UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_ to_
Commission File Number: 0-18059
PTC Inc.
(Exact name of registrant as specified in its charter)
Massachusetts
04-2866152
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
121 Seaport Boulevard, Boston, MA 02210
(Address of principal executive offices, including zip code)
(781) 370-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value per share
PTC
NASDAQ Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
There were 120,135,231 shares of our common stock outstanding on July 31, 2024.
INDEX TO FORM 10-Q
For the Quarter Ended June 30, 2024
Page
Number
Part I—FINANCIAL INFORMATION
Item 1.
Unaudited Condensed Consolidated Financial Statements:
1
Consolidated Balance Sheets as of June 30, 2024 and September 30, 2023
Consolidated Statements of Operations for the three and nine months ended June 30, 2024 and June 30, 2023
2
Consolidated Statements of Comprehensive Income for the three and nine months ended June 30, 2024 and June 30, 2023
3
Consolidated Statements of Cash Flows for the nine months ended June 30, 2024 and June 30, 2023
4
Consolidated Statements of Stockholders' Equity for the three and nine months ended June 30, 2024 and June 30, 2023
5
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
30
Item 4.
Controls and Procedures
Part II—OTHER INFORMATION
Item 1A.
Risk Factors
31
Item 5.
Other Information
Item 6.
Exhibits
32
Signature
33
Table of Contents
PART I—FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
June 30,2024
September 30,2023
ASSETS
Current assets:
Cash and cash equivalents
$
247,749
288,103
Accounts receivable, net of allowance for doubtful accounts of $1,269 and $429 at June 30, 2024 and September 30, 2023, respectively
674,959
811,398
Prepaid expenses
109,373
96,016
Other current assets
59,690
81,849
Total current assets
1,091,771
1,277,366
Property and equipment, net
77,535
88,391
Goodwill
3,442,245
3,358,511
Acquired intangible assets, net
910,505
941,249
Deferred tax assets
151,659
123,319
Operating right-of-use lease assets
131,297
143,028
Other assets
323,133
356,978
Total assets
6,128,145
6,288,842
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
47,153
43,480
Accrued expenses and other current liabilities
123,090
132,841
Accrued compensation and benefits
161,073
160,431
Accrued income taxes
25,366
14,919
Current portion of long-term debt
518,071
9,375
Deferred acquisition payments
—
620,040
Deferred revenue
671,209
665,362
Short-term lease obligations
23,287
24,737
Total current liabilities
1,569,249
1,671,185
Long-term debt
1,293,083
1,686,410
Deferred tax liabilities
37,255
29,508
Long-term deferred revenue
16,405
16,188
Long-term lease obligations
156,987
168,455
Other liabilities
40,487
39,806
Total liabilities
3,113,466
3,611,552
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued
Common stock, $0.01 par value; 500,000 shares authorized; 120,049 and 118,846 shares issued and outstanding at June 30, 2024 and September 30, 2023, respectively
1,200
1,188
Additional paid-in capital
1,910,615
1,820,905
Retained earnings
1,223,087
973,277
Accumulated other comprehensive loss
(120,223
)
(118,080
Total stockholders’ equity
3,014,679
2,677,290
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
Nine months ended
June 30, 2024
June 30, 2023
Revenue:
License
149,104
192,940
567,423
562,631
Support and cloud services
339,505
313,721
1,006,420
875,448
Total software revenue
488,609
506,661
1,573,843
1,438,079
Professional services
30,030
35,681
98,082
112,354
Total revenue
518,639
542,342
1,671,925
1,550,433
Cost of revenue:
Cost of license revenue
12,072
11,501
33,003
41,293
Cost of support and cloud services revenue
69,968
68,264
204,405
177,626
Total cost of software revenue
82,040
79,765
237,408
218,919
Cost of professional services revenue
29,876
36,089
94,583
106,231
Total cost of revenue
111,916
115,854
331,991
325,150
Gross margin
406,723
426,488
1,339,934
1,225,283
Operating expenses:
Sales and marketing
140,318
145,083
411,763
392,673
Research and development
110,253
103,819
323,034
292,345
General and administrative
49,659
57,055
180,391
173,949
Amortization of acquired intangible assets
10,672
10,670
31,459
29,352
Restructuring and other credits, net
(39
(802
(376
Total operating expenses
310,902
316,588
945,845
887,943
Operating income
95,821
109,900
394,089
337,340
Interest and debt premium expense
(27,785
(35,836
(94,705
(93,719
Other income (expense), net
(663
2,462
(667
398
Income before income taxes
67,373
76,526
298,717
244,019
Provision (benefit) for income taxes
(1,605
15,128
48,907
44,082
Net income
68,978
61,398
249,810
199,937
Earnings per share—Basic
0.58
0.52
2.09
1.69
Earnings per share—Diluted
0.57
0.51
2.07
1.68
Weighted-average shares outstanding—Basic
119,893
118,483
119,533
118,186
Weighted-average shares outstanding—Diluted
120,822
119,392
120,593
119,072
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Other comprehensive income (loss), net of tax:
Hedge gain (loss) arising during the period, net of tax of $(0.8) million and $0.2 million in the third quarter of 2024 and 2023, respectively, and $0.9 million and $4.7 million in the first nine months of 2024 and 2023, respectively
2,292
(521
(2,787
(14,005
Foreign currency translation adjustment, net of tax of $0 for each period
(9,344
1,405
538
70,181
Change in pension benefit, net of tax of $0.0 million and $0.0 million in the third quarter of 2024 and 2023, respectively, and $(0.1) million and $0.0 million in the first nine months of 2024 and 2023, respectively
112
(24
106
(356
Other comprehensive income (loss)
(6,940
860
(2,143
55,820
Comprehensive income
62,038
62,258
247,667
255,757
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
81,272
76,943
Amortization of right-of-use lease assets
23,143
24,705
Stock-based compensation
161,242
147,568
Other non-cash items, net
(297
(3,114
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable
131,422
99,521
Accounts payable and accrued expenses
(8,631
5,407
8,666
5,961
8,393
18,696
(1,795
(9,910
Other current assets and prepaid expenses
(9,962
8,670
Operating lease liabilities
(13,438
(1,360
Other noncurrent assets and liabilities
22,045
(11,932
Net cash provided by operating activities
651,870
561,092
Cash flows from investing activities:
Additions to property and equipment
(9,841
(18,035
Acquisitions of businesses, net of cash acquired
(93,457
(828,271
Proceeds from sale of investments
349
Purchases of investments
(5,823
Settlement of net investment hedges
3,826
(14,204
Divestitures of businesses and assets, net
(154
Net cash used in investing activities
(99,472
(866,138
Cash flows from financing activities:
Borrowings under credit facility
944,845
1,130,000
Repayments of borrowings under credit facility and acquired debt
(835,796
(744,000
Proceeds from issuance of common stock
12,709
10,592
Payments of withholding taxes in connection with stock-based awards
