PTC 10-Q 2021-12-31

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 December 31, 2021

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 116,952,189 shares of our common stock outstanding on February 3, 2022.

PTC Inc.

INDEX TO FORM 10-Q

For the Quarter Ended December 31, 2021

				Page Number
Part I—FINANCIAL INFORMATION
Item 1.		Unaudited Condensed Consolidated Financial Statements:
		Consolidated Balance Sheets as of December 31, 2021 and September 30, 2021		1
		Consolidated Statements of Operations for the three months ended December 31, 2021 and 2020		2
		Consolidated Statements of Comprehensive Income for the three months ended December 31, 2021 and 2020		3
		Consolidated Statements of Cash Flows for the three months ended December 31, 2021 and 2020		4
		Consolidated Statements of Stockholders' Equity for the three months ended December 31, 2021 and 2020		5
		Notes to Condensed Consolidated Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		33
Item 4.		Controls and Procedures		33
Part II—OTHER INFORMATION
Item 1.		Legal Proceedings		34
Item 1A.		Risk Factors		34
Item 2.		Unregistered Sale of Equity Securities and Use of Proceeds		34
Item 6.		Exhibits		35
Signature				36

PART I—FINANCIAL INFORMATION

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PTC Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)

		December 31, 2021				September 30, 2021
ASSETS
Current assets:
Cash and cash equivalents		$	296,125			$	326,532
Accounts receivable, net of allowance for doubtful accounts of $295 and $304 at December 31, 2021 and September 30, 2021, respectively			478,673				541,072
Prepaid expenses			89,473				69,991
Other current assets			145,051				135,415
Total current assets			1,009,322				1,073,010
Property and equipment, net			96,848				100,237
Goodwill			2,189,880				2,191,887
Acquired intangible assets, net			363,877				378,967
Deferred tax assets			292,171				297,789
Operating right-of-use lease assets			150,261				152,337
Other assets			318,261				313,333
Total assets		$	4,420,620			$	4,507,560
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	32,922			$	33,381
Accrued expenses and other current liabilities			132,806				113,067
Accrued compensation and benefits			119,928				117,784
Accrued income taxes			2,867				5,055
Deferred revenue			464,910				482,131
Short-term lease obligations			26,545				27,864
Total current liabilities			779,978				779,282
Long-term debt			1,440,014				1,439,471
Deferred tax liabilities			4,279				4,165
Long-term deferred revenue			16,160				15,546
Long-term lease obligations			179,487				180,935
Other liabilities			46,890				49,693
Total liabilities			2,466,808				2,469,092
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued			—				—
Common stock, $0.01 par value; 500,000 shares authorized; 116,870 and 117,163 shares issued and outstanding at December 31, 2021 and September 30, 2021, respectively			1,169				1,172
Additional paid-in capital			1,590,285				1,718,504
Retained earnings			460,745				414,656
Accumulated other comprehensive loss			(98,387	)			(95,864	)
Total stockholders’ equity			1,953,812				2,038,468
Total liabilities and stockholders’ equity		$	4,420,620			$	4,507,560

The accompanying notes are an integral part of the condensed consolidated financial statements.

PTC Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

		Three months ended
		December 31, 2021				December 31, 2020
Revenue:
License		$	169,108			$	177,175
Support and cloud services			244,485				216,245
Total software revenue			413,593				393,420
Professional services			44,128				35,630
Total revenue			457,721				429,050
Cost of revenue:
Cost of license revenue			9,794				13,256
Cost of support and cloud services revenue			45,885				38,342
Total cost of software revenue			55,679				51,598
Cost of professional services revenue			39,439				35,232
Total cost of revenue			95,118				86,830
Gross margin			362,603				342,220
Operating expenses:
Sales and marketing			125,476				124,725
Research and development			80,534				70,835
General and administrative			51,940				49,528
Amortization of acquired intangible assets			8,484				6,547
Restructuring and other charges, net			33,991				247
Total operating expenses			300,425				251,882
Operating income			62,178				90,338
Interest expense			(12,986	)			(11,518	)
Other income (expense), net			6,184				(1,413	)
Income before income taxes			55,376				77,407
Provision for income taxes			9,287				53,892
Net income		$	46,089			$	23,515
Earnings per share—Basic		$	0.39			$	0.20
Earnings per share—Diluted		$	0.39			$	0.20
Weighted-average shares outstanding—Basic			117,347				116,401
Weighted-average shares outstanding—Diluted			118,598				117,605

The accompanying notes are an integral part of the condensed consolidated financial statements.

