PTC INC. Business Overview
PTC is a global software and services company that enables industrial companies
to improve growth and profitability with a portfolio of innovative digital
solutions that work together to transform how physical products are engineered,
manufactured, and serviced. Our award-winning technology portfolio spans the
computer-aided design (CAD), product lifecycle management (PLM), Industrial
Internet of Things (IIoT), and Augmented Reality (AR) markets.
Our customer base includes some of the world's most innovative manufacturers in
the aerospace and defense, automotive, electronics and high tech, industrial
machinery and equipment, life sciences, oil and gas, retail and consumer
products industries. Our solutions enable industrial companies to create a
closed loop of information shared across their organization's entire value
chain. This "digital thread" can drive excellence in engineering, efficiency in
manufacturing operations and service delivery, and innovation across product
offerings and business models. With our solutions, digital transforms physical.
We generate revenue through the sale of software subscriptions, which include
license access and support (technical support and software updates); support for
existing perpetual licenses; professional services (consulting, implementation,
and training); and cloud services (hosting for our software and Software as a
Service (SaaS)).
Forward-Looking Statements
Statements in this document that are not historic facts, including statements
about our future financial and growth expectations 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 not improve when or as we expect, or may deteriorate, due to, among
other factors, the COVID-19 pandemic and the effects of the Russia /Ukraine
conflict, 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 SaaS businesses, may not expand and/or
generate the revenue or ARR we expect if customers are slower to adopt our
technologies than we expect or if they adopt competing technologies; the
transaction with ITC Infotech may not close when or as we expect due to the
failure to achieve the applicable closing conditions; the Intland Software and
ITC Infotech transactions may not have expected effects on our business or
results of operations; our strategic initiatives and investments, including our
restructuring and our accelerated investments in our transition to SaaS, may not
deliver the results when or as we expect; we may be unable to generate
sufficient operating cash flow to repay amounts under our credit facility or to
return 50% of free cash flow to shareholders, and other uses of cash or our
credit facility limits or other matters could preclude such repayment and/or
repurchases; we may be unable to attract and retain employees in the current
competitive hiring environment, which could adversely impact our operations and
our financial results; 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, as well as other risks and uncertainties 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, including
the reasons we use those 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.
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Executive Overview
We delivered another strong financial performance in Q2'22 despite macro and
geopolitical concerns and currency headwinds, once again demonstrating the
benefit of our recurring revenue model. Q2'22 ARR increased to $1.53 billion ,
representing 11% growth (13% on a constant currency basis) compared to Q2'21,
driven by strength in new bookings. ARR at the end of Q2'22 includes a $4
million reduction associated with discontinuing our business operations in
Russia . Q2'22 revenue of $505 million was up 9% (13% constant currency) over
Q2'21, driven by higher revenue from our recurring revenue business lines,
particularly in Digital Thread where contract durations on on-premise
subscriptions increased over Q2'21. Q2'22 operating margin was 32% compared to
22% in Q2'21, and Q2'22 non-GAAP operating margin was 42% compared to 37% in
Q2'21. Year-over-year operating margin improvements were primarily due to
year-over-year revenue increases and expense reductions resulting from the
restructuring we announced in Q1'22 in alignment with our SaaS-acceleration
initiatives and operational discipline. Q2'22 EPS decreased to $0.76 compared to
$0.92 in Q2'21 primarily due to the effect of a non-cash reduction in value of a
publicly-traded equity investment on non-operating expenses. Non-GAAP EPS in
Q2'22 was $1.39 compared to $1.08 in Q2'21 and benefited from year-over-year
revenue increases and expense reductions. Discontinuing our operations in Russia
during Q2'22 had an immaterial effect on our on revenue, operating margins, EPS
and cash flows.
We generated $142 million of cash from operations compared to $122 million in
Q2'21, with the increase driven by strong operational execution. Included in
operating cash flow are payments related to restructuring, which were higher by
$13 million year-over-year, and acquisition and transaction-related payments,
which were $8 million lower. In Q2'22, we had proceeds of $43 million from the
sale of a publicly-traded equity investment and used those proceeds and cash
from operations to repay $175 million of our revolving credit facility
balance. We completed stock repurchases of $5 million in Q2'22, reflecting the
settlement of repurchases that were initiated in Q1'22, bringing year-to-date
total share repurchases to $125 million .
Subsequent to the end of Q2'22, we entered into an agreement to acquire Intland
Software , maker of the Codebeamer® suite of application lifecycle management
solutions, and completed the acquisition on April 29, 2022 . We paid
approximately $280 million for Intland, net of cash acquired, using $264 million
borrowed under our revolving credit facility and cash on hand. We also entered
into an agreement with ITC Infotech to transition a portion of our PLM services
business to them to accelerate our SaaS initiatives, which transaction is
expected to close in Q3'22.