(92,589
(75,489
Payments of principal for financing leases
(217
Credit facility origination costs
(13,355
Payment of deferred acquisition consideration
(620,040
Net cash provided by (used in) financing activities
(590,871
307,531
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
(2,003
6,835
Net change in cash, cash equivalents, and restricted cash
(40,476
9,320
Cash, cash equivalents, and restricted cash, beginning of period
288,798
272,888
Cash, cash equivalents, and restricted cash, end of period
248,322
282,208
Supplemental disclosure of non-cash financing and investing activities:
Withholding taxes in connection with stock-based awards, accrued
7,674
5,705
Operating right-of-use assets obtained in exchange for operating lease liabilities
4,941
23,142
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three months ended June 30, 2024
Common Stock
Accumulated
Shares
Amount
AdditionalPaid-InCapital
Retained Earnings
OtherComprehensiveLoss
TotalStockholders’Equity
Balance as of March 31, 2024
119,717
1,197
1,901,109
1,154,109
(113,283
2,943,132
Common stock issued for employee stock-based awards
486
(5
Shares surrendered by employees to pay taxes related to stock-based awards
(2
(28,069
(28,071
Compensation expense from stock-based awards
37,580
Gain on net investment hedges, net of tax
Foreign currency translation adjustment
Change in defined benefit pension items, net of tax
Balance as of June 30, 2024
120,049
Nine months ended June 30, 2024
Balance as of September 30, 2023
118,846
1,702
(18
(601
(7
(99,938
(99,945
Common stock issued for employee stock purchase plan
102
12,708
176,958
Loss on net investment hedges, net of tax
Three months ended June 30, 2023
Balance as of March 31, 2023
118,334
1,182
1,749,574
866,276
(98,498
2,518,534
582
6
(6
(185
(25,170
(25,172
43,044
Balance as of June 30, 2023
118,731
1,186
1,767,442
927,674
(97,638
2,598,664
Nine months ended June 30, 2023
Balance as of September 30, 2022
117,472
1,175
1,720,580
727,737
(153,458
2,296,034
1,766
(609
(81,187
(81,194
117,475
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
General
The accompanying unaudited condensed consolidated financial statements include the accounts of PTC Inc. and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. While we believe that the disclosures presented are adequate in order to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with our annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair statement of our financial position, results of operations and cash flows as of the dates and for the periods indicated. The September 30, 2023 Consolidated Balance Sheet included herein is derived from our audited consolidated financial statements.
Unless otherwise indicated, all references to a year mean our fiscal year, which ends on September 30.
Pending Accounting Pronouncements
Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The ASU will be effective for us in 2026. We expect the adoption to result in disclosure changes only.
Improvements to Reportable Segment Disclosures
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The ASU will be effective for us in 2025. We expect the adoption to result in disclosure changes only.
2. Revenue from Contracts with Customers
Receivables, Contract Assets and Contract Liabilities
Short-term and long-term receivables
840,382
997,490
Contract asset
13,443
16,465
687,614
681,550
During the nine months ended June 30, 2024, we recognized $619.2 million of revenue that was included in Deferred revenue as of September 30, 2023. The remainder of the change was driven by additional deferrals, primarily from new billings.
Our multi-year, non-cancellable on-premises subscription contracts provide customers with an annual right to exchange software within the subscription with other software. As of June 30, 2024 and September 30, 2023, our total revenue liability was $27.0 million and $23.7 million, respectively, primarily associated with the annual right to exchange on-premises subscription software.
Remaining Performance Obligations
Our contracts with customers include transaction price amounts allocated to performance obligations that will be satisfied and recognized as revenue at a later date. As of June 30, 2024, the transaction price amounts include performance obligations of $687.6 million recorded in Deferred revenue and $1,382.2 million that are not yet recorded in the Consolidated Balance Sheets. Of the total $2,069.8 million, we expect to recognize approximately 59% over the next 12 months, 26% over the next 13 to 24 months, and the remaining amount thereafter.
Disaggregation of Revenue
Recurring revenue(1)
481,559
498,410
1,551,600
1,407,662
Perpetual license
7,050
8,251
22,243
30,417
Our international revenue is presented based on the location of our customer. Revenue for the geographic regions in which we operate is presented below.
Americas
253,592
278,329
781,480
761,617
Europe
170,617
173,559
624,884
549,835
Asia Pacific
94,430
90,454
265,561
238,981
3. Stock-based Compensation
The value of stock issued for vested restricted stock units (RSUs) is as follows:
Stock issued for vested RSUs
88,803
79,129
283,975
235,430
Compensation expense recorded for our stock-based awards is classified in our Consolidated Statements of Operations as follows:
June 30,2023
49
53
116
141
4,035
3,479
10,762
9,464
1,772
2,315
5,101
6,063
15,167
14,513
46,023
39,554
13,101
14,801
41,275
41,839
13,914
18,657
57,965
50,507
Total stock-based compensation expense
48,038
53,818
As of June 30, 2024 and September 30, 2023, we had liability-classified awards related to stock-based compensation based on a fixed monetary amount of $29.1 million and $44.9 million, respectively.
8
4. Earnings per Share (EPS) and Common Stock
EPS
The following table presents the calculation for both basic and diluted EPS:
Dilutive effect of restricted stock units
929
909
1,060
886
Anti-dilutive shares were immaterial for the three and nine months ended June 30, 2024 and June 30, 2023.
5. Acquisitions
Acquisition and transaction-related costs for the third quarter and first nine months of 2024 totaled $0.2 million and $3.0 million, respectively, compared to $0.8 million and $18.5 million in the third quarter and first nine months of 2023, respectively. These costs are classified in General and administrative expense in the accompanying Consolidated Statements of Operations.
pure-systems
On October 4, 2023, we acquired pure-systems GmbH pursuant to a Share Purchase Agreement. pure-systems is a leading provider of product and software variant management solutions used by manufacturing companies to efficiently manage the different versions of software and systems engineering assets. The purchase price was $93.5 million, net of cash acquired, which we financed primarily with a draw on the revolving line of our credit facility. pure-systems had approximately 50 employees on the close date.