PTC Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

		Three months ended
		December 31, 2021				December 31, 2020
Net income		$	46,089			$	23,515
Other comprehensive income (loss), net of tax:
Hedge gain (loss) arising during the period, net of tax of $0.8 million and $0 million in the first quarter of 2022 and 2021, respectively			2,495				(6,779	)
Foreign currency translation adjustment, net of tax of $0 for each period			(5,668	)			19,975
Unrealized gain (loss) on marketable securities, net of tax of $0 for each period			—				(307	)
Amortization of net actuarial pension loss included in net income, net of tax of $0.1 million and $0.3 million in the first quarter of 2022 and 2021, respectively			265				732
Change in unamortized pension gain (loss) during the period related to changes in foreign currency			385				(1,112	)
Other comprehensive income (loss)			(2,523	)			12,509
Comprehensive income		$	43,566			$	36,024

The accompanying notes are an integral part of the condensed consolidated financial statements.

PTC Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

		Three months ended
		December 31, 2021				December 31, 2020
Cash flows from operating activities:
Net income		$	46,089			$	23,515
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			22,088				18,835
Amortization of right-of-use lease assets			8,860				9,391
Stock-based compensation			45,942				46,088
Gain on investment			(9,766	)			—
Other non-cash items, net			(273	)			(331	)
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable			57,316				10,315
Accounts payable and accrued expenses			12,959				12,381
Accrued compensation and benefits			2,853				(9,252	)
Deferred revenue			(13,696	)			(851	)
Accrued income taxes			(8,328	)			44,53

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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, which could cause customers to delay or reduce purchases of new software, reduce the number of subscriptions they carry, or delay payments to us, all of 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; 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; 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.

Executive Overview

ARR of $1.50 billion at the end of Q1’22 represents 12% growth (16% on a constant currency basis) compared to Q1’21 driven by strength in new bookings. Organic constant currency ARR growth year over year was 11%. Q1’22 revenue of $458 million was up 7% (8% constant currency) over Q1’21, driven by increased revenue from our recurring revenue business lines, including the revenue contribution from the Arena acquisition, and an increase in professional services revenues. Q1’22 operating margin was 14% compared to 21% in Q1’21, primarily due to $34 million of restructuring charges recorded in Q1’22. Q1’22 non-GAAP operating margin was 35% compared to 36% in Q1’21 due to lower up-front license revenue recognized in the quarter as a result of the mix of contract types and contract durations in Q1’22 compared to Q1’21, which also impacted Q1’22 EPS compared to Q1’21 EPS.

Q1’22 EPS reflects a lower tax rate compared to the prior year as Q1’21 included a charge of $35.3 million related to a South Korean tax matter, primarily related to foreign withholding taxes.

We generated a first quarter record of $138 million of cash from operations in Q1’22 compared to $114 million in Q1’21, with the increase driven by strong operational execution. Cash from operations in Q1’22 included $11 million of payments related to restructuring, compared to $7 million of restructuring payments made in Q1’21. We repurchased $120 million of our common stock in Q1’22 and ended Q1’22 with cash and cash equivalents of $296 million. In addition, we held an equity investment in Matterport, Inc., which was valued at $87 million and subject to trading restrictions as of the end of Q1’22. We sold our investment in Matterport near the end of January 2022 (in Q2’22) for an aggregate of $39 million.

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.

(Dollar amounts in millions, except per share data)		Three months ended								Percent Change
		December 31, 2021				December 31, 2020				Actual				Constant Currency(1)
ARR(1)		$	1,496.3			$	1,336.1				12	%			16	%
Total recurring revenue(2)		$	405.1			$	385.0				5	%			6	%
Perpetual license			8.5				8.5				0	%			0	%
Professional services			44.1				35.6				24	%			26	%
Total revenue			457.7				429.1				7	%			8	%
Total cost of revenue			95.1				86.8				10	%			10	%
Gross margin			362.6				342.2				6	%			7	%
Operating expenses			300.4				251.9				19	%			19	%
Total costs and expenses			395.5				338.7				17	%			17	%
Operating income		$	62.2			$	90.3				(31	)%			(29	)%
Non-GAAP operating income(3)		$	158.1			$	153.4				3	%			6	%
Operating margin			13.6	%			21.1	%
Non-GAAP operating margin(3)			34.5	%			35.8	%
Diluted earnings per share		$	0.39			$	0.20
Non-GAAP diluted earnings per share(3)(4)		$	0.95			$	0.97
Cash flow from operations(5)		$	137.7			$	113.8
Free cash flow(6)		$	134.4			$	110.9

(1)	For go-forward comparability purposes, $7 million of ARR was removed in the period ended December 31, 2020 associated with a Vuforia AR product which we no longer intend to sell on a recurring basis beginning in FY’22.