Results of Operations
The following table shows the financial measures that we consider the most
significant indicators of our business performance. In addition to providing
operating income, operating margin, diluted earnings per share and cash from
operations as calculated under GAAP, we provide non-GAAP operating income,
non-GAAP operating margin, non-GAAP diluted earnings per share, and free cash
flow for the reported periods. We also provide a view of our actual results on a
constant currency basis. These non-GAAP financial measures exclude the items
described in Non-GAAP Financial Measures below. Investors should use these
non-GAAP financial measures only in conjunction with our GAAP results.
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(Dollar amounts in millions,
except per share data) Three months ended Percent Change
Constant
March 31, 2022 March 31, 2021 Actual Currency(1)
ARR(1) $ 1,532.5 $ 1,386.3 11 % 13 %
Total recurring revenue(2) $ 452.7 $ 414.8 9 % 13 %
Perpetual license 9.5 6.9 38 % 21 %
Professional services 43.0 40.0 7 % 12 %
Total revenue 505.2 461.8 9 % 13 %
Total cost of revenue 93.3 89.4 4 % 7 %
Gross margin 411.9 372.3 11 % 15 %
Operating expenses 252.7 270.6 (7 )% (5 )%
Total costs and expenses 346.0 360.1 (4 )% (2 )%
Operating income $ 159.2 $ 101.7 57 % 73 %
Non-GAAP operating income(3) $ 213.8 $ 172.0 24 % 32 %
Operating margin 31.5 % 22.0 %
Non-GAAP operating margin(3) 42.3 % 37.2 %
Diluted earnings per share $ 0.76 $ 0.92
Non-GAAP diluted earnings per
share(3)(4) $ 1.39 $ 1.08
Cash flow from operations(5) $ 142.3 $ 121.7
Capital expenditures $ (2.1 ) $ (5.4 )
Free cash flow $ 140.2 $ 116.3
(Dollar amounts in millions,
except per share data) Six months ended Percent Change
Constant
March 31, 2022 March 31, 2021 Actual Currency(1)
ARR(1) $ 1,532.5 $ 1,386.3 11 % 13 %
Total recurring revenue(2) $ 857.8 $ 799.8 7 % 10 %
Perpetual license 18.0 15.4 17 % 17 %
Professional services 87.1 75.6 15 % 19 %
Total revenue 962.9 890.8 8 % 11 %
Total cost of revenue 188.5 176.3 7 % 8 %
Gross margin 774.5 714.6 8 % 11 %
Operating expenses 553.1 522.5 6 % 7 %
Total costs and expenses 741.6 698.8 6 % 7 %
Operating income $ 221.4 $ 192.0 15 % 23 %
Non-GAAP operating income(3) $ 372.0 $ 325.4 14 % 19 %
Operating margin 23.0 % 21.6 %
Non-GAAP operating margin(3) 38.6 % 36.5 %
Diluted earnings per share $ 1.15 $ 1.13
Non-GAAP diluted earnings per
share(3)(4) $ 2.34 $ 2.05
Cash flow from operations(5) $ 280.1 $ 235.5
Capital expenditures $ (5.5 ) $ (8.2 )
Free cash flow $ 274.6 $ 227.2
(1) For the
million of ARR associated with a Vuforia AR product that we ceased selling as
of
(2) Recurring revenue is comprised of subscription, perpetual support, and SaaS,
and cloud revenue.
(3) See Non-GAAP Financial Measures below for a reconciliation of our GAAP
results to our non-GAAP financial measures and Impact of Foreign Currency
Exchange on Results of Operations below for a description of how we calculate
our results on a constant currency basis.
(4) Income tax adjustments reflect the tax effects of non-GAAP adjustments which
are calculated applying the applicable tax rate by jurisdiction to the
non-GAAP adjustments listed above. In 2021 we had recorded a full valuation
allowance against our
a non-GAAP basis, the 2021 tax provision was calculated assuming there was no
valuation allowance. Additionally, our non-GAAP results for the six months
ended March 31, 2021 excluded tax expenses of $34.6 million related to a
South Korean tax exposure, primarily related to prior period foreign
withholding taxes.
(5) Cash flow from operations for the second quarter and first six months of
FY'22 includes
respectively, and
payments. Cash flow from operations for the second quarter and first six
months of FY'21 includes
payments, respectively,
acquisition-related payments, respectively, and
course tax payments related to a prior period tax exposure from a non-
tax dispute.