The acquisition of pure-systems has been accounted for as a business combination. Assets and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using a discounted cash flow model which requires the use of significant estimates and assumptions, including estimating future revenues and costs. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill.
The following table outlines the purchase price allocation for pure-systems:
77,118
Customer relationships
17,400
Purchased software
10,000
Trademarks
800
Net tax liability
(8,860
Acquired debt
(2,475
Other net liabilities
(526
Total
93,457
9
The acquired customer relationships, purchased software, and trademarks are being amortized over useful lives of 18 years, 10 years, and 10 years, respectively, based on the expected economic benefit pattern of the assets. The acquired goodwill will not be deductible for income tax purposes. The amount of goodwill resulting from the purchase price allocation reflects the expected value that will be created by expanding our application lifecycle management (ALM) offerings, which are included within our PLM product group.
Our results of operations for the reported periods if presented on a pro forma basis would not differ materially from our reported results.
ServiceMax
On January 3, 2023, we acquired ServiceMax, Inc. pursuant to a Share Purchase Agreement dated November 17, 2022 for $1,448.2 million, net of cash acquired. PTC paid the first installment of $828.2 million on the acquisition date. The remaining installment of $650.0 million, of which $620.0 million represented the fair value as of the acquisition date and $30.0 million was imputed interest, was paid in October 2023. The fair value of the deferred acquisition payment was calculated based on our borrowing rate at the time of the acquisition. The purchase price allocation resulted in $974.9 million of Goodwill, $628.6 million of intangible assets, $121.7 million of net tax liabilities, and $33.6 million of other net liabilities.
ServiceMax develops and licenses cloud-native, product-centric field service management (FSM) software, which is included within our PLM product group. ServiceMax had approximately 500 employees on the close date.
Unaudited Pro Forma Financial Information
The unaudited pro forma financial information in the table below summarizes the combined results of operations for PTC and ServiceMax for the pro forma nine months ended June 30, 2023. The unaudited pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2022. Since the acquisition took place in fiscal 2023, the unaudited pro forma financial information was prepared as though ServiceMax was acquired at the beginning of fiscal 2022. The unaudited pro forma financial information for all periods presented includes adjustments to reflect certain business combination effects, including: amortization of acquired intangible assets, including the elimination of related ServiceMax expenses; acquisition-related costs incurred by both parties; reversal of certain costs incurred by ServiceMax which would not have been incurred had the acquisition occurred at the beginning of fiscal 2022; interest expense under the new combined capital structure; stock-based compensation charges; and the related tax effects as though ServiceMax was acquired as of the beginning of fiscal 2022.
The unaudited pro forma financial information for the nine months ended June 30, 2023 presented below combines the historical results of PTC for those periods, the historical results of ServiceMax for the three months ended January 31, 2023, and the effects of the pro forma adjustments listed above.
Pro forma nine months ended
Revenue
1,594,118
193,834
10
6. Goodwill and Intangible Assets
During the third fiscal quarter of 2024, we completed our annual impairment test of goodwill, which was based on a qualitative assessment, and concluded that there was no impairment. A qualitative assessment is designed to determine whether we believe it is more likely than not that the fair values of our reporting units exceed their carrying values. A qualitative assessment includes a review of qualitative factors, including company-specific (financial performance and long-range plans), industry, and macroeconomic factors, and a consideration of the fair value of each reporting unit at the last valuation date.
Goodwill and acquired intangible assets consisted of the following:
September 30, 2023
GrossCarryingAmount
AccumulatedAmortization
Net BookValue
Goodwill (not amortized)
Intangible assets with finite lives (amortized):
627,099
424,643
202,456
615,915
395,109
220,806
Capitalized software
22,877
Customer lists and relationships
1,135,067
443,644
691,423
1,116,117
413,125
702,992
Trademarks and trade names
37,727
21,101
16,626
36,851
19,400
17,451
Other
3,886
3,867
Total intangible assets with finite lives
1,826,656
916,151
1,795,627
854,378
Total goodwill and acquired intangible assets
4,352,750
4,299,760
Changes in Goodwill were as follows:
Balance, October 1, 2023
Acquisitions
6,616
Balance, June 30, 2024
The aggregate amortization expense for intangible assets with finite lives is classified in our Consolidated Statements of Operations as follows:
Cost of revenue
9,685
9,841
28,835
25,817
Total amortization expense
20,357
20,511
60,294
55,169
7. Fair Value Measurements
The valuation hierarchy for disclosure of assets and liabilities reported at fair value prioritizes the inputs for such valuations into three broad levels:
A financial asset's or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
11
Money market funds, time deposits, and corporate notes/bonds are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.
The principal market in which we execute our foreign currency derivatives is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants are generally large financial institutions. Our foreign currency derivatives’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.
Our significant financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2024 and September 30, 2023 were as follows:
Level 1
Level 2
Level 3
Financial assets:
Cash equivalents(1)
41,103
Forward contracts
181
41,284
Financial liabilities:
2,103
72,754
Convertible note
2,000
7,340
82,094
3,158
Level 3 Investments
Convertible Note
In the fourth quarter of 2021, we invested $2.0 million in a non-marketable convertible note. This debt security was classified as available-for-sale and included in Other assets on the Consolidated Balance Sheet. During the nine months ended June 30, 2024, we recorded a $2.0 million impairment loss related to this Level 3 investment. The impairment loss is included in Other income (expense), net on the Consolidated Statements of Operations.
12
8. Derivative Financial Instruments
We enter into foreign currency forward contracts to manage our exposure to foreign currency exchange risk to reduce earnings volatility. We do not enter into derivative transactions for trading or speculative purposes.
The following table shows our derivative instruments measured at gross fair value as reflected in the Consolidated Balance Sheets:
Fair Value of Derivatives Designated As Hedging Instruments
Fair Value of Derivatives Not Designated As Hedging Instruments
Derivative assets(1):
81
3,770
100
3,570
Derivative liabilities(2):
681
1,422
Non-Designated Hedges
We hedge our net foreign currency monetary assets and liabilities primarily resulting from foreign currency denominated receivables and payables with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These contracts have maturities of up to approximately three months. Generally, we do not designate these foreign currency forward contracts as hedges for accounting purposes and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, gains or losses on the underlying foreign-denominated balance are generally offset by the losses or gains on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in Other income (expense), net.
