPS guidance by $0.07 at the midpoint due to
the higher expected subscription mix for the full
year.
● At the midpoint,
FY’17 non-GAAP EPS is down 1% YoY due to the impact of higher
subscription mix, higher interest expense related to the
outstanding notes issued in May 2016 and a less favorable tax rate
than FY’16.
(Non-GAAP)
$0.24
$0.29
$1.13
$1.23
Free Cash Flow
Adjusted FCF
$115
$158
$125
$168
● We exclude
restructuring and litigation payments from our adjusted free cash
flow guidance. With an increase in our subscription mix guidance,
we have reduced our guidance for Free Cash Flow and Adjusted FCF by
approximately $12 million.
Our
guidance above assumes 68% mix of subscription bookings in
Q3’17 and 68% 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
third 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
Q3’17
FY’17
Effect
of acquisition accounting on fair value of acquired deferred
revenue
$
1
$
3
Stock-based
compensation expense
18
76
Intangible
asset amortization expense
14
57
Restructuring
charges(1)
3
10
Acquisition-related
charges
0
1
Non-operating
credit facility refinancing costs
0
1
Total Estimated GAAP adjustments
$ 36
$ 148
(1) We expect to record approximately $3 million in
restructuring charges in the third quarter of 2017 related to the
closure of a leased facility.
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) - To help investors
understand and assess the success of our subscription transition,
we provide an Annualized Recurring Revenue operating measure.
Annualized Recurring Revenue (ARR) for a given quarter is
calculated by dividing the portion of non-GAAP software revenue
attributable to subscription and support for the quarter 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 of future
revenue, which can be impacted by contract expiration and renewal
rates, 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 expense, 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 third quarter and full fiscal 2017 targets and
other future financial and growth expectations and targets, 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 as we expect,
which could impact our ability to achieve targeted subscription
bookings and subscription mix; sales of our solutions as
subscriptions may not have the longer-term effect on revenue that
we expect; 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; and any repatriation of cash held outside the U.S.,
which constitutes a significant portion of our cash, could be
subject to significant taxes. In addition, our assumptions
concerning our future GAAP and non-GAAP effective income tax rates
are based on estimates and other factors that could change,
including the geographic mix of our revenue, expenses and profits
and loans and cash repatriations from foreign subsidiaries. Other
risks and uncertainties that could cause actual results to differ
materially from those projected are detailed from time to time in
reports we file with the Securities and Exchange Commission,
including our most recent Annual Report on Form 10-K and Quarterly
Report on Form 10-Q.
PTC
Inc.
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS
(UNAUDITED)
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 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. For the
three and six months ended April 1, 2017 and April 2, 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.
Dates Referenced Herein and Documents Incorporated by Reference
