PTC Announces Strong Q3 Results and FY'11 Guidance

PTC (Nasdaq: PMTC), The Product Development Company®, today reported results for its third fiscal quarter ended July 2, 2011.

Highlights

Q3 Results: Non-GAAP revenue of $292.5 million and non-GAAP EPS of $0.32
GAAP revenue of $291.8 million and GAAP EPS of $0.13
Revenue contribution from MKS Inc, which PTC acquired on May 31, 2011 was $6.7 million on a non-GAAP basis and $6.0 million on a GAAP basis
MKS Inc was neutral to Q3 non-GAAP EPS results
Non-GAAP operating margin of 17.6%; GAAP operating margin of 8.4%
Relative to Q3 guidance ($275 - $285 million in organic revenue with $0.28 to $0.32 non-GAAP EPS), currency fluctuations negatively impacted revenue by $0.5 million and had no material impact on non-GAAP EPS results
Q4 Guidance: Non-GAAP revenue of $320 to $330 million and non-GAAP EPS of $0.40 to $0.44;
GAAP revenue of $318 to $328 million and GAAP EPS of $0.25 to $0.29
Assumes $1.45 USD / EURO
Non-GAAP revenue guidance assumes approximately $20 million contribution from MKS
FY’11 Targets: Non-GAAP revenue of $1,150 to $1,160 million and non-GAAP EPS of $1.20 to $1.24
GAAP revenue of $1,147 to $1,157 million and GAAP EPS of $0.63 to $0.67
Non-GAAP revenue guidance assumes approximately $25 million contribution from MKS

The Q3 non-GAAP revenue results exclude a $0.7 million effect of purchase accounting on the fair value of the acquired deferred maintenance balance of MKS Inc. The Q3 non-GAAP EPS results exclude $11.6 million of stock-based compensation expense, $8.6 million of acquisition-related intangible asset amortization, $6.0 million of acquisition-related expense, $4.4 million of acquisition-related foreign currency losses and $8.5 million of income tax adjustments. The Q3 non-GAAP results include a tax rate of 23% and 121 million diluted shares outstanding. The Q3 GAAP results include a tax rate of 15% and 121 million diluted shares outstanding.

Results Commentary

James Heppelmann, president and chief executive officer, commented, “PTC had a strong Q3, with organic revenue of $285.8 million exceeding the high-end of our guidance and non-GAAP EPS of $0.32 at the high-end of our guidance range. Our organic license revenue of $79.4 million was up 18% on a year-over-year basis, an increase from the 15% growth we experienced in Q2 ‘11. The momentum in our Desktop business continued with 41% year-over-year organic license growth. This was our 6th consecutive quarter of year-over-year improvement in Desktop license revenue and in our Channel business. We were pleased to see the strength of our Enterprise business increase, with organic license revenue up 40% sequentially and note that our year-over-year organic Enterprise license revenue growth reflects the very strong quarter we had in Q3’10. We also continue to see robust adoption of our PLM solutions, as is reflected in our 22% and 21% year-over-year increases in organic maintenance and services revenue, respectively. Importantly, we continue to experience the dilutive impact of strong Desktop revenue on our Enterprise sales capacity, and as we highlighted at our recent investor event in June, will begin to ramp sales capacity in response to the broadening demand for PTC’s products. Overall, we delivered 20% total revenue growth compared to the year ago period.” On a constant currency basis, total revenue growth and license revenue growth were both 13% compared to Q3’10.

“Our momentum in the PLM market continued with the addition of 2 new strategically important ‘domino’ accounts during Q3,” Heppelmann continued. “Since 2009, we have won 27 domino accounts and we continue to expect to win a cumulative total of 30 domino accounts by the end of FY’11. Dominoes represent the largest of many competitive displacement opportunities, and we believe they demonstrate that PTC is gaining share and becoming recognized as the industry leader for both our technology and product development process expertise.”

Heppelmann added, “We had 27 large deals (license + services revenue of more than $1 million) in Q3’11, compared to 24 last quarter and 14 in Q3’10. We believe this is an indicator of the strength of our pipeline for business opportunities with new and existing customers. During the quarter we recognized revenue from leading organizations such as BAE Systems, ESPRIT Europe GMBH, Force Protection, Jabil, Poclain Hydraulics, Robert Bosch, Sears, the US Department of Energy and Weatherford International.”