As of June 30, 2024 and September 30, 2023, we had outstanding forward contracts not designated as hedging instruments with notional amounts equivalent to the following:
Currency Hedged (in thousands)
Canadian Dollar / U.S. Dollar
5,125
5,135
Euro / U.S. Dollar
396,345
383,227
British Pound / U.S. Dollar
13,460
6,058
Israeli Shekel / U.S. Dollar
12,091
11,852
Japanese Yen / U.S. Dollar
27,914
4,770
Swiss Franc / U.S. Dollar
16,743
32,766
Swedish Krona / U.S. Dollar
21,841
35,085
Chinese Renminbi / U.S. Dollar
4,209
16,660
New Taiwan Dollar / U.S. Dollar
8,915
11,855
Korean Won / U.S. Dollar
6,157
Danish Krone / U.S. Dollar
3,353
6,731
All other
4,854
3,340
514,850
523,636
13
The following table shows the effect of our non-designated hedges on the Consolidated Statements of Operations for the three and nine months ended June 30, 2024 and June 30, 2023:
Location of Gain (Loss)
Net realized and unrealized loss, excluding the underlying foreign currency exposure being hedged
(1,590
(1,006
(6,611
(13,437
In the three months ended June 30, 2024, foreign currency losses, net were $1.7 million. In the three months ended June 30, 2023, foreign currency gains, net were $0.5 million. In the nine months ended June 30, 2024 and June 30, 2023, foreign currency losses, net were $1.8 million and $3.4 million, respectively.
Net Investment Hedges
We translate balance sheet accounts of subsidiaries with foreign functional currencies into the U.S. Dollar using the exchange rate at each balance sheet date. Resulting translation adjustments are reported as a component of Accumulated other comprehensive loss on the Consolidated Balance Sheets. We designate certain foreign exchange forward contracts as net investment hedges against exposure on translation of balance sheet accounts of Euro and Japanese Yen functional subsidiaries. Net investment hedges partially offset the impact of Foreign currency translation adjustment recorded in Accumulated other comprehensive loss on the Consolidated Balance Sheets. All foreign exchange forward contracts are carried at fair value on the Consolidated Balance Sheets and the maximum duration of net investment hedge foreign exchange forward contracts is approximately three months.
Net investment hedge relationships are designated at inception, and effectiveness is assessed retrospectively on a quarterly basis using the net equity position of Euro and Japanese Yen functional subsidiaries. As the forward contracts are highly effective in offsetting exchange rate exposure, we record changes in these net investment hedges in Accumulated other comprehensive loss and subsequently reclassify them to Foreign currency translation adjustment in Accumulated other comprehensive loss at the time of forward contract maturity. Changes in the fair value of foreign exchange forward contracts due to changes in time value are excluded from the assessment of effectiveness. Our derivatives are not subject to any credit contingent features. We manage credit risk with counterparties by trading among several counterparties and we review our counterparties’ credit at least quarterly.
As of June 30, 2024 and September 30, 2023, we had outstanding forward contracts designated as net investment hedges with notional amounts equivalent to the following:
429,516
337,923
9,495
10,285
439,011
348,208
The following table shows the effect of our derivative instruments designated as net investment hedges in the Consolidated Statements of Operations for the three and nine months ended June 30, 2024 and June 30, 2023:
Gain (loss) recognized in OCI
OCI
3,047
(695
(3,705
(18,663
Gain (loss) reclassified from OCI to earnings
n/a
Gain recognized, excluded portion
946
1,124
3,161
3,272
14
As of June 30, 2024, we estimate that all amounts reported in Accumulated other comprehensive loss will be applied against exposed balance sheet accounts upon translation within the next three months.
Offsetting Derivative Assets and Liabilities
We have entered into master netting arrangements for our forward contracts that allow net settlements under certain conditions. Although netting is permitted, it is currently our policy and practice to record all derivative assets and liabilities on a gross basis in the Consolidated Balance Sheets.
The following table sets forth the offsetting of derivative assets as of June 30, 2024:
Gross Amounts Offset in the Consolidated Balance Sheets
Gross Amounts Not Offset in the Consolidated Balance Sheets
As of June 30, 2024
GrossAmount ofRecognizedAssets
Net Amounts of Assets Presented in the Consolidated Balance Sheets
FinancialInstruments
CashCollateralReceived
NetAmount
(181
The following table sets forth the offsetting of derivative liabilities as of June 30, 2024:
GrossAmount ofRecognizedLiabilities
GrossAmountsOffset in theConsolidatedBalanceSheets
Net Amounts of LiabilitiesPresented intheConsolidatedBalance Sheets
CashCollateralPledged
1,922
9. Income Taxes
Effective income tax rate
)%
20
%
16
The effective tax rate for the three and nine months ended June 30, 2024 was lower than the effective tax rate for the corresponding prior-year periods primarily due to changes in the geographic mix of income before taxes and the effects of IRS procedural guidance requiring IRS consent for certain previously automatic changes of accounting method. The IRS procedural guidance change significantly increased our estimated taxable income for the year ended September 30, 2024, resulting in an increase to the estimated tax benefit for the deductions associated with Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income. The benefit from this IRS procedural guidance change for the three and nine months ended June 30, 2024 will reverse in a future fiscal period if we receive IRS consent for a change in the treatment of these deductions. For the nine months ended June 30, 2024, this was offset by a tax expense of $3.6 million related to a tax reserve in a foreign jurisdiction.
In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the Internal Revenue Service in the U.S. We regularly assess the likelihood of additional assessments by tax authorities and provide for these matters as appropriate. We are currently under audit by tax authorities in several jurisdictions. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, transfer pricing, limitations on net operating losses and tax credits.
15
10. Debt
As of June 30, 2024 and September 30, 2023, we had the following debt obligations:
4.000% Senior notes due 2028
500,000
3.625% Senior notes due 2025
Credit facility revolver line(1)(2)
322,000
202,000
Credit facility term loan(1)(2)
493,750
Total debt
1,815,750
1,702,000
Unamortized debt issuance costs for the senior notes(3)
(4,596
(6,215
Total debt, net of issuance costs(4)
1,811,154
1,695,785
Senior Unsecured Notes
In February 2020, we issued $500 million in aggregate principal amount of 4.0% senior, unsecured long-term debt at par value, due in 2028 (the 2028 notes) and $500 million in aggregate principal amount of 3.625% senior, unsecured long-term debt at par value, due in 2025 (the 2025 notes).
