PTC Announces Third 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 fourth 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) business, may not expand and/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 the mix of revenue between license & subscription solutions, support and professional services could be different than we expect, which 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 our workforce realignment may adversely affect our operations, 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, and the possibility that we may incur additional acquisition-related and pension plan termination-related expenses and losses than we expect.

Further, our results could be materially adversely affected by the resolution of our previously announced investigation in China. In the third quarter, we recorded a liability of $13.6 million associated with pending discussions with the Securities and Exchange Commission and the Department of Justice to resolve this matter. This is the minimum amount of liability we expect to incur if we are able to reach a settlement in this matter, and does not include any amounts associated with potential fines that might be imposed by either or both of the SEC and DOJ, which amounts would increase our liability and could be significant. There can be no assurance that we will reach a settlement with these agencies or that the cost of such settlements, if reached, would not materially exceed the existing accrual.

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) is a global provider of technology platforms and enterprise applications for smart and connected products, operations, and systems. PTC’s enterprise applications serve manufacturers and other businesses that create, operate and service products. Led by its award winning ThingWorx® application enablement platform, PTC’s platform technologies help companies deliver new value emerging from the Internet of Things. An early pioneer in Computer Aided Design (CAD) software, PTC today employs more than 6,000 professionals serving more than 28,000 businesses worldwide.

 
PTC Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
                   
                   
      Three Months Ended   Nine Months Ended
      July 4,
2015
  June 28,
2014
  July 4,
2015
  June 28,
2014
                   
Revenue:                  
License and subscription solutions (L&SS)     $ 83,926     $ 97,703     $ 248,850     $ 269,114  
Support       165,687       172,021       516,042       508,412  
Total software revenue       249,613       269,724       764,892       777,526  
Professional services       53,500       66,910       177,782       212,733  
Total revenue       303,113       336,634       942,674       990,259  
                   
Cost of revenue:                  
Cost of L&SS revenue (1)       12,830       11,246       39,349       32,454  
Cost of support revenue (1)       20,452       21,118       63,176       62,598  
Total cost of software revenue       33,282       32,364       102,525       95,052  
Cost of professional services revenue (1)       46,094       58,712       155,847       182,777  
Total cost of revenue       79,376       91,076       258,372       277,829  
                   
Gross margin       223,737       245,558       684,302       712,430  
                   
Operating expenses:                  
Sales and marketing (1)       86,454       91,440       256,085       261,612  
Research and development (1)       54,078       57,405       175,333       166,109  
General and administrative (1)       48,100       33,817       119,342       98,888  
Amortization of acquired intangible assets       9,105       7,998       27,691       23,772  
Restructuring charges       4,393       514       42,625       1,581  
Total operating expenses       202,130       191,174       621,076       551,962  
                   
Operating income       21,607       54,384       63,226       160,468  
Other expense, net       (3,668 )     (2,278 )     (10,492 )     (6,724 )
Income before income taxes       17,939       52,106       52,734       153,744  
Provision (benefit) for income taxes       504       14,080       (377 )     32,305  
Net income     $ 17,435     $ 38,026     $ 53,111     $ 121,439  
                   
Earnings per share:                  
Basic     $ 0.15     $ 0.32     $ 0.46     $ 1.02  
Weighted average shares outstanding       114,764       118,328       115,021       118,753  
                   
Diluted     $ 0.15     $ 0.32     $ 0.46     $ 1.01  
Weighted average shares outstanding       116,025       119,901       116,330       120,573  
                   
                   
                   

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

                   
      Three Months Ended   Nine Months Ended
      July 4,
2015
  June 28,
2014
  July 4,
2015
  June 28,
2014
Cost of L&SS revenue     $ 121     $ 63     $ 381     $ 210  
Cost of support revenue       1,012       898       2,777       2,711  
Cost of service revenue       1,317       1,549       4,510       4,435  
Sales and marketing       3,430       3,065       9,383       8,583  
Research and development       2,928       2,231       9,015       7,067  
General and administrative       5,263       4,726       12,069       14,856  
Total stock-based compensation     $ 14,071     $ 12,532     $ 38,135     $ 37,862  
                   
 
PTC Inc.
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS (UNAUDITED)
(in thousands, except per share data)
                   
      Three Months Ended   Nine Months Ended
      July 4,
2015
  June 28,
2014
  July 4,
2015
  June 28,
2014
                   
GAAP revenue     $ 303,113     $ 336,634     $ 942,674     $ 990,259  
Fair value adjustment of acquired deferred L&SS revenue       352       -       1,624       -  
Fair value adjustment of acquired deferred support revenue       125       -       855       -  
Fair value adjustment of acquired deferred service revenue       309       -       844       -  
Non-GAAP revenue     $ 303,899     $ 336,634     $ 945,997     $ 990,259  
                   