(2)	Recurring revenue is comprised of subscription, perpetual support, and SaaS 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 by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments. In Q1’21 we had recorded a full valuation allowance against our U.S. net deferred tax assets. As we were profitable on a non-GAAP basis, the Q1’21 tax provision was calculated assuming there was no valuation allowance. Additionally, our Q1’21 non-GAAP financial measures excluded tax expense of $34.6 million related to a South Korean tax exposure, primarily related to foreign withholding taxes.

(5)	Cash flow from operations for Q1'22 includes $10.5 million of restructuring payments. Cash flow from operations for Q1'21 includes $7.3 million of restructuring payments and $2.9 million of acquisition-related payments.

(6)	Free cash flow is cash from operations net of capital expenditures of $3.4 million and $2.9 million in Q1'22 and Q1'21, respectively.

Impact of Foreign Currency Exchange on Results of Operations

Approximately 55% 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’22 and FY’21 by the exchange rates in effect on September 30, 2021. We anticipate foreign currency exchange rates will be a headwind for 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. Subscription contracts have up-front recognition of subscription license revenue, with the support element of the contract recognized ratably over the term. Perpetual support contracts are recognized ratably over the term of the contract, however we continue to convert to subscription contracts resulting in a shift to up-front recognition of subscription license revenue in the period converted compared to ratable recognition for a perpetual support renewal. 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 of year or sequential revenue comparisons can have significant variability.

Revenue by Line of Business

(Dollar amounts in millions)		Three months ended								Percent Change
		December 31, 2021				December 31, 2020				Actual				Constant Currency
License		$	169.1			$	177.2				(5	)%			(4	)%
Support and cloud services			244.5				216.2				13	%			14	%
Software revenue			413.6				393.4				5	%			6	%
Professional services			44.1				35.6				24	%			26	%
Total revenue		$	457.7			$	429.1				7	%			8	%

Software revenue in Q1’22 increased over Q1’21 primarily due to contribution from the acquisition of 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. Subscription license revenue decreased in Q1’22 compared to Q1’21 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 annualized values are consistent.

Professional services revenue increased in Q1’22 over Q1’21 by 24% (26% constant currency) as Q1’21 revenue was negatively impacted by challenges with project scoping and implementation activities and performance due to social distancing measures and facility closures implemented to address the COVID-19 pandemic. Q1’22 saw an increase in revenue associated with large PLM consulting engagements, particularly with automotive, aerospace and defense customers. Q1’21 professional services revenue was also lower due to a prior-year extension to complete work on a large fixed-price contract.

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 flat-to-down over time due to our strategy to expand margins by migrating more services engagements to our partners and delivering products that require less consulting and training services.

Software Revenue by Product Group

(Dollar amounts in millions)		Three months ended								Percent Change
		December 31, 2021				December 31, 2020				Actual				Constant Currency
Digital Thread - Core		$	282.1			$	289.5				(3	)%			(2	)%
Digital Thread - Growth			62.0				55.3				12	%			13	%
Digital Thread - FSG			51.6				46.2				12	%			12	%
Digital Thread (Total)			395.7				391.0				1	%			2	%
Velocity			17.9				2.4				646	%			646	%
Software revenue		$	413.6			$	393.4				5	%			6	%

Digital Thread

Core Product software revenue declined in Q1’22 compared to Q1’21, driven by a decline in subscription license revenue 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 annualized values are consistent. Subscription support revenues increased 19% in Q1’22 compared to Q1’22 (21% constant currency), offset by a decrease in perpetual support revenue as customers have continued to convert from perpetual support to subscriptions.

ARR increased 7% (11% constant currency) for Q1’22 compared to Q1’21, reflecting double-digit constant currency growth in both CAD and PLM driven by higher than anticipated new bookings and a low rate of churn.

Growth Product software revenue increased in Q1’22 over Q1’21 due to subscription revenue growth of 16% (17% constant currency), resulting in recurring revenue growth of 15% (16% constant currency).

