Strong ARR and Cash Flow Results; Raising ARR and Cash Flow Guidance for FY’23
BOSTON, MA, July 26, 2023 - PTC (NASDAQ: PTC) today reported financial results for its third fiscal quarter ended June 30, 2023.
“In our third fiscal quarter, we again delivered strong ARR and cash flow results that exceeded our guidance ranges. On both a reported and constant currency basis, our ARR growth was 25% – with organic growth of 14% and our ServiceMax® business contributing an additional 11 points of growth. In Q3, our cash from operations was $169 million, up 45% year over year, and our free cash flow was $164 million, up 46% year over year,” said James Heppelmann, CEO, PTC.
“Our strong product portfolio, now increasingly differentiated with the addition of ServiceMax, and our industry-leading SaaS capabilities align well to the manufacturing industry’s push for digital transformation. Our strong market position and solid execution, coupled with a subscription model, position PTC to deliver ARR and cash flow growth at peer-leading levels,” concluded Heppelmann.
Third Quarter 2023 Highlights
Key operating and financial highlights are set forth below. For additional details, please refer to the Q3’23 earnings presentation and financial data tables that have been posted to the Investor Relations section of our website at investor.ptc.com. The definitions of our operating and non-GAAP financial measures and reconciliations of non-GAAP financial measures to comparable GAAP measures are included below and in the reconciliation tables at the end of this press release.
(1) In Q3’23, revenue growth was 21% year over year on a constant currency basis. Revenue and, as a result, operating margin, operating profit, and earnings per share are impacted by revenue recognition under ASC 606.
(2) In Q3’23, both EPS and non-GAAP EPS benefitted from higher revenue, partially offset by higher cost of revenue, operating expenses, and interest expense. Q3’22 EPS included a $0.28 positive impact due to non-operational credits and a $0.13 positive impact due to a tax adjustment, both of which were primarily related to the sale of a portion of our PLM services business.
(3) Q3’23 gross debt includes a deferred acquisition payment related to ServiceMax of $620 million, which will be paid in October 2023.
Fiscal 2023 and Q4’23 Guidance
“Despite a less than ideal macroeconomic backdrop, our financial results in the first nine months of our fiscal year were solid, driven by the resilience of our business model, consistent execution, operational discipline, and the actions we have taken to align our investments with our growth opportunities. Based on our performance in the first nine months of FY’23 and outlook for FY’23, we are raising our full year guidance midpoint for ARR and our guidance for cash flow, while investing in long-term growth opportunities,” said Kristian Talvitie, CFO, PTC.
Reconciliation of Cash from Operations Guidance to Free Cash Flow Guidance
Reconciliation of EPS Guidance to Non-GAAP EPS Guidance
(1) Our FY’23 EPS and non-GAAP EPS guidance are both inclusive of an expected $120 million in interest expense ($95 million, net of tax) or $1.01 per share ($0.80 per share, net of tax). This compares to interest expense in FY’22 of $51 million ($40 million, net of tax) or $0.43 per share ($0.34 per share, net of tax) with the expected increase in FY’23 primarily due to an increase in debt. (2)2 Our Q4’23 EPS and non-GAAP EPS guidance are both inclusive of an expected $34 million in interest expense ($27 million, net of tax) or $0.29 per share ($0.23 per share, net of tax). This compares to interest expense in Q4’22 of $14 million ($11 million, net of tax) or $0.12 per share ($0.10 per share, net of tax) with the expected increase in Q4’23 primarily due to an increase in debt.
Our FY’23 and Q4’23 financial guidance include the assumptions below:
PTC’s Fiscal Third Quarter Results Conference Call
The Company will host a conference call to discuss results at 5:00 pm ET on Wednesday, July 26, 2023. To participate in the live conference call, dial (888) 330-2508 or (240) 789-2735 and provide the passcode 7328695, or log in to the webcast, available on PTC’s Investor Relations website. A replay will also be available.