GAAP gross margin     $ 223,737     $ 245,558     $ 684,302     $ 712,430  
Fair value adjustment of acquired deferred L&SS revenue       352       -       1,624       -  
Fair value adjustment of acquired deferred support revenue       125       -       855       -  
Fair value adjustment of acquired deferred service revenue       309       -       844       -  
Fair value adjustment to deferred services cost       (135 )     -       (392 )     -  
Stock-based compensation       2,450       2,510       7,668       7,356  
Amortization of acquired intangible assets
included in cost of L&SS revenue
      4,957       4,415       14,438       13,319  
Non-GAAP gross margin     $ 231,795     $ 252,483     $ 709,339     $ 733,105  
                   
GAAP operating income     $ 21,607     $ 54,384     $ 63,226     $ 160,468  
Fair value adjustment of acquired deferred L&SS revenue       352       -       1,624       -  
Fair value adjustment of acquired deferred support revenue       125       -       855       -  
Fair value adjustment of acquired deferred service revenue       309       -       844       -  
Fair value adjustment to deferred services cost       (135 )     -       (392 )     -  
Stock-based compensation       14,071       12,532       38,135       37,862  
Amortization of acquired intangible assets
included in cost of L&SS revenue
      4,957       4,415       14,438       13,319  
Amortization of acquired intangible assets       9,105       7,998       27,691       23,772  
Acquisition-related charges included in
general and administrative expenses
      2,778       1,528       8,703       6,768  
US pension plan termination-related costs       1,995       -       5,392       -  
Pending legal settlement accrual       13,622       -       13,622       -  
Restructuring charges       4,393       514       42,625       1,581  
Non-GAAP operating income (2)     $ 73,179     $ 81,371     $ 216,763     $ 243,770  
                   
GAAP net income     $ 17,435     $ 38,026     $ 53,111     $ 121,439  
Fair value adjustment of acquired deferred L&SS revenue       352       -       1,624       -  
Fair value adjustment of acquired deferred support revenue       125       -       855       -  
Fair value adjustment of acquired deferred service revenue       309       -       844       -  
Fair value adjustment to deferred services cost       (135 )     -       (392 )     -  
Stock-based compensation       14,071       12,532       38,135       37,862  
Amortization of acquired intangible assets
included in cost of L&SS revenue
      4,957       4,415       14,438       13,319  
Amortization of acquired intangible assets       9,105       7,998       27,691       23,772  
Acquisition-related charges included in
general and administrative expenses
      2,778       1,528       8,703       6,768  
US pension plan termination-related costs       1,995       -       5,392       -  
Pending legal settlement accrual       13,622       -       13,622       -  
Restructuring charges       4,393       514       42,625       1,581  
Income tax adjustments (3)       (7,309 )     (1,275 )     (24,551 )     (23,088 )
Non-GAAP net income     $ 61,698     $ 63,738     $ 182,097     $ 181,653  
                   
GAAP diluted earnings per share     $ 0.15     $ 0.32     $ 0.46     $ 1.01  
Fair value of acquired deferred revenue       0.01       -       0.03       -  
Fair value adjustment to deferred services cost       -       -       -       -  
Stock-based compensation       0.12       0.10       0.33       0.31  
Amortization of acquired intangibles       0.12       0.10       0.36       0.31  
Acquisition-related charges       0.02       0.01       0.07       0.06  
US pension plan termination-related costs       0.02       -       0.05       -  
Pending legal settlement accrual       0.12       -       0.12       -  
Restructuring charges       0.04       -       0.37       0.01  
Income tax adjustments       (0.06 )     (0.01 )     (0.21 )     (0.19 )
Non-GAAP diluted earnings per share     $ 0.53     $ 0.53     $ 1.57     $ 1.51  
                   
(2)Operating margin impact of non-GAAP adjustments:
 
      Three Months Ended   Nine Months Ended
      July 4,
2015
  June 28,
2014
  July 4,
2015
  June 28,
2014
GAAP operating margin       7.1 %     16.2 %     6.7 %     16.2 %
Fair value of acquired deferred revenue       0.3 %     0.0 %     0.4 %     0.0 %
Fair value adjustment to deferred services cost       0.0 %     0.0 %     0.0 %     0.0 %
Stock-based compensation       4.6 %     3.7 %     4.0 %     3.8 %
Amortization of acquired intangibles       4.6 %     3.7 %     4.5 %     3.7 %
Acquisition-related charges       0.9 %     0.5 %     0.9 %     0.7 %
US pension plan termination-related costs       0.7 %     0.0 %     0.6 %     0.0 %
Pending legal settlement accrual       4.5 %     0.0 %     1.4 %     0.0 %
Restructuring charges       1.4 %     0.2 %     4.5 %     0.2 %
Non-GAAP operating margin       24.1 %     24.2 %     22.9 %     24.6 %
                   

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