Growth Product ARR increased 11% (14% constant currency) for Q1’22 compared to Q1’21, reflecting double-digit growth in AR and IoT, primarily from expansion deals with existing customers. We anticipate continued improvement in IoT market conditions and the introduction of our new Digital Performance Management offering will continue to drive demand for our Growth Products.

FSG Product software revenue growth in Q1’22 reflects subscription revenue growth of 26% (actual and constant currency) over Q1’21 due to a few large contracts with longer durations, offset by a 17% (actual and constant currency) decline in perpetual support revenue due to conversions of support contracts to subscriptions.

FSG product ARR increased by 4% (6% constant currency) for Q1’22 compared to Q1’21 driven primarily by new bookings.

Velocity

Velocity Product software revenue and ARR growth in Q1’22 compared to Q1’21 are due to the acquisition and subsequent growth of the Arena business purchased in January 2021, as well as growth in Onshape.

Software Revenue by Geographic Region

A significant portion of our software revenue is generated outside the U.S. In the first three months of FY'22 and FY'21 approximately 45% to 50% of software revenue was generated in the Americas, 30% to 35% in Europe, and 15% to 20% in Asia Pacific.

(Dollar amounts in millions)		Three months ended								Percent Change
		December 31, 2021				December 31, 2020				Actual				Constant Currency
Americas		$	196.8			$	191.0				3	%			3	%
Europe			140.8				144.8				(3	)%			(1	)%
Asia Pacific			76.0				57.6				32	%			35	%
Software revenue		$	413.6			$	393.4				5	%			6	%

Americas software revenue growth in Q1’22 was primarily driven by the contribution of the Arena acquisition, offset by a decline in Digital Thread – Core subscription license revenue 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 annualized values are consistent.

Q1’22 Americas ARR was up 19% over Q1’21, led by Arena’s contribution and the Velocity business overall, as well as strength in our Core products.

Europe software revenue declined in Q1’22 primarily due to the decrease in Digital Thread – Core subscription license revenue due to the duration and mix of contract types for new and renewal contracts started in the quarter, partially offset by an increase in Digital Thread – Growth cloud services revenue.

Q1’22 ARR in Europe was up 6% (13% constant currency) over Q1’21, led by mid-30s growth in our Digital Thread Growth products and strength in our Core products.

Asia Pacific software revenue growth in Q1’22 was driven by subscription revenue growth of 51% (54% constant currency) over Q1’21 due to a few large multi-year renewal transactions resulting in higher up-front subscription license revenue under ASC 606.

Q1’22 ARR in Asia Pacific was up 8% (14% constant currency) over Q1’21, led by mid-teens growth in Core products.

Gross Margin

(Dollar amounts in millions)		Three months ended
		December 31, 2021				December 31, 2020				Percent Change
License gross margin		$	159.3			$	163.9				(3	)%
License gross margin percentage			94	%			93	%
Support and cloud services gross margin		$	198.6			$	177.9				12	%
Support and cloud services gross margin percentage			81	%			82	%
Professional services gross margin		$	4.7			$	0.4				1078	%
Professional services gross margin percentage			11	%			1	%
Total gross margin		$	362.6			$	342.2				6	%
Total gross margin percentage			79	%			80	%
Non-GAAP gross margin(1)		$	375.1			$	352.9				6	%
Non-GAAP gross margin percentage(1)			82	%			82	%

(1)	Non-GAAP financial measures are reconciled to GAAP results under Non-GAAP Financial Measures below.

License gross margin decreased in Q1’22 compared to Q1’21 due to an $8.1 million decrease in license revenue, partially offset by a $3.5 million decrease in cost of license revenue.

Support and cloud services gross margin increased in Q1’22 compared to Q1’21 due to increases in subscription support and cloud revenue, partially offset by a decrease in perpetual support revenue, for a $28.2 million overall increase in support and cloud services revenue. This was partially offset by an increase of $7.5 million in cost of support and cloud services in Q1’22 compared to Q1’21.

Professional services gross margin increased in Q1’22 compared to Q1’21, primarily due to the impact of the COVID-19 pandemic on Q1’21 revenue, as well as a large fixed-price contract requiring a prior-year extension that impacted Q1’21 margins.