Impact of Foreign Currency Exchange on Results of Operations
Approximately 60% of our revenue and 40% 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
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disclosures are calculated by multiplying the results in local currency for the quarterly and year-to-date periods for FY'22 and FY'21 by the exchange rates in effect onSeptember 30, 2021 . Changes in foreign currency exchange rates have been a headwind to results in the first half of FY'22, with reported revenue, total costs and expenses and operating margin lower than at constant currency based on plan rates. We anticipate foreign currency exchange rates will continue to be a headwind for the remainder of FY'22. The results of operations in the table above and revenue by line of business, product group, and geographic region in the tables that follow present both actual percentage changes year over year and percentage changes on a constant currency basis. Revenue Under ASC 606, the volume, mix, and duration of contract types (support, SaaS, subscription) starting or renewing in any given period may 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 subscription contracts up front when we deliver the licenses to the customer, typically on the start date, and we recognize revenue on the support element of subscription contracts and stand-alone support contracts ratably over the term. We continue to convert existing support contracts to subscriptions resulting in a shift to up-front recognition of subscription license revenue in the period converted compared to ratable recognition for a perpetual support contract. Revenue from our SaaS contracts is recognized ratably. We are expanding our SaaS offerings and are releasing additional cloud functionality into our products and customers are migrating from subscription to SaaS products. As a result, over time a higher portion of our revenue will be recognized ratably. Given the different mix, duration and volume of new and renewing contracts in any period, year-over-year or sequential revenue comparisons can vary significantly. Revenue by Line of Business (Dollar amounts in millions) Three months ended Percent Change Six months ended Percent Change March 31, March 31, Constant March 31, March 31, Constant 2022 2021 Actual Currency 2022 2021 Actual Currency License$ 218.4 $ 198.0 10 % 15 %$ 387.5 $ 375.2 3 % 6 % Support and cloud services 243.9 223.8 9 % 12 % 488.4 440.0 11 % 13 % Software revenue 462.3 421.8 10 % 13 % 875.8 815.2 7 % 16 % Professional services 43.0 40.0 7 % 12 % 87.1 75.6 15 % 19 % Total revenue$ 505.2 $ 461.8 9 % 13 %$ 962.9 $ 890.8 8 % 11 % Software revenue in the second quarter and first six months of FY'22 increased compared to the year-ago periods primarily due to contribution from Arena, as well as subscription support growth in Digital Thread - Core, offset by a decline in perpetual support revenue due to conversions of support contracts to subscriptions. On-premise subscription contract durations for Digital Thread - Core year over year were shorter in Q1'22, but higher in Q2'22, driving variability in the amount of up-front license revenue recognized. Under ASC 606, shorter duration contracts result in less up-front license revenue, even if the annual values are the same. Professional services in the second quarter and first six months of FY'22 increased compared to the year-ago periods by 7% (12% constant currency) and 15% (19% constant currency), respectively, as revenue in the first half of 2021 was negatively impacted by services delivery challenges associated with the COVID-19 pandemic. In addition, in the three and six months ended Q2'22 there was an increase in revenue associated with large PLM consulting engagements, particularly with automotive, aerospace and defense customers. We expect that professional services revenue will be higher in FY'22 than FY'21 or FY'20 as we expect demand for services will increase to a level that is more consistent with pre-pandemic levels. Our longer-term expectation is that professional services revenue will trend down over time as we migrate more services engagements to our partners, including through our pending transaction withITC Infotech , and as we deliver products that require less consulting and training services. 28
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Software Revenue byProduct Group (Dollar amounts in millions) Three months ended Percent Change Six months ended Percent Change March 31, March 31, Constant March 31, March 31, Constant 2022 2021 Actual Currency 2022 2021 Actual Currency Digital Thread - Core$ 327.5 $ 298.8 10 % 14 %$ 609.6 $ 588.3 4 % 12 % Digital Thread - Growth 62.5 60.7 3 % 6 % 124.5 116.0 7 % 10 % Digital Thread - FSG 52.4 52.5 - 2 % 103.9 98.7 5 % 16 % Digital Thread (Total) 442.4 412.0 7 % 11 % 838.0 803.0 4 % 12 % Velocity 19.9 9.8 103 % 104 % 37.8 12.2 210 % 214 % Software revenue$ 462.3 $ 421.8 10 % 13 %$ 875.8 $ 815.2 7 % 16 % Digital Thread Core Product software revenue growth in the second quarter and first six months of FY'22 compared to the year-ago periods was driven by subscription license revenue growth of 15% (20% constant currency) and 3% (5% constant currency), respectively, which is impacted by the duration and mix of contract types for new and renewal contracts started in the quarter. On-premise subscription contract durations year over year were lower in Q1'22, but higher in Q2'22, driving variability in the amount of up-front revenue recognized. For the second quarter and first six months of FY'22, subscription support revenues increased 17% (22% constant currency) and 18% (21% constant currency), respectively, and cloud revenues grew by 23% (25% constant currency) and 34% (35% constant currency, respectively. Growth in subscription and cloud services revenues were offset by a decrease in perpetual support revenue as customers continue to convert from perpetual support to subscriptions.