As of June 30, 2024, the total estimated fair value of the 2028 and 2025 notes was approximately $471.9 million and $493.6 million, respectively, based on quoted prices for the notes on that date.
We were in compliance with all the covenants for all our senior notes as of June 30, 2024.
Credit Agreement
Our credit facility consists of (i) a $1.25 billion revolving credit facility, (ii) a $500 million term loan credit facility, and (iii) an incremental facility pursuant to which we may incur additional term loan tranches or increase the revolving credit facility. As of June 30, 2024, unused commitments under our credit facility were $928.0 million and amounts available for borrowing were $912.1 million.
As of June 30, 2024, the fair value of our credit facility approximates its book value.
PTC and certain eligible foreign subsidiaries are eligible borrowers under the credit facility. As of June 30, 2024, $123.0 million was borrowed by an eligible foreign subsidiary borrower.
Loans under the credit facility bear interest at variable rates. As of June 30, 2024, the annual rate for borrowings outstanding was 6.9%. A quarterly revolving commitment fee on the undrawn portion of the revolving credit facility is required, ranging from 0.175% to 0.325% per annum, based upon our total leverage ratio.
As of June 30, 2024, we were in compliance with all financial and operating covenants of the credit facility.
Interest
We incurred interest expense on our debt of $27.8 million and $94.7 million in the third quarter and first nine months of 2024, respectively, and $35.8 million and $93.7 million in the third quarter and first nine months of 2023, respectively. Interest expense in the third quarter and first nine months of 2023 included $10.0 million and $20.0 million, respectively, of interest associated with the $650.0 million ServiceMax deferred acquisition payment that we settled in the first quarter of 2024. The average interest rate on borrowings outstanding was approximately 5.3% and 5.5% during the third quarter and first nine months of 2024, respectively, and 5.2% and 4.8% during the third quarter and first nine months of 2023, respectively.
11. Commitments and Contingencies
Guarantees and Indemnification Obligations
We enter into standard indemnification agreements with our customers and business partners in the ordinary course of our business. Under such agreements, we typically indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our products. Indemnification may also cover other types of claims, including claims relating to certain data breaches. These agreements typically limit our liability with respect to indemnification claims other than intellectual property infringement claims. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and, accordingly, we believe the estimated fair value of liabilities under these agreements is immaterial.
We warrant that our software products will perform in all material respects in accordance with our standard published specifications during the term of the license. Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry standards and, in the case of fixed price services, the agreed-upon specifications. In most cases, liability for these warranties is capped. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, we have not incurred significant cost under our product or services warranties. As a result, we believe the estimated fair value of these liabilities is immaterial.
17
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Business Overview
PTC is a global software company that provides a portfolio of innovative digital solutions that work together to transform how physical products are engineered, manufactured, and serviced.
Our software portfolio includes award-winning offerings that enable companies to author product data (our computer-aided design (CAD) portfolio solutions) and to manage product data and orchestrate processes (our product lifecycle management (PLM) portfolio solutions).
Our software can be delivered on premises, in the cloud, or in a hybrid model. Our customers include some of the world's most innovative companies in the aerospace and defense, automotive, electronics and high tech, industrial machinery and equipment, life sciences, retail and consumer products industries.
We generate revenue through the sale of subscriptions, which include term-based on-premises software licenses and related support, Software-as-a-Service (SaaS), and hosting services; perpetual licenses; support for perpetual licenses; and professional services (consulting, implementation, and training).
Forward-Looking Statements
Statements in this document that are not historic facts, including statements about our future financial and growth expectations and potential stock repurchases, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks include: the macroeconomic and/or global manufacturing climates may not improve or may deteriorate due to, among other factors, high interest rates or increases in interest rates and inflation, volatile foreign exchange rates and the relative strength of the U.S. dollar, tightening of credit standards and availability, the effects of the conflicts between Russia and Ukraine and in the Middle East, and growing tensions with China, any of which could cause customers to delay or reduce purchases of new software, reduce the number of subscriptions they carry, or delay payments to us, which would adversely affect ARR and/or our financial results, including cash flow; our investments in our solutions may not drive expansion of those solutions and/or generate the ARR and/or cash flow we expect if customers are slower to adopt those solutions than we expect or if they adopt competing solutions; other uses of cash or our credit facility limits could limit or preclude the return of 50% of free cash flow to shareholders via share repurchases; and foreign exchange rates may differ materially from those we expect. In addition, our assumptions concerning our future GAAP and non-GAAP effective income tax rates are based on estimates and other factors that could change, including changes to tax laws in the U.S. and other countries and the geographic mix of our revenue, expenses, and profits. Other risks and uncertainties that could cause actual results to differ materially from those projected are described below throughout or referenced in Part II, Item 1A. Risk Factors of this report.
Operating and Non-GAAP Financial Measures
Our discussion of results includes discussion of our ARR (Annual Run Rate) operating measure, non-GAAP financial measures, and disclosure of our results on a constant currency basis. ARR and our non-GAAP financial measures are described below in Results of Operations - Operating Measure and Results of Operations - Non-GAAP Financial Measures, respectively. The methodology used to calculate constant currency disclosures is described in Results of Operations - Impact of Foreign Currency Exchange on Results of Operations. You should read those sections to understand our operating measure, non-GAAP financial measures, and constant currency disclosures.
Executive Overview
Despite the overall demand environment, which has been sluggish for many quarters now, ARR grew 10% (12% constant currency) to $2.13 billion as of the end of Q3’24 compared to Q3’23.
Cash provided by operating activities grew 26% to $214 million in Q3'24 compared to Q3'23. Free cash flow grew 29% to $212 million in Q3'24 compared to Q3'23.
Revenue decreased 4% (3% constant currency) to $519 million in Q3'24 compared to Q3'23, driven by lower on-premises subscription license revenue due to shorter contract durations and an increase in the proportion of ratably recognized SaaS contracts compared to on-premises subscription contracts. Diluted earnings per share grew 11% to $0.57 in Q3'24 compared to Q3'23, primarily driven by a non-cash tax benefit associated with the effects of IRS procedural guidance issued in May 2024 and a reduction in total expenses, partially offset by lower revenue.
