PTC Announces Second Quarter FY’15 Results

PTC also provides information on “free cash flow” and “free cash flow return” to enable investors to assess our ability to generate cash without incurring additional external financings and to evaluate our performance against our announced long-term goal of returning approximately 40% of our free cash flow to shareholders via stock repurchases. Free-cash flow is net cash provided by (used in) operating activities less capital expenditures and free-cash flow return is the value of shares repurchased divided by free cash flow.

Forward-Looking Statements

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

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

About PTC

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


PTC Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)


			Three Months Ended						Six Months Ended
			April 4,			March 29,			April 4,			March 29,
			2015			2014			2015			2014

Revenue:
	License and subscription solutions (L&SS)		$	85,952		$	88,545		$	164,923		$	171,411
	Support			168,727			166,249			350,356			336,391
		Total software revenue		254,679			254,794			515,279			507,802
	Professional services			59,440			73,906			124,282			145,823
Total revenue				314,119			328,700			639,561			653,625

Cost of revenue:
	Cost of L&SS revenue (1)			13,190			10,889			26,519			21,208
	Cost of support revenue (1)			21,328			21,564			42,724			41,480
		Total cost of software revenue		34,518			32,453			69,243			62,688
	Cost of professional services revenue (1)			51,536			61,344			109,753			124,065
Total cost of revenue				86,054			93,797			178,996			186,753

Gross margin				228,065			234,903			460,565			466,872

Operating expenses:
	Sales and marketing ⁽¹⁾			82,024			85,934			169,631			170,172
	Research and development ⁽¹⁾			60,158			55,631			121,255			108,704
	General and administrative ⁽¹⁾			34,235			34,140			71,242			65,071
	Amortization of acquired intangible assets			9,173			7,985			18,586			15,774
	Restructuring charges			38,487			-			38,232			1,067
Total operating expenses				224,077			183,690			418,946			360,788

Operating income				3,988			51,213			41,619			106,084
	Other expense, net			(3,601	)		(2,692	)		(6,825	)		(4,446	)
Income before income taxes				387			48,521			34,794			101,638
	Provision (benefit) for income taxes			(5,005	)		4,765			(882	)		18,225
Net income			$	5,392		$	43,756		$	35,676		$	83,413

Earnings per share:
	Basic		$	0.05		$	0.37		$	0.31		$	0.70
		Weighted average shares outstanding		114,944			118,978			115,147			118,973

	Diluted		$	0.05		$	0.36		$	0.31		$	0.69
		Weighted average shares outstanding		115,922			120,698			116,479			120,916



	(1)	The amounts in the tables above include stock-based compensation as follows:

			Three Months Ended						Six Months Ended
			April 4,			March 29,			April 4,			March 29,
			2015			2014			2015			2014
	Cost of L&SS revenue		$	118		$	82		$	260		$	147
	Cost of support revenue			989			889			1,765			1,813
	Cost of service revenue			1,504			1,349			3,193			2,886
	Sales and marketing			3,081			3,019			5,953			5,518
	Research and development			3,001			2,147			6,087			4,836
	General and administrative			4,129			5,080			6,806			10,130
		Total stock-based compensation	$	12,822		$	12,566		$	24,064		$	25,330


PTC Inc.
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS (UNAUDITED)
(in thousands, except per share data)

			Three Months Ended						Six Months Ended
			April 4,			March 29,			April 4,			March 29,
			2015			2014			2015			2014

GAAP revenue			$	314,119		$	328,700		$	639,561		$	653,625
	Fair value adjustment of acquired deferred L&SS revenue			590			-			1,272			-
	Fair value adjustment of acquired deferred support revenue			265			-			730			-
	Fair value adjustment of acquired deferred service revenue			278			-			535			-
Non-GAAP revenue			$	315,252		$	328,700		$	642,098		$	653,625