ARR increased 10% (13% constant currency) for Q2'22 compared to Q2'21, reflecting growth in both CAD and PLM.
Growth Product software revenue growth in the second quarter and first six months of FY'22 compared to the year-ago periods was driven by ratably recognized cloud revenue growth of 16% (18% constant currency) and 21% (23% constant currency), respectively. This was offset by a year-over-year decrease in subscription license revenue of 16% (13% constant currency) and 6% (4% constant currency) for the three and six months ended Q2'22, respectively. The majority of the year-over-year decreases in Growth subscription license revenue was driven by the discontinuance at the beginning of FY'22 of certain AR products with up-front revenue recognition.
Growth Product ARR increased 13% (15% constant currency) for Q2'22 compared to Q2'21, driven primarily by growth in IoT.
FSG Product software revenue fluctuations in the second quarter and first six months of FY'22 were driven by ratably recognized cloud revenue growth of 27% (29% constant currency) and 24% (25% constant currency), respectively. Subscription license revenue decreased by 9% (5% constant currency) and increased 7% (10% constant currency), for the three and six months ended Q2'22 due to the duration and mix of contract types for new and renewal contracts started in the quarter. Under ASC 606, shorter duration contracts result in less up-front license revenue, even if the annual values are the same.
FSG product ARR increased by 6% (8% constant currency) for Q2'22 compared to
Q2'21 driven primarily by strength in the
Velocity
Velocity Product software revenue growth in the second quarter and first six
months of FY'22 compared to the year-ago periods was driven by the acquisition
of the Arena business in January 2021 . Additionally, Onshape revenue grew by 45%
(actual and constant currency) and 48% (49% constant currency) during the three
and six months ended Q2'22, respectively.
ARR grew in Q2'22 compared to Q2'21 by 27% (actual and constant currency)
reflecting strong growth in both Arena and
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Software Revenue by
A significant portion of our software revenue is generated outside theU.S. In the first six months of FY'22 and FY'21, approximately 45% of software revenue was generated in theAmericas , 40% inEurope , and 15% inAsia Pacific . (Dollar amounts in millions) Three months ended Percent Change Six months ended Percent Change March 31, March 31, Constant March 31, March 31, Constant 2022 2021 Actual Currency 2022 2021 Actual Currency Americas$ 187.1 $ 166.3 13 % 12 %$ 383.9 $ 357.3 7 % 12 % Europe 201.6 182.7 10 % 18 % 342.4 327.5 5 % 18 % Asia Pacific 73.6 72.8 1 % 5 % 149.5 130.4 15 % 25 % Software revenue$ 462.3 $ 421.8 10 % 13 %$ 875.8 $ 815.2 7 % 16 %Americas software revenue growth in the second quarter and first six months of FY'22 compared to the year-ago periods was driven by the acquisition of Arena business inJanuary 2021 . Digital Thread revenue in theAmericas increased 7% (actual and constant currency) and 1% (actual and constant currency) during the three and six months ended Q2'22, respectively. Q2'22 Americas ARR was up 12% (actual and constant currency) over Q2'21, led by double digit percentage growth in Digital Thread - Core and mid-20s percentage growth in Velocity.Europe software revenue growth in the second quarter and first six months of FY'22 compared to the year-ago periods was driven by growth in Digital Thread - Core of 13% (21% constant currency) and 4% (18% constant currency), respectively.