Operating Expenses

(Dollar amounts in millions)		Three months ended
		December 31, 2021				December 31, 2020				Percent Change
Sales and marketing		$	125.5			$	124.7				1	%
% of total revenue			27	%			29	%
Research and development		$	80.5			$	70.8				14	%
% of total revenue			18	%			17	%
General and administrative		$	51.9			$	49.5				5	%
% of total revenue			11	%			12	%
Amortization of acquired intangible assets		$	8.5			$	6.6				30	%
% of total revenue			2	%			2	%
Restructuring and other charges, net		$	34.0			$	0.2				13662	%
% of total revenue			7	%			0	%
Total operating expenses		$	300.4			$	251.9				19	%

Headcount increased 1% between Q1’22 and Q1’21.

Operating expenses in Q1'22 compared to operating expenses in Q1'21 increased primarily due to the following:

	•	a $10 million increase in compensation expense (including benefit costs), primarily driven by:

	•	a $5 million (5%) increase in salaries primarily due to the addition of $4 million in salary costs for Arena employees,

	•	a $4 million (18%) increase in benefits, primarily related to higher health insurance costs,

	•	a $1 million (87%) increase in travel due to reduced travel restrictions.

	•	a $1 million (17%) increase in bonus expense due to higher attainment,

	•	partially offset by a $2 million (4%) decrease in stock-based compensation expense.

	•	a $34 million increase in restructuring charges primarily due to the restructuring plan initiated in the quarter. We expect to incur an additional $6 to $11 million of restructuring charges in the remainder of fiscal 2022. The anticipated 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;

	•	a $2 million (30%) increase in amortization expense due to the [acquisition of Arena];

	•	a $2 million (24%) increase in equipment subscriptions;

	•	a $2 million (36%) increase in internal hosting costs;

partially offset by:

	•	a $3 million decrease in acquisition-related charges.

Interest Expense

(Dollar amounts in millions)		Three months ended
		December 31, 2021				December 31, 2020				Percent Change
Interest and debt premium expense		$	(13.0	)		$	(11.5	)			13	%

Interest expense includes interest on our credit facility and senior notes. We had $1.5 billion of total debt at the end of Q1’22, compared to $1.0 billion at the end of Q1’21. We borrowed $600 million under our credit facility to acquire Arena in Q2’21, $450 million of which remains outstanding. The average interest rate on borrowings outstanding was 3.2% during Q1’22, compared to 3.8% during Q1’21.

Other Income (Expense)

(Dollar amounts in millions)		Three months ended
		December 31, 2021				December 31, 2020				Percent Change
Interest income		$	0.5			$	0.6				(15	)%
Other income (expense), net			5.7				(2.0	)			(386	)%
Other income (expense), net		$	6.2			$	(1.4	)			(538	)%

The $7.6 million increase in other income (expense), net, for Q1’22 compared to Q1’21 is driven by a $9.8 million unrealized gain related to an equity investment in Matterport, Inc., calculated and recorded at the end of Q1’22, offset by foreign currency losses in the quarter. We sold our investment in Matterport near the end of January 2022 (in Q2’22) for an aggregate of $39.1 million and recognized a loss of $48.2 million.

Income Taxes

(Dollar amounts in millions)		Three months ended
		December 31, 2021				December 31, 2020				Percent Change
Income before income taxes		$	55.4			$	77.4				(28	)%
Provision for income taxes		$	9.3			$	53.9				(83	)%
Effective income tax rate			17	%			70	%

In Q1’22 and Q1’21, our effective tax rate differed from the statutory federal income tax rate of 21% due to U.S. tax reform, our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate and the excess tax benefit related to stock-based compensation. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland and the Cayman Islands. In Q1’22 and Q1’21, the foreign rate differential predominantly relates to these earnings.

In Q1’22 and Q1’21, 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.

In Q1’21, our results also include a charge of $35.3 million related to the effects of an unrecognized tax benefit in the Republic of Korea (South Korea), primarily related to foreign withholding taxes, as well as the effects of the full valuation allowance which was maintained against our U.S. net deferred tax assets at that time.

Operating Measure

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. ARR 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.

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 ended September 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.