GAAP gross margin			$	228,065		$	234,903		$	460,565		$	466,872
	Fair value adjustment of acquired deferred L&SS revenue			590			-			1,272			-
	Fair value adjustment of acquired deferred support revenue			265			-			730			-
	Fair value adjustment of acquired deferred service revenue			278			-			535			-
	Fair value adjustment to deferred services cost			(151	)		-			(257	)		-
	Stock-based compensation			2,611			2,320			5,218			4,846
	Amortization of acquired intangible assets
		included in cost of L&SS revenue		4,714			4,407			9,481			8,904
Non-GAAP gross margin			$	236,372		$	241,630		$	477,544		$	480,622

GAAP operating income			$	3,988		$	51,213		$	41,619		$	106,084
	Fair value adjustment of acquired deferred L&SS revenue			590			-			1,272			-
	Fair value adjustment of acquired deferred support revenue			265			-			730			-
	Fair value adjustment of acquired deferred service revenue			278			-			535			-
	Fair value adjustment to deferred services cost			(151	)		-			(257	)		-
	Stock-based compensation			12,822			12,566			24,064			25,330
	Amortization of acquired intangible assets
		included in cost of L&SS revenue		4,714			4,407			9,481			8,904
	Amortization of acquired intangible assets			9,173			7,985			18,586			15,774
	Acquisition-related charges included in
		general and administrative expenses		3,605			3,935			9,322			5,240
	Restructuring charges			38,487			-			38,232			1,067
Non-GAAP operating income ⁽²⁾			$	73,771		$	80,106		$	143,584		$	162,399

GAAP net income			$	5,392		$	43,756		$	35,676		$	83,413
	Fair value adjustment of acquired deferred L&SS revenue			590			-			1,272			-
	Fair value adjustment of acquired deferred support revenue			265			-			730			-
	Fair value adjustment of acquired deferred service revenue			278			-			535			-
	Fair value adjustment to deferred services cost			(151	)		-			(257	)		-
	Stock-based compensation			12,822			12,566			24,064			25,330
	Amortization of acquired intangible assets
		included in cost of L&SS revenue		4,714			4,407			9,481			8,904
	Amortization of acquired intangible assets			9,173			7,985			18,586			15,774
	Acquisition-related charges included in
		general and administrative expenses ⁽³⁾		3,605			3,935			9,322			5,240
	Restructuring charges			38,487			-			38,232			1,067
	Income tax adjustments ⁽⁴⁾			(13,757	)		(14,954	)		(17,243	)		(21,813	)
Non-GAAP net income			$	61,418		$	57,695		$	120,398		$	117,915

GAAP diluted earnings per share			$	0.05		$	0.36		$	0.31		$	0.69
	Fair value of acquired deferred revenue			0.01			-			0.02			-
	Fair value adjustment to deferred services cost			-			-			-			-
	Stock-based compensation			0.11			0.10			0.21			0.21
	Amortization of acquired intangibles			0.12			0.10			0.24			0.20
	Acquisition-related charges			0.03			0.03			0.08			0.04
	Restructuring charges			0.33			-			0.33			0.01
	Income tax adjustments			(0.12	)		(0.12	)		(0.15	)		(0.18	)
Non-GAAP diluted earnings per share			$	0.53		$	0.48		$	1.03		$	0.98

	(2)	Operating margin impact of non-GAAP adjustments:

			Three Months Ended						Six Months Ended
			April 4,			March 29,			April 4,			March 29,
			2015			2014			2015			2014
	GAAP operating margin			1.3	%		15.6	%		6.5	%		16.2	%
		Fair value of acquired deferred revenue		0.4	%		0.0	%		0.4	%		0.0	%
		Fair value adjustment to deferred services cost		0.0	%		0.0	%		0.0	%		0.0	%
		Stock-based compensation		4.1	%		3.8	%		3.8	%		3.9	%
		Amortization of acquired intangibles		4.4	%		3.8	%		4.4	%		3.8	%
		Acquisition-related charges		1.1	%		1.2	%		1.5	%		0.8	%
		Restructuring charges		12.3	%		0.0	%		6.0	%		0.2	%
	Non-GAAP operating margin			23.4	%		24.4	%		22.4	%		24.8	%

	(3)	Represents acquisition-related charges, as well as, expense related to a terminating U.S. pension plan of $1.7 million and $3.4 million in the three and six months ended April 4, 2015, respectively.

