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PMTC > SEC Filings for PMTC > Form 10-K on 16-Nov-2012All Recent SEC Filings

Show all filings for PARAMETRIC TECHNOLOGY CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-K for PARAMETRIC TECHNOLOGY CORP


16-Nov-2012

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Forward-Looking Statements
Statements in this Annual Report about anticipated financial results and growth, as well as about the development of our products and markets, are forward-looking statements that are based on our current plans and assumptions. Important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in Item 1A. "Risk Factors" of this Annual Report.
Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.
Executive Overview
We achieved our non-GAAP earnings per share and non-GAAP operating margin targets for 2012 on lighter than expected revenue. Our 2012 non-GAAP earnings per share grew 20% to $1.51 per share and our non-GAAP operating margin was 19.6%, up 190 basis points year over year (up 210 basis points on a constant currency basis). Non-GAAP revenue was $1,258 million, up 8% year over year (up 10% on a constant currency basis). On an organic basis (excluding revenue for both 2011 and 2012 from our MKS and 4CS businesses acquired in the second half of 2011) revenue increased 3% (5% on a constant currency basis). Our 2012 GAAP earnings per share and operating margin results were affected by the recording of a valuation allowance against U.S. net deferred tax assets, which resulted in a non-cash income tax charge of $124 million, and restructuring charges of $25 million, resulting in a loss per share of $0.30 and operating margin of 10.2%, up 20 basis points year over year (up 50 basis points on a constant currency basis). GAAP revenue was $1,256 million, up 8% year over year (up 10% on a constant currency basis). Non-GAAP measures are reconciled to GAAP results under Results of Operations - Income and Margins; Earnings Per Share below.

Our revenue results were negatively impacted by uncertainty in the global economy and currency, particularly the Euro. We believe that global economic concerns have impacted customer purchasing decisions, causing customers to reduce the size of their purchases and/or to delay purchase decisions. License revenue was more adversely affected by this trend than were maintenance and service revenues. Total license revenue for 2012 was $348 million, an increase of 2% year over year (up 4% on a constant currency basis). On an organic basis, total license revenue for 2012 was down 3% year-over-year (down 1% on a constant currency basis).

Our maintenance and services businesses performed well in 2012, despite the lower than anticipated license revenue. We have more than 1.7 million software seats under maintenance as of the end of 2012, up 13% from the end of 2011, and our services business improved its profitability. Throughout 2012 we remained committed to meeting our earnings targets through diligent headcount and expense management. We ended 2012 with 5,897 employees, a 4% decline from the end of 2011, due primarily to headcount reductions associated with restructuring actions completed in the second and third quarters of 2012 and


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the completion of our integration of our MKS and 4CS acquisitions. Our operating margin and earnings per share improvements were partially offset by the impact of changes in foreign currency exchange rates, which unfavorably impacted 2012 non-GAAP and GAAP operating margin by approximately $7 million and $6 million, respectively.

We ended 2012 with $490 million of cash and $370 million of debt, up from $168 million of cash and $200 million of debt at September 30, 2011, reflecting $230 million in proceeds drawn from our credit facility to finance the Servigistics acquisition, which we completed on October 2, 2012. Operating cash flows were $218 million in 2012 and we used $35 million to repurchase shares of our common stock in 2012.

Future Expectations, Strategies and Risks

For 2013, our goal is to achieve revenue growth of 8% to 10% (which includes revenue from Servigistics) including license revenue growth of 6% to 9%, maintenance revenue growth of approximately 7%, and consulting and training service revenue growth of 12% to 15%, and non-GAAP operating margin expansion of 200 basis points, from 19.6% in 2012 to approximately 21.5% in 2013 (expansion of GAAP operating margins from 10.2% in 2012 to approximately 12% in 2013). If foreign currency exchange rates relative to the U.S. dollar differ significantly from our current assumed rates or if economic conditions deteriorate, our results could differ materially from our plans. Our current plan assumes a $1.30 USD to Euro rate.

We expect to record a restructuring charge of approximately $16 million in the first quarter of 2013, primarily for severance and related costs associated with approximately 170 employees notified of termination during the first quarter (representing approximately 3% of our total workforce, which total workforce includes approximately 400 employees from Servigistics). We expect this restructuring will reduce our costs by approximately $5 million per quarter in 2013. While we expect the restructuring to be implemented in the first quarter of 2013, the full impact of the expense reductions will not