Jeff Glidden, chief financial officer, commented, “From a profitability standpoint we had a very strong quarter; we delivered $0.32 of non-GAAP EPS, up 52% from $0.21 non-GAAP EPS in Q3 ‘10. We delivered $48 million in cash flow from operations during the quarter, and we ended Q3 with $261 million of cash, including $16 million from MKS, flat with the end of Q2. As expected, we resumed our stock buyback program with a total of $40 million in stock repurchased during the quarter.”

Outlook Commentary

“With the launch of Windchill 10.0 this spring and Creo 1.0 in June, we have had an exciting year from a product portfolio perspective,” said Heppelmann. “In addition, the acquisition of MKS adds important breadth and depth to our already robust product portfolio, and further extends PTC’s long-term growth opportunity. Given the market momentum we are experiencing and the extent of our technology leadership position, we remain confident in our ability to achieve our longer-term goal of 20% non-GAAP EPS CAGR through 2014. Based on the market momentum we are seeing, the strength of our pipeline and investment to increase sales capacity, we continue to be excited about our FY’12 growth opportunity. We will provide formal FY’12 guidance when we issue our Q4 results in October.”

“For Q4, we are providing guidance of $320 to $330 million in non-GAAP revenue, which includes approximately $20 million in non-GAAP revenue from the acquisition of MKS Inc. We are expecting non-GAAP EPS of $0.40 to $0.44, which reflects incremental sales expense as we begin to ramp capacity in the quarter,” Glidden added. “We continue to expect MKS to be neutral to FY’11 non-GAAP EPS. From a revenue perspective, we are expecting approximately $100 to $110 million in license revenue in Q4, with combined services and maintenance revenue of approximately $220 million, resulting in approximately 20% to 23% year-over-year growth in total non-GAAP revenue.” For Q4, the GAAP revenue target is $318 to $328 million and the GAAP EPS target is $0.25 to $0.29.

The Q4 guidance assumes a non-GAAP tax rate of 23%, a GAAP tax rate of 20% and 121 million diluted shares outstanding. The Q4 non-GAAP guidance excludes approximately $2 million for the effect of purchase accounting on acquired MKS deferred maintenance revenue, $13 million of stock-based compensation expense, $10 million of acquisition-related intangible asset amortization expense, any acquisition-related expenses, and their related income tax effects.

Glidden concluded, “Looking to the full year FY’11, we are increasing our non-GAAP revenue growth target to a range of 14% to 15% vs. our previous guidance of 13% to 14%. We expect MKS to contribute approximately $25 million in non-GAAP revenue for the full year. We are expecting license revenue growth of approximately 15%, at the lower-end of our previous 15% to 20% guidance range, which is more than offset by stronger and more predictable services and maintenance revenue. We are now expecting growth of approximately 20% in services revenue and 12% in maintenance revenue. Our FY’11 non-GAAP EPS target of $1.20 to $1.24 reflects incremental sales expense in Q4 as we begin to ramp sales capacity to better address market demand. We will continue to balance investments to support future growth with our commitment to 20% non-GAAP EPS growth.” For FY’11, the GAAP EPS target is $0.63 to $0.67.

The FY’11 targets assume a non-GAAP tax rate of 23%, a GAAP tax rate of 19% and 121 million diluted shares outstanding. The FY’11 non-GAAP guidance excludes approximately $3 million for the effect of purchase accounting on acquired MKS deferred maintenance revenue, $45 million of stock-based compensation expense, $34 million of acquisition-related intangible asset amortization, $5 million of foreign currency transaction losses, any acquisition-related expenses, and their related income tax effects.

Other Important Information

We have identified payments by certain business partners in China that raise questions of compliance with laws, including the Foreign Corrupt Practices Act, and/or compliance with the Company’s business policies. We are conducting an internal investigation and have voluntarily disclosed this matter to the United States Department of Justice and the Securities and Exchange Commission. Based on the findings to date, we do not believe that these matters will have a material adverse effect on our results of operations or financial condition.