19
Results of Operations
(Dollar amounts in millions, except per share data)
Percent Change
Actual
ConstantCurrency(1)
ARR
2,126.1
1,928.7
Total recurring revenue(2)
481.6
498.4
(3
7.1
8.3
(15
(14
30.0
35.7
(16
518.6
542.3
(4
111.9
115.9
406.7
426.5
Operating expenses
310.9
316.6
(1
95.8
109.9
(13
(10
Non-GAAP operating income(1)
164.4
185.0
(11
(9
Operating margin
18.5
20.3
Non-GAAP operating margin(1)
31.7
34.1
Diluted earnings per share
Non-GAAP diluted earnings per share(1)
0.98
0.99
Cash provided by operating activities
213.8
169.2
Capital expenditures
(1.6
(5.1
Free cash flow
212.2
164.1
1,551.6
1,407.7
22.2
30.4
(27
98.1
112.4
1,671.9
1,550.4
332.0
325.2
1,339.9
1,225.3
945.8
887.9
394.1
337.3
617.8
558.2
23.6
21.8
37.0
36.0
3.54
3.14
651.9
561.1
(9.8
(18.0
642.0
543.1
Impact of Foreign Currency Exchange on Results of Operations
Approximately 50% of our revenue and 35% of our expenses are transacted in currencies other than the U.S. Dollar. Because we report our results of operations in U.S. Dollars, currency translation, particularly changes in the Euro, Yen, Shekel, and Rupee relative to the U.S. Dollar, affects our reported results. Our constant currency disclosures are calculated by multiplying the results in local currency for the quarterly periods for FY'24 and FY'23 by the exchange rates in effect on September 30, 2023.
Under ASC 606, the volume, mix, and duration of contract types (support, SaaS, on-premises subscription) starting or renewing in any given period can have a material impact on revenue in the period, and as a result can impact the comparability of reported revenue period over period. We recognize revenue for the license portion of on-premises subscription contracts up front when we deliver the licenses to the customer, typically on the start date, and we recognize revenue on the support portion of on-premises subscription contracts and stand-alone support contracts ratably over the term. We continue to convert existing support contracts to on-premises subscriptions, resulting in a shift to up-front recognition of on-premises subscription license revenue in the period converted compared to ratable recognition for a perpetual support contract. Revenue from our cloud services (primarily SaaS) contracts is recognized ratably. We expect that over time a higher portion of our revenue will be recognized ratably as we expand our SaaS offerings, as we release additional cloud functionality into our products, and as customers migrate from on-premises subscriptions to SaaS. Given the different mix, duration and volume of new and renewing contracts in any period, year-over-year or sequential revenue can vary significantly.
Revenue by Line of Business
(Dollar amounts in millions)
ConstantCurrency
149.1
192.9
(23
(21
567.4
562.6
0
339.5
313.7
1,006.4
875.4
Software revenue
488.6
506.7
1,573.8
1,438.1
Software revenue decreased in Q3'24 compared to Q3'23, primarily driven by lower license revenue in Q3'24 due to shorter contract durations and an increase in the proportion of ratably recognized SaaS contracts compared to on-premises subscription contracts. Software revenue growth in the first nine months of FY'24 was driven by PLM, which included the contribution from ServiceMax (acquired in early Q2'23), and CAD.
License revenue growth was relatively flat in the first nine months of FY'24, reflecting CAD and PLM growth in Europe and Asia Pacific, offset by lower license revenue in the Americas, particularly in PLM.
Support and cloud services revenue growth in Q3'24 was mainly driven by PLM growth in the Americas and Europe. Support and cloud services revenue growth in the first nine months of FY'24 was driven by PLM (which included contribution from ServiceMax) in the Americas and Europe.
Professional services revenue decreased in Q3'24 and the first nine months of FY'24 as we continue to execute on our strategy of leveraging partners to deliver services rather than contracting to deliver services ourselves.
Software Revenue by Product Group
PLM
300.3
314.4
958.6
864.4
CAD
188.3
192.3
615.2
573.7
21
PLM software revenue decreased in Q3'24, driven by lower revenue in the Americas. PLM software revenue growth in the first nine months of FY’24 was driven by the contribution from ServiceMax (acquired in early Q2’23) and growth in Europe. Year-over-year PLM software revenue growth for the first nine months of FY'24 excluding Q1'24 ServiceMax revenue would have been 6% (5% constant currency).
PLM ARR grew 12% (13% constant currency) from Q3’23 to Q3'24.
CAD software revenue decreased in Q3'24 compared to Q3'23, primarily due to lower revenue in the Americas. Year-over-year CAD software revenue growth for the first nine months of FY'24 was primarily driven by revenue growth in Europe and Asia Pacific.
CAD ARR grew 8% (10% constant currency) from Q3’23 to Q3’24.
Gross Margin
License gross margin
137.0
181.4
534.4
521.3
License gross margin percentage
92
94
93
Support and cloud services gross margin
269.5
245.5
802.0
697.8
Support and cloud services gross margin percentage
79
78
80
Professional services gross margin
0.2
(0.4
138
3.5
6.1
(43
Professional services gross margin percentage
Total gross margin
Total gross margin percentage
Non-GAAP gross margin(1)
422.3
442.2
1,384.7
1,266.8
Non-GAAP gross margin percentage(1)
82
83
License gross margin changes in Q3'24 and the first nine months of FY'24 compared to the corresponding FY'23 periods were in line with changes in license revenue. License gross margin growth in the first nine months of FY'24 was due mainly to lower intangible amortization expense. Cost of license revenue in Q3'24 remained consistent with Q3'23.
Support and cloud services gross margin growth in Q3'24 and the first nine months of FY'24 compared to the corresponding FY'23 periods was in line with support and cloud services revenue growth. Cost of support and cloud services revenue in the first nine months of FY’24 grew at a similar rate to revenue, driven by higher intangible amortization expense, compensation expense, and royalty expense. Cost of support and cloud services revenue in Q3'24 remained consistent with Q3'23.
Professional services gross margin decreased in first nine months of FY'24 compared to the corresponding FY'23 period, primarily due to lower margins on business subcontracted to partners. Professional services gross margin improved in Q3'24 compared to Q3'23 due to lower outside services and compensation costs. The decreases in professional services revenue and costs are due to our continued execution on our strategy of leveraging partners to deliver services rather than contracting to deliver services ourselves.
22
Operating Expenses
140.3
145.1
411.8
392.7
% of total revenue
27
25
110.3
103.8
323.0
292.3
49.7
57.1
180.4
173.9
10.7
31.5
29.4
(0.0
(100
(0.8
113
(0
Total headcount increased 4% between Q3’23 and Q3’24.