(in millions, except per share amounts)		Three months ended
		December 31, 2021				December 31, 2020
GAAP gross margin		$	362.6			$	342.2
Stock-based compensation			6.0				4.4
Amortization of acquired intangible assets included in cost of revenue			6.5				6.3
Non-GAAP gross margin		$	375.1			$	352.9
GAAP operating income		$	62.2			$	90.3
Stock-based compensation			45.9				46.1
Amortization of acquired intangible assets			15.0				12.8
Acquisition-related and other transactional charges included in general and administrative expenses			1.1				3.9
Restructuring and other charges, net			34.0				0.2
Non-GAAP operating income		$	158.1			$	153.4
GAAP net income		$	46.1			$	23.5
Stock-based compensation			45.9				46.1
Amortization of acquired intangible assets			15.0				12.8
Acquisition-related and other transactional charges included in general and administrative expenses			1.1				3.9
Restructuring and other charges, net			34.0				0.2
Non-operating charges (credits) (1)			(9.8	)			0.0
Income tax adjustments (2)			(19.2	)			27.2
Non-GAAP net income		$	113.1			$	113.7
GAAP diluted earnings per share		$	0.39			$	0.20
Stock-based compensation			0.39				0.39
Amortization of acquired intangible assets			0.13				0.11
Acquisition-related and other transactional charges included in general and administrative expenses			0.01				0.03
Restructuring and other charges, net			0.29				—
Non-operating charges (credits) (1)			(0.08	)			0.00
Income tax adjustments (2)			(0.16	)			0.23
Non-GAAP diluted earnings per share		$	0.95			$	0.97

(1)	In the first quarter of 2022, we recorded a $9.8 million gain on our equity investment in Matterport, Inc.

(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 U.S. net deferred tax assets. As we were profitable on a non-GAAP basis, the 2021 tax provision was calculated assuming there was no valuation allowance. Additionally, our 2021 non-GAAP results excluded tax expense of $34.6 million related to a South Korean tax matter, primarily related to foreign withholding taxes.

Operating margin impact of non-GAAP adjustments:

		Three months ended
		December 31, 2021				December 31, 2020
GAAP operating margin			13.6	%			21.1	%
Stock-based compensation			10.0	%			10.7	%
Amortization of acquired intangible assets			3.3	%			3.0	%
Acquisition-related and other transactional charges included in general and administrative expenses			0.2	%			0.9	%
Restructuring and other charges, net			7.4	%			0.1	%
Non-GAAP operating margin			34.5	%			35.8	%

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

(in millions)		December 31, 2021				September 30, 2021
Cash and cash equivalents		$	296.1			$	326.5
Restricted cash			0.5				0.5
Total		$	296.6			$	327.0
(in millions)		Three months ended
		December 31, 2021				December 31, 2020
Net cash provided by operating activities		$	137.7			$	113.8
Net cash provided by investing activities		$	2.7			$	46.7
Net cash used in financing activities		$	(169.1	)		$	(42.8	)

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.

A significant portion of our cash is generated and held outside the U.S. As of December 31, 2021, we had cash and cash equivalents of $55 million in the U.S., $75 million in Europe, $139 million in Asia Pacific (including India) and $27 million in other non-U.S. countries. We have substantial cash requirements in the U.S., but we believe that the combination of our existing U.S. cash and cash equivalents, our ability to repatriate cash to the U.S. more cost effectively with the recent U.S. tax law changes, future U.S. operating cash flows and cash available under our credit facility 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 was $138 million in Q1’22, compared to $114 million in Q1’21. The increase in cash from operations in Q1’22 compared to Q1’21 was primarily driven by an increase in collections, offset by higher salary and salary-related payments. Cash from operations for Q1’22 includes $11 million of restructuring payments, compared to $7 million of restructuring payments in the year-ago period. Q1’21 cash from operations also included $3 million of acquisition-related payments.

Cash Provided by Investing Activities

(in millions)		Three months ended
		December 31, 2021				December 31, 2020
Additions to property and equipment		$	(3.4	)		$	(2.9	)
Proceeds from (purchases of) short- and long-term marketable securities, net			—				58.5
Settlement of net investment hedges			6.5				(7.4	)
Other			(0.4	)			(1.5	)
Net cash provided by investing activities		$	2.7			$	46.7

Cash provided by investing activities in Q1’22 reflects settlement of net investment hedges of $6.5 million. Cash provided in investing activities in Q1’21 reflects proceeds from the sale of marketable securities of $56 million.