Q2'22 ARR in
Q2'22 ARR in
Gross Margin
(Dollar amounts in millions) Three months ended Six months ended
March 31, March 31, Percent Change March 31, March 31, Percent Change
2022 2021 2022 2021
License gross margin $ 206.4 $ 183.8 12 % $ 365.8 $ 347.8 5 %
License gross margin percentage 95 % 93 % 94 % 93 %
Support and cloud services gross
margin $ 199.1 $ 183.8 8 % $ 397.7 $ 361.7 10 %
Support and cloud services gross
margin percentage 82 % 82 % 81 % 82 %
Professional services gross
margin $ 6.3 $ 4.7 35 % $ 11.0 $ 5.1 116 %
Professional services gross
margin percentage 15 % 12 % 13 % 7 %
Total gross margin $ 411.9 $ 372.3 11 % $ 774.5 $ 714.6 8 %
Total gross margin percentage 82 % 81 % 80 % 80 %
Non-GAAP gross margin(1) $ 422.1 $ 384.0 10 % $ 797.1 $ 736.9 8 %
Non-GAAP gross margin
percentage(1) 84 % 83 % 83 % 83 %
(1) Non-GAAP financial measures are reconciled to GAAP results under Non-GAAP
Financial Measures below.
License gross margin increased in the second quarter and first six months of FY'22 compared to the year-ago periods due to increases in license revenue of$20.4 million and$12.3 million , respectively, along with decreases in cost of license revenue of$2.2 million and$5.7 million , respectively, which were driven by lower royalty and compensation costs.
Support and cloud services gross margin increased in the second quarter and
first six months of FY'22 compared to the year-ago periods due to increases in
subscription support and cloud revenue of
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Professional services gross margin increased in the second quarter and first six months of FY'22 compared to the year-ago periods primarily due to the impact of the COVID-19 pandemic on Q1'21 revenue, as professional services revenue increased by$3.0 million and$11.5 million over the year-ago periods, respectively. This was partially offset by increases in professional services cost of$1.3 million and$5.5 million , respectively. Operating Expenses (Dollar amounts in millions) Three months ended Six months ended March 31, March 31, Percent March 31, March 31, Percent 2022 2021 Change 2022 2021 Change Sales and marketing$ 116.4 $ 129.2 (10 )%$ 241.9 $ 253.9 (5 )% % of total revenue 23 % 28 % 25 % 29 % Research and development$ 81.9 $ 72.5 13 %$ 162.5 $ 143.4 13 % % of total revenue 16 % 16 % 17 % 16 % General and administrative$ 47.5 $ 60.8 (22 )%$ 99.4 $ 110.3 (10 )% % of total revenue 9 % 13 % 10 % 12 % Amortization of acquired intangible assets$ 8.5 $ 7.6 10 %$ 16.9 $ 14.2 19 % % of total revenue 2 % 2 % 2 % 2 % Restructuring and other charges, net$ (1.6 ) $ 0.5 (433 )%$ 32.4 $ 0.7 4429 % % of total revenue (0 )% 0 % 3 % 0 % Total operating expenses$ 252.7 $ 270.6 (7 )%$ 553.1 $ 522.5 6 %
Headcount decreased 4% between Q2'22 and Q2'21.
Operating expenses in Q2'22 compared to operating expenses in Q2'21 decreased primarily due to the following:
• a
costs) due to lower headcount caused by attrition and restructuring actions,
including:
• a $7 million (16%) decrease in stock-based compensation,
• a $5 million (5%) decrease in salaries,
• a $3 million (10%) decrease in benefits and pension expenses,
• partially offset by a $1 million increase in travel expenses;
• a
in general and administrative; and
• a $2 million decrease in restructuring costs;
partially offset by:
• a$1 million increase in software subscriptions; and • a$1 million increase in internal hosting costs;
Operating expenses in the first six months of FY'22 compared to operating expenses in the first six months of FY'21 increased primarily due to the following:
• a
restructuring plan initiated in Q1'22;
• a $3 million increase in internal hosting costs;
partially offset by:
• a
costs), primarily driven by:
• an $8 million (10%) decrease in stock-based compensation,
• partially offset by:
• a $3 million increase in travel expenses,
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• a
• a$1 million increase in benefits and pension expenses; and • a$1 million increase in salaries;
• a
in general and administrative expenses.
Interest Expense
(Dollar amounts in millions) Three months ended Six months ended
March 31, March 31, Percent Change March 31, March 31, Percent Change
2022 2021 2022 2021
Interest and debt premium expense $ (12.2 ) $ (12.9 ) (5 )% $ (25.2 ) $ (24.4 ) 3 %
Interest expense includes interest on our credit facility and senior notes. We
had $1.3 billion of total debt at March 31, 2022 , compared to $1.5 billion at
March 31, 2021 . We repaid $175 million of our revolving credit facility in
Q2'22. The average interest rate on borrowings outstanding was approximately
3.2% and 3.2% during the second quarter and first six months of FY'22,
respectively, and 3.3% and 3.5% during the second quarter and first six months
of FY'21, respectively. We expect the average interest rates will increase
during the rest of the year, driven by our variable-rate revolving credit
facility.