	(4)	Income tax adjustments for the three and six months ended April 4, 2014 and March 29, 2014 reflect the tax effects of non-GAAP adjustments which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments listed above, and also include any identified tax items. In the fourth quarter of 2012, a valuation allowance was established against our U.S. net deferred tax assets. Similarly, in the fourth quarter of 2014, valuation allowances were established against our foreign net deferred tax assets in two foreign jurisdictions. As the U.S. and the two foreign jurisdictions are profitable on a non-GAAP basis, the 2015 and 2014 non-GAAP tax provisions are being calculated assuming there is no valuation allowance in these jurisdictions. The following identified tax item has been excluded from the non-GAAP tax results: Q2'14 includes a non-cash tax benefit of $8.9 million related to the release of a portion of the valuation allowance as a result of deferred tax liabilities established for the acquisition of ThingWorx.


PTC Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)


	April 4,		September 30,
	2015		2014

ASSETS

Cash and cash equivalents	$	267,815	$	293,654
Accounts receivable, net		201,379		235,688
Property and equipment, net		65,191		67,783
Goodwill and acquired intangible assets, net		1,286,396		1,349,400
Other assets		287,849		253,429

Total assets	$	2,108,630	$	2,199,954

LIABILITIES AND STOCKHOLDERS' EQUITY

Deferred revenue	$	420,827	$	382,544
Borrowings under credit facility		530,625		611,875
Other liabilities		302,958		351,646
Stockholders' equity		854,220		853,889

Total liabilities and stockholders' equity	$	2,108,630	$	2,199,954


PTC Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)


		Three Months Ended						Six Months Ended
		April 4,			March 29,			April 4,			March 29,
		2015			2014			2015			2014

Cash flows from operating activities:
	Net income	$	5,392		$	43,756		$	35,676		$	83,413
	Stock-based compensation		12,822			12,566			24,064			25,330
	Depreciation and amortization		20,968			19,173			42,205			38,273
	Accounts receivable		(3,089	)		(2,536	)		22,711			16,737
	Accounts payable and accruals		33,720			5,231			(17,198	)		(37,631	)
	Deferred revenue		40,976			40,510			32,200			29,683
	Income taxes		(13,612	)		(1,514	)		(16,565	)		5,879
	Excess tax benefits from stock-based awards		-			(1,290	)		(163	)		(8,092	)
	Other		(5,185	)		(5,174	)		(17,306	)		(6,628	)
Net cash provided by operating activities ⁽⁵⁾			91,992			110,722			105,624			146,964

Capital expenditures			(6,160	)		(4,568	)		(14,107	)		(10,342	)
Acquisitions of businesses, net of cash acquired ⁽⁶⁾			-			(111,519	)		180			(111,519	)
Proceeds (payments) on debt, net			(75,000	)		(50,000	)		(81,250	)		60,000
Proceeds from issuance of common stock			3			365			6			716
Payments of withholding taxes in connection with
	vesting of stock-based awards		(195	)		(2,274	)		(21,864	)		(21,637	)
Repurchases of common stock			-			(39,965	)		-			(39,965	)
Excess tax benefits from stock-based awards			-			1,290			163			8,092
Credit facility origination costs			-			(4,120	)		-			(4,120	)
Other financing & investing activities			-			-			(1,000	)		-
Foreign exchange impact on cash			(3,877	)		(838	)		(13,591	)		368

Net change in cash and cash equivalents			6,763			(100,907	)		(25,839	)		28,557
Cash and cash equivalents, beginning of period			261,052			371,377			293,654			241,913
Cash and cash equivalents, end of period		$	267,815		$	270,470		$	267,815		$	270,470


(5)	The three and six months ended April 4, 2015 includes $5 million and $15 million of voluntary contribution funding payments to a non-U.S. pension plan, respectively. The three and six months ended April 4, 2015 include $5 million and $23 million in restructuring payments, respectively. The three and six months ended March 29, 2014 include $5 million and $17 million in restructuring payments, respectively.

(6)	We acquired ThingWorx on December 30, 2013 for $112 million (net of cash acquired) which was funded with $110 million borrowed under our revolving credit facility. We borrowed the funds in Q1'14 in contemplation of the acquisition closing.

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