Cash Used in Financing Activities

(in millions)		Three months ended
		December 31, 2021				December 31, 2020
Borrowings on debt, net		$	—			$	(18.0	)
Repurchases of common stock			(119.7	)			—
Payments of withholding taxes in connection with stock-based awards			(49.2	)			(24.5	)
Payment of principal for financing leases			(0.2	)			(0.3	)
Net cash used in financing activities		$	(169.1	)		$	(42.8	)

Net cash outflows related to financing activities in Q1’22 include the repurchase of $120 million of common stock. We were committed to repurchasing an additional $5 million of common stock as of December 31, 2021, which settled in early January 2022 (Q2’22).

Outstanding Debt

(in millions)		December 31, 2021
4.000% Senior notes due 2028		$	500.0
3.625% Senior notes due 2025			500.0
Credit facility revolver			450.0
Total debt		$	1,450.0
Unamortized debt issuance costs for the senior notes			(10.0	)
Total debt, net of issuance costs		$	1,440.0
Undrawn under credit facility revolver		$	550.0
Undrawn under credit facility revolver available to borrow		$	534.7

As of December 31, 2021, 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.

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 (which we expect to be approximately $30 million in FY’22) through at least the next twelve months and to meet our known long-term capital requirements. In FY’22 we expect to pay approximately $45 million to $50 million in restructuring cash payments related to our recently announced restructuring charge as well as previous restructuring charges.

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 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.

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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 2021 Annual Report on Form 10-K.

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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 December 31, 2021.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a or 15(d) of the Exchange Act that occurred during the period ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS | --- | --- |

Information on legal proceedings can be found in Note 15. Commitments and Contingencies – Legal and Regulatory Matters – 401(k) Plan of Notes to Consolidated Financial Statements in this Form 10-Q, which information is incorporated herein by reference.

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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 2021 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.

ITE****M 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below shows the shares of our common stock we repurchased in the first quarter of 2022.

Period	Total Number of Shares (or Units) Purchased			Average Price Paid per Share (or Unit)			Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs			Approximate Dollar Value of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)
October 1, 2021 - October 31, 2021		—			—			—		$	970,000,047
November 1, 2021 - November 30, 2021		—			—			—		$	970,000,047
December 1, 2021- December 31, 2021		1,003,420		$	119.33			1,003,420		$	850,260,561
Total		1,003,420		$	119.33			1,003,420		$	850,260,561

	(1)	Our Board of Directors has authorized us to repurchase up to $1 billion of our common stock in the period November 13, 2020 through September 30, 2023, which program we announced on December 15, 2020.

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3.1		Restated Articles of Organization of PTC Inc. adopted August 4, 2015 (filed as Exhibit 3.1 to our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 (File No. 0-18059) and incorporated herein by reference).
3.2.1		By-Laws, as amended and restated, of PTC Inc. (filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 2014 (File No. 0-18059) and incorporated herein by reference).
3.2.2		Amendment to PTC By-Laws dated June 24, 2021 (filed as Exhibit 3.1 to our Current Report on Form 8-K filed on June 25, 2021 (File No. 0-18059) and incorporated herein by reference).
4.1		Indenture, dated as of February 13, 2020, between PTC Inc. and Wells Fargo Bank, National Association, as trustee (filed as Exhibit 4.1 to our Current Report on Form 8-K filed on February 13, 2020 (File No. 0-18059) and incorporated herein by reference).
4.2		Form of 3.625% senior unsecured notes due 2025 (filed as Exhibit 4.2 to our Current Report on Form 8-K filed on February 13, 2020 (File No. 0-18059) and incorporated herein by reference).
4.3		Form of 4.000% senior unsecured notes due 2028 (filed as Exhibit 4.3 to our Current Report on Form 8-K filed on February 13, 2020 (File No. 0-18059) and incorporated herein by reference).
31.1		Certification of the Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a).
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		The following materials from PTC Inc.'s Quarterly Report on Form 10-Q for the quarter ended December 31, 2021 ("Q1 Form 10-Q") formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of December 31, 2021 and September 30, 2021; (ii) Condensed Consolidated Statements of Operations for the three months ended December 31, 2021 and December 31, 2020; (iii) Condensed Consolidated Statements of Comprehensive Income for the three months ended December 31, 2021 and December 31, 2020; (iv) Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2021 and December 31, 2020; (v) Consolidated Statements of Stockholders’ Equity for the three months ended December 31, 2021 and December 31, 2020; and (vi) Notes to Condensed Consolidated Financial Statements.
104		The cover page of this Q1'22 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.

	PTC Inc.
	By:		/S/ KRISTIAN TALVITIE
			Kristian Talvitie Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Date: February 4, 2022