Other Income (Expense)
(Dollar amounts in millions) Three months ended Six months ended
March 31, March 31, Percent March 31, March 31, Percent Change
2022 2021 Change 2022 2021
Interest income $ 0.5 $ 0.3 64 % $ 1.0 $ 0.9 13 %
Other expense, net (43.9 ) (2.7 ) 1518 % (38.2 ) (4.7 ) 712 %
Other expense, net $ (43.4 ) $ (2.4 ) 1703 % $ (37.2 ) $ (3.8 ) 874 %
The increase in other expense, net, in FY'22 over the FY'21 periods is driven by
a recognized loss on our equity investment in a publicly-traded company of $44.6
million and $34.8 million in the three and six months ended March 31, 2022 ,
respectively. We sold our investment for $42.7 million in Q2'22.
Income Taxes
(Dollar amounts in millions) Three months ended Six months ended
March 31, March 31, Percent March 31, March 31, Percent Change
2022 2021 Change 2022 2021
Income before income taxes $ 103.6 $ 86.4 20 % $ 158.9 $ 163.8 (3 )%
Provision(benefit) for income taxes $ 13.9 $ (22.9 ) (161 )% $ 23.2 $ 31.0 (25 )%
Effective income tax rate 13 % (27 )% 15 % 19 %
In the second quarter and first six months of FY'22 and FY'21, our effective tax
rate differed from the statutory federal income tax rate of 21% due to our
corporate structure in which our foreign taxes are at a net effective tax rate
lower than the U.S. rate. A significant amount of our foreign earnings is
generated by our subsidiaries organized in Ireland and the Cayman Islands . In
2022 and 2021, the foreign rate differential predominantly relates to these
earnings.
In FY'22 and FY'21, in addition to the foreign rate differential, the effective tax rate was impacted by the net effects of the Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) regimes and the excess tax benefit related to stock-based compensation.
Our results for the second quarter and six months endedMarch 31, 2021 , include the effects of the full valuation allowance, which was maintained against ourU.S. net deferred tax assets at that time. In the second quarter of FY'21 we reduced our previously establishedU.S. valuation allowance by$42.3 million as a result of the Arena acquisition. Additionally, in the first six months of FY'21, our results included a charge of$36.1 million related to the effects of an unrecognized tax benefit in theRepublic of Korea (South Korea ), primarily related to foreign withholding taxes. 32
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Critical Accounting Policies and Estimates
The financial information included in Item 1 reflects no material changes in 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
2021 Annual Report on Form 10-K.
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.
Liquidity and Capital Resources
September 30,
(in millions) March 31, 2022 2021
Cash and cash equivalents $ 306.7 $ 326.5
Restricted cash 0.7 0.5
Total $ 307.4 $ 327.0
(in millions) Six months ended
March 31, 2022 March 31, 2021
Net cash provided by operating activities $ 280.1 $ 235.5
Net cash provided by (used in) investing activities $ 44.0 $ (670.3 )
Net cash (used in) provided by financing activities $ (340.0 ) $ 485.0
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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. At
A significant portion of our cash is generated and held outside theU.S. As ofMarch 31, 2022 , we had cash and cash equivalents of$34.2 million in theU.S. ,$103.2 million inEurope ,$138.8 million inAsia Pacific (includingIndia ) and$30.8 million in other non-U.S. countries. We have substantial cash requirements in theU.S. , but we believe that the combination of our existingU.S. cash and cash equivalents, our ability to repatriate cash to theU.S. , futureU.S. operating cash flows, and cash available under our credit facility will be sufficient to meet our ongoingU.S. operating expenses and known capital requirements.
Cash Provided by Operating Activities
Cash provided by operating activities was$280.1 million in the first six months of FY'22, compared to$235.5 million in the first six months of FY'21. Cash from operations for the first six months of FY'22 includes$28.4 million of restructuring payments and$0.4 million of acquisition-related payments compared to$11.7 million of restructuring payments and$11.1 million of acquisition and transaction-related payments in the prior-year period. The increase in cash from operations in the first six months of FY'22 compared to the same period in FY'21 was primarily driven by increased collections of$134 million in collections, offset by a$51 million increase in salaries, primarily severance related to restructuring, bonus payments in FY'22, a$23 million increase in disbursements largely related to timing of subscription payments, and a$9 million increase in tax-related payments.