Operating expenses in Q3'24 decreased compared to Q3'23, primarily due to the following:
partially offset by:
Operating expenses in the first nine months of FY'24 increased compared to the first nine months of FY'23, due to the following:
23
Interest Expense
(27.8
(35.8
(22
(94.7
(93.7
Interest expense in both FY'23 and FY'24 includes interest on our revolving credit facility, term loan, and our senior notes due 2025 and 2028. Interest expense in FY'23 also included interest on a deferred acquisition payment associated with the ServiceMax acquisition. Interest expense decreased in Q3'24 compared to Q3'23 primarily due to lower aggregate debt and deferred acquisition payments. The increase in interest expense in the first nine months of FY'24 compared to the first nine months of FY'23 was driven by higher interest rates, offset by lower aggregate debt and deferred acquisition payments.
Other Income (Expense)
Interest income
1.0
1.4
(25
3.4
3.9
(12
(1.7
1.1
(258
(4.1
(3.5
(0.7
2.5
(127
0.4
(268
Other income (expense), net was lower in Q3'24 compared to Q3'23, driven by foreign currency exchange losses. Other income (expense), net was lower in the first nine months of FY'24 compared to the first nine months of FY'23 due to a $2.0 million impairment loss related to an available-for-sale debt security classified as a Level 3 investment, offset by lower foreign exchange losses.
Income Taxes
67.4
76.5
298.7
244.0
15.1
(111
48.9
44.1
The effective tax rate for Q3'24 and the first nine months of FY'24 was lower than the effective tax rate for the corresponding prior-year periods primarily due to changes in the geographic mix of income before taxes and the non-cash effects of IRS procedural guidance requiring IRS consent for certain previously automatic changes of accounting method. The IRS procedural guidance change significantly increased our estimated taxable income for 2024, resulting in an increase to the estimated tax benefit for the deductions associated with Global Intangible Low-taxed Income and Foreign-derived Intangible Income. The benefit from this change for Q3’24 and the first nine months of FY’24 will reverse in a future fiscal period if we receive IRS consent for a change in the treatment of these deductions. For the first nine months of FY'24, this was offset by a tax expense of $3.6 million related to a tax reserve in a foreign jurisdiction.
Critical Accounting Policies and Estimates
There were no material changes to our critical accounting policies and estimates as set forth under the heading Critical Accounting Policies and Estimates in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2023 Annual Report on Form 10-K.
24
Recent Accounting Pronouncements
In accordance with recently issued accounting pronouncements, we will be required to comply with certain changes in accounting rules and regulations. Refer to Note 1. Basis of Presentation to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q, which is incorporated herein by reference, for all recently issued accounting pronouncements, none of which are expected to have a material effect.
Liquidity and Capital Resources
(in millions)
247.7
288.1
Restricted cash
0.6
0.7
248.3
288.8
(99.5
(866.1
(590.9
307.5
Cash, Cash Equivalents and Restricted Cash
We invest our cash with highly rated financial institutions. Cash and cash equivalents include highly liquid investments with original maturities of three months or less.
Due to the stability of our subscription model and consistency of annual, up-front billing, we aim to maintain a low cash balance. A significant portion of our cash is generated and held outside the U.S. As of June 30, 2024, we had cash and cash equivalents of $37.1 million in the U.S., $99.5 million in Europe, $88.5 million in Asia Pacific (including India) and $22.6 million in other countries. We have substantial cash requirements in the U.S. but believe that the combination of our existing U.S. cash and cash equivalents, cash available under our revolving credit facility, future U.S. operating cash flows, and our ability to repatriate cash to the U.S. will be sufficient to meet our ongoing U.S. operating expenses and known capital requirements.
Cash Provided by Operating Activities
Cash provided by operating activities increased $90.8 million in the first nine months of FY'24 compared to the same period in FY'23. The increase was driven by higher collections (including contribution from ServiceMax) and lower vendor disbursements, which were partially offset by higher interest and salary-related payments. Interest payments in the first nine months of FY'24 were approximately $60 million higher than in the prior-year period and include the payment of $30.0 million of imputed interest on the ServiceMax deferred acquisition payment.
Cash Used in Investing Activities
Cash used in investing activities in the first nine months of FY'24 was driven by the acquisition of pure-systems for $93.5 million in Q1'24. Cash used in investing activities in the first nine months of FY'23 was driven by a payment of $828.2 million in Q2'23 related to the acquisition of ServiceMax. Capital expenditures in the first nine months of FY'24 were lower than in the prior year period as we invest more in cloud-based rather than on-premises software.
Cash Provided by (Used in) Financing Activities
Cash used in financing activities in the first nine months of FY'24 included $620.0 million paid to settle the ServiceMax deferred acquisition payment, partially offset by net borrowings of $109.0 million ($944.8 million borrowed under the revolving line of our existing credit facility, less payments of $835.8 million) to
fund the ServiceMax deferred acquisition payment and the pure-systems acquisition. In the first nine months of FY'24, payments of withholding taxes in connection with vesting of stock-based awards were higher than in FY'23, primarily driven by vesting of awards held by our former CEO in connection with the CEO succession in Q2'24.
Cash provided by financing activities in the first nine months of FY'23 included net new borrowings of $771.0 million (a $500.0 million term loan and a $271.0 million incremental revolving line) to fund the ServiceMax acquisition, repayments of $385.0 million on the new revolving facility, and payments of $13.4 million related to credit facility origination costs.
Outstanding Debt
500.0
Credit facility revolver line
322.0
202.0
Credit facility term loan
493.8
1,815.8
1,702.0
Unamortized debt issuance costs for the senior notes
(4.6
(6.2
Total debt, net of issuance costs
1,811.2
1,695.8
Undrawn under credit facility revolver
928.0
1,048.0
Undrawn under credit facility revolver available to borrow
912.1
384.6
As of June 30, 2024, we were in compliance with all financial and operating covenants of the credit facility and the note indenture. As of June 30, 2024, the annual rate for borrowings outstanding under the credit facility was 6.9%.
Our credit facility and our senior notes are described in Note 10. Debt to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q. As of June 30, 2024, $518.1 million of our debt was classified as current, including $499.3 million associated with the 2025 senior notes and related debt issuance costs which will become due in February 2025.
Future Expectations
We believe that existing cash and cash equivalents, together with cash generated from operations and amounts available under the credit facility, will be sufficient to meet our working capital and capital expenditure requirements through at least the next twelve months and to meet our known long-term capital requirements.
For the remainder of FY'24, we expect to use substantially all our cash generated from operating activities to repay debt outstanding under our revolving credit facility.