PTC Announces CEO Succession Plan
Concurrent with the release of its fiscal 2023 third quarter results, PTC also announced its CEO succession plan. Neil Barua, President of PTC’s Service Lifecycle Management business, will succeed James Heppelmann as Chief Executive Officer of PTC at the time of the Company’s annual shareholder meeting in February 2024. Please read today’s press release for additional information. Mr. Heppelmann and Mr. Barua will address the succession plan during today’s webcast and conference call.
Important Information About Our Operating and Non-GAAP Financial Measures
Non-GAAP Financial Measures
PTC provides supplemental non-GAAP financial measures to its financial results. We use these non-GAAP financial measures, and we believe that they assist our investors, to make period-to-period comparisons of our operating performance because they provide a view of our operating results without items that are not, in our view, indicative of our operating results. These non-GAAP financial measures should not be construed as an alternative to GAAP results as the items excluded from the non-GAAP financial measures often have a material impact on our operating results, certain of those items are recurring, and others often recur. Management uses, and investors should consider, our non-GAAP financial measures only in conjunction with our GAAP results.
Non-GAAP operating expense, non-GAAP operating margin, non-GAAP gross profit, non-GAAP gross margin, non-GAAP net income and non-GAAP EPS exclude the effect of the following items: stock-based compensation; amortization of acquired intangible assets; acquisition and transaction-related charges included in general and administrative expenses; restructuring and other charges, net; certain non-operating charges and credits; and income tax adjustments. Additional information about the items we exclude from our non-GAAP financial measures and the reasons we exclude them can be found in “Non-GAAP Financial Measures” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022.
Free Cash Flow: PTC provides information on free cash flow to enable investors to assess our ability to generate cash without incurring additional external financings and to evaluate our performance against our announced long-term goals and intent to return approximately 50% of our free cash flow to shareholders via stock repurchases. Free cash flow is cash provided by (used in) operations net of capital expenditures. Free cash flow is not a measure of cash available for discretionary expenditures.
Constant Currency (CC): We present CC information to provide a framework for assessing how our underlying business performed excluding the effects of foreign currency rate fluctuations. To present CC information, FY’23 and comparative prior period results for entities reporting in currencies other than United States dollars are converted into United States dollars using the foreign exchange rate as of September 30, 2022, rather than the actual exchange rates in effect during that period. All discussion of FY’23 and comparative prior period ARR results (including FY’22 baseline amounts) are reflected using the foreign exchange rates as of September 30, 2022.
ARR: ARR (Annual Run Rate) represents the annualized value of our portfolio of active subscription software, cloud, SaaS, 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 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 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.
Organic Constant Currency ARR: We provide an organic constant currency ARR measure to help investors understand and assess the performance of our business without the distorting effects of ARR from acquisitions in the comparative period and foreign exchange rate fluctuations.
Statements in this press release that are not historic facts, including statements about our future financial and growth expectations, guidance, and targets, 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 deteriorate due to, among other factors, supply chain disruptions, increasing 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 Russia/Ukraine conflict, including the effect on energy supplies to Europe, 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 businesses, including our ServiceMax and SaaS businesses, may not expand and/or generate the ARR and/or cash flow we expect if customers are slower to adopt those technologies than we expect or if they adopt competing technologies; our strategic initiatives and investments, including our accelerated investments in our transition to SaaS and the acquisition of ServiceMax, may not deliver the results when or as we expect; we may be unable to integrate the ServiceMax technology when or as we expect; we may be unable to generate sufficient operating cash flow to return 50% of free cash flow to shareholders via share repurchases, and other uses of cash or our credit facility limits could preclude such 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 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 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 Reports on Form 10-Q.
About PTC (NASDAQ: PTC)
PTC (NASDAQ: PTC) is a global software company that enables industrial and manufacturing companies to digitally transform how they engineer, manufacture, and service the physical products that the world relies on. Headquartered in Boston, Massachusetts, PTC employs over 7,000 people and supports more than 25,000 customers globally. For more information, please visit www.ptc.com.