Cash Provided by (Used In) Investing Activities
(in millions) Six months
ended
March 31, 2022 March 31, 2021
Additions to property and equipment $ (5.5 ) $ (8.2 )
Proceeds from (purchases of) short- and long-term
marketable securities, net - 58.5
Acquisitions of businesses, net of cash acquired - (717.2 )
Proceeds from sale of investments 42.7 -
Other 6.8 (3.4 )
Net cash provided by (used in) investing activities $ 44.0
Cash provided by investing activities in the first six months of FY'22 reflects proceeds from sale of investments of$42.7 million and proceeds from net investment hedges of$11.3 million , offset by fixed asset additions of$5.5 million and purchases of intangible assets of$4.5 million . Cash used in investing activities in the first six months of FY'21 reflects approximately$715 million used for the Arena acquisition and$56 million in proceeds from the sale of marketable securities.
Cash (Used In) Provided by Financing Activities
(in millions) Six months ended
March 31, 2022 March 31, 2021
Borrowings on debt, net $ (175.0 ) $ 502.0
Repurchases of common stock (125.0 ) -
Proceeds from issuance of common stock 10.9 10.5
Payments of withholding taxes in connection with
stock-based awards (50.6 ) (27.2 )
Other (0.3 ) (0.3 )
Net cash (used in) provided by financing activities $ (340.0 )
$ 485.0
Cash used in financing activities in the first six months of FY'22 reflects a$175 million repayment of the amounts outstanding under our revolving credit facility, repurchase of common stock of$125 million and payment of withholding taxes related to stock-based awards of$50 million . Cash provided by financing activities in the first six months of FY'21 reflects net borrowings of$502 million under our credit facility. 34
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Table of Contents Outstanding Debt (in millions) March 31, 2022 4.000% Senior notes due 2028 $ 500.0 3.625% Senior notes due 2025 500.0 Credit facility revolver 275.0 Total debt$ 1,275.0 Unamortized debt issuance costs for the senior notes (9.5 ) Total debt, net of issuance costs $
1,265.5
Undrawn under credit facility revolver $
725.0
Undrawn under credit facility revolver available to borrow $ 709.8
As ofMarch 31, 2022 , we were in compliance with all financial and operating covenants of the credit facility and the note indentures. Any failure to comply with such covenants under the credit facility would prevent us from being able to borrow additional funds under the credit facility, and, as with any failure to comply with such covenants under the note indentures, could constitute a default that could cause all amounts outstanding to become due and payable immediately.
Our credit facility and our senior notes described in Note 13. Debt to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.
We borrowed$264 million under the credit facility inApril 2022 to complete the acquisition ofIntland Software , leaving$461 million undrawn and$446 million available to borrow under the credit facility.
Future Expectations
We believe that existing cash and cash equivalents as ofMarch 31, 2022 , together with cash generated from operations and amounts available under the credit facility, will be sufficient to meet our payment obligations associated with the acquisition ofIntland Software , working capital and capital expenditure requirements (which we expect to be approximately$25 million in FY'22) through at least the next twelve months and to meet our known long-term capital requirements. Related to restructuring, we expect to incur an additional approximately$5 million of charges and make approximately$15 million in payments for the remainder of fiscal 2022. Cost savings resulting from the 2022 restructuring action are expected to help align our customer facing and product-related functions with the SaaS industry best practices and accelerate the opportunity for our on-premise customers to move to the cloud. Our expected uses and sources of cash could change, our cash position could be reduced, and we could incur additional debt obligations if we decide to retire debt, engage in additional 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. Operating Measure
ARR
ARR (AnnualRun 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. ARR in FY21 includes orders placed under our Strategic Alliance Agreement with Rockwell Automation, including orders placed to satisfy contractual minimum commitments. We believe ARR is a valuable operating metric to measure the health of a subscription business because it captures expected subscription and support cash generation from customers. Because this measure represents the annualized value of customer contracts as of a point in time, it does not represent revenue for any particular period or remaining revenue that will be recognized in future periods. 35
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Non-GAAP Financial Measures
Our non-GAAP financial measures and the reasons we use them and the reasons we
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, 2021 .