Our expected uses and sources of cash could change, our cash position could be reduced, and we could incur additional debt obligations if we retire other debt, engage in strategic transactions, or repurchase shares, any of which could be commenced, suspended, or completed at any time. Any such repurchases or retirement of debt will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved in any debt retirement or issuance, share repurchases, or strategic transactions may be material.
26
Operating Measure
ARR (Annual Run Rate) represents the annualized value of our portfolio of active subscription software, SaaS, hosting, and support contracts as of the end of the reporting period. We calculate ARR as follows:
We believe ARR is a valuable operating measure to assess the health of a subscription business because it is aligned with the amount that we invoice the customer on an annual basis. We generally invoice customers annually for the current year of the contract. A customer with a one-year contract will typically be invoiced for the total value of the contract at the beginning of the contractual term, while a customer with a multi-year contract will be invoiced for each annual period at the beginning of each year of the contract.
ARR increases by the annualized value of active contracts that commence in a reporting period and decreases by the annualized value of contracts that expire in the reporting period.
As ARR is not annualized recurring revenue, it is not calculated based on recognized or unearned revenue and is not affected by variability in the timing of revenue under ASC 606, particularly for on-premises license subscriptions where a substantial portion of the total value of the contract is recognized as revenue at a point in time upon the later of when the software is made available, or the subscription term commences.
ARR should be viewed independently of recognized and unearned revenue and is not intended to be combined with, or to replace, either of those items. Investors should consider our ARR operating measure only in conjunction with our GAAP financial results.
Non-GAAP Financial Measures
Our non-GAAP financial measures and the reasons we use them and exclude the items identified below are described in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended September 30, 2023.
The non-GAAP financial measures presented in the discussion of our results of operations and the respective most directly comparable GAAP measures are:
The non-GAAP financial measures other than free cash flow exclude, as applicable: stock-based compensation expense; amortization of acquired intangible assets; acquisition and transaction-related charges included in General and administrative expenses; Restructuring and other charges (credits), net; non-operating charges (credits); and income tax adjustments as defined in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 and as reflected in the reconciliation tables.
The items excluded from the non-GAAP financial measures often have a material impact on our financial results, certain of those items are recurring, and other such items often recur. Accordingly, the non-GAAP financial measures included in this Quarterly Report on Form 10-Q should be considered in addition to, and not as a substitute for or superior to, the comparable measures prepared in accordance with GAAP. The following tables reconcile each of these non-GAAP financial measures to its most closely comparable GAAP measure on our financial statements.
28
(in millions, except per share amounts)
GAAP gross margin
5.9
5.8
16.0
15.7
Amortization of acquired intangible assets included in cost of revenue
9.7
9.8
28.8
25.8
Non-GAAP gross margin
GAAP operating income
48.0
53.8
161.2
147.6
20.4
20.5
60.3
55.2
Acquisition and transaction-related charges
0.8
3.0
Non-GAAP operating income
GAAP net income
69.0
61.4
249.8
199.9
Non-operating charges(1)
2.0
5.1
Income tax adjustments(2)
(19.5
(18.8
(48.2
(52.5
Non-GAAP net income
118.0
117.7
427.3
373.4
GAAP diluted earnings per share
0.40
0.45
1.34
1.24
0.17
0.50
0.46
0.00
0.01
0.02
0.16
(0.00
(0.01
0.04
(0.16
(0.40
(0.44
Non-GAAP diluted earnings per share
Operating margin impact of non-GAAP adjustments:
GAAP operating margin
9.3
9.9
9.6
9.5
3.8
3.6
0.0
0.1
1.2
Non-GAAP operating margin
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes in our market risk exposure as described in Item 7A. Quantitative and Qualitative Disclosures about Market Risk of our 2023 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Effectiveness of Disclosure Controls and Procedures
Our management maintains disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively), as appropriate, to allow for timely decisions regarding required disclosure.
We evaluated, under the supervision and with the participation of management, including our principal executive and principal financial officers, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2024.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2024, we completed the second phase of the implementation of a new enterprise resource planning (“ERP”) system for our corporate operations, which included customer billing and collection functions. As part of the implementation, we designed new internal controls and modified and/or enhanced existing internal controls to align with the new ERP system and business processes. We do not believe this implementation has had or will have a material adverse effect on our internal control over financial reporting. There were no additional changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act that occurred during the period ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to other information set forth in this report, you should carefully consider the risk factors described in Part I. Item 1A. Risk Factors in our 2023 Annual Report on Form 10-K, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
ITEM 5.OTHER INFORMATION
Director and Executive Officer Adoption, Modification or Termination of 10b5-1 Plans in Q3'24
Our section 16 officers and directors may enter into plans or arrangements for the purchase or sale of our securities that are intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act. Such plans and arrangements must comply in all respects with our insider trading policies, including our policy governing entry into and operation of 10b5-1 plans and arrangements.
During the quarter ended June 30, 2024, the below Section 16 officers and directors adopted Rule-10b5-1 trading arrangements (as defined in Item 408 of Regulation S-K of the Securities Exchange Act of 1934, as amended). All plans adopted covered only sales of PTC common stock. No plans were modified or terminated.
Name and Title of Director or Section 16 Officer
Date of Adoption, Modification, or Termination
Duration of the Plan
Aggregate Number of Shares of Common Stock that may be Sold under the Plan
Corinna Lathan
Director
Adopted May 24, 2024
EndsSeptember 30, 2025
3,817
ITEM 6. EXHIBITS
Incorporated by Reference
Exhibit Number
Description
Filed Herewith
Form
Filling Date
Exhibit
SEC File No.
3.1
Restated Articles of Organization of PTC Inc.
10-K
November 23, 2015
0-18059
3.2
Amended and Restated By-Laws of PTC Inc.
November 15, 2022
4.1
Indenture dated as of February 13, 2020, between PTC Inc. and Wells Fargo Bank, National Association, as trustee
8-K
February 13, 2020
4.2
Form of 3.625% senior unsecured notes due 2025
4.3
Form of 4.000% senior unsecured notes due 2028
31.1
Certification of the Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
X
31.2
Certification of the Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
32*
Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350
101.INS
Inline XBRL Instance Document – the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema with Embedded Linkbase Documents
104
The cover page of the Q3 Form 10-Q formatted in Inline XBRL (included in Exhibit 101)
* Indicates that the exhibit is being furnished, not filed, with this report.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
By:
/S/ KRISTIAN TALVITIE
Kristian Talvitie
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
Date: August 2, 2024