The non-GAAP financial measures presented in the discussion of our results of operations and the respective most directly comparable GAAP measures are:
• free cash flow-cash flow from operations • non-GAAP gross margin-GAAP gross margin • non-GAAP operating income-GAAP operating income • non-GAAP operating margin-GAAP operating margin • non-GAAP net income-GAAP net income
• non-GAAP diluted earnings or loss per share-GAAP diluted earnings or loss
per share
Free cash flow is cash flow from operations net of capital expenditures, which are expenditures for property and equipment and consist primarily of facility improvements, office equipment, computer equipment, and software. We believe that free cash flow, in conjunction with cash from operations, is a useful measure of liquidity since capital expenditures are a necessary component of ongoing operations. The non-GAAP financial measures other than free cash flow exclude, as applicable, stock-based compensation expense; amortization of acquired intangible assets; acquisition-related and other transactional charges included in general and administrative expenses; restructuring and other charges, net; non-operating charges (credits); and income tax adjustments as defined in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 . In Q1'21, we incurred tax expense related to a reserve for a South Korean tax exposure established in the quarter which is excluded from our non-GAAP financial measures as it was related to prior periods and not included in management's view of Q1'21 results for comparative purposes. We use these non-GAAP financial measures, and we believe that they assist our investors, to make period-to-period comparisons of our operational performance because they provide a view of our operating results without items that are not, in our view, indicative of our core operating results. We believe that these non-GAAP financial measures help illustrate underlying trends in our business, and we use the measures to establish budgets and operational goals (communicated internally and externally) for managing our business and evaluating our performance. We believe that providing non-GAAP financial measures also affords investors a view of our operating results that may be more easily compared to the results of other companies in our industry that use similar financial measures to supplement their GAAP results. 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. 36
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(in millions, except per share amounts) Three months ended Six months ended
March 31, 2022 March 31, 2021 March 31, 2022 March 31, 2021
GAAP gross margin $ 411.9 $ 372.3 $ 774.5 $ 714.6
Stock-based compensation 4.3 4.5 10.2 8.9
Amortization of acquired intangible
assets included in cost of revenue 5.9 7.1 12.4 13.4
Non-GAAP gross margin $ 422.1 $ 384.0 $ 797.1 $ 736.9
GAAP operating income $ 159.2 $ 101.7 $ 221.4 $ 192.0
Stock-based compensation 37.9 44.7 83.9 90.8
Amortization of acquired intangible
assets 14.4 14.8 29.3 27.5
Acquisition-related and other
transactional charges included in
general and administrative expenses 3.9 10.3 5.0 14.2
Restructuring and other charges, net (1.6 ) 0.5 32.4 0.7
Non-GAAP operating income $ 213.8 $ 172.0 $ 372.0 $ 325.4
GAAP net income $ 89.7 $ 109.3 $ 135.8 $ 132.8
Stock-based compensation 37.9 44.7 83.9 90.8
Amortization of acquired intangible
assets 14.4 14.8 29.3 27.5
Acquisition-related and other
transactional charges included in
general and administrative expenses 3.9 10.3 5.0 14.2
Restructuring and other charges, net (1.6 ) 0.5 32.4 0.7
Non-operating charges(1) 44.6 0.0 34.8 0.0
Income tax adjustments(2) (25.4 ) (51.7 ) (44.7 ) (24.6 )
Non-GAAP net income $ 163.5 $ 127.8 $ 276.5 $ 241.6
GAAP diluted earnings per share $ 0.76 $ 0.92 $ 1.15 $ 1.13
Stock-based compensation 0.32 0.38 0.71 0.77
Amortization of acquired intangible
assets 0.12 0.12 0.25 0.23
Acquisition-related and other
transactional charges included in
general and administrative expenses 0.03 0.09 0.04 0.12
Restructuring and other charges, net (0.01 ) 0.00 0.27 0.01
Non-operating charges(1) 0.38 0.00 0.29 0.00
Income tax adjustments(2) (0.22 ) (0.44 ) (0.38 ) (0.21 )
Non-GAAP diluted earnings per share $ 1.39 $ 1.08 $ 2.34 $ 2.05
(1) We recorded charges related to losses on our equity investment in a
publicly-traded company of
six months ended Q2'22.
(2) Income tax adjustments reflect the tax effects of non-GAAP adjustments which
are calculated by applying the applicable tax rate by jurisdiction to the
non-GAAP adjustments listed above. In 2021 we had recorded a full valuation
allowance against our
a non-GAAP basis, the 2021 tax provision was calculated assuming there was no
valuation allowance. Additionally, our non-GAAP results for the six months
ended
South Korean tax exposure, primarily related to foreign withholding taxes.
Operating margin impact of non-GAAP adjustments:
Three months ended Six months ended
March 31, 2022 March
31, 2021
31.5 % 22.0 % 23.0 % 21.6 %
Stock-based compensation 7.5 % 9.7 % 8.7 % 10.2 %
Amortization of acquired intangible
assets 2.8 % 3.2 % 3.0 % 3.1 %
Acquisition-related and other
transactional charges included in
general and administrative expenses 0.8 % 2.2 % 0.5 % 1.6 %
Restructuring and other charges, net (0.3 )% 0.1 % 3.4 % 0.1 %
Non-GAAP operating margin 42.3 % 37.2 % 38.6 % 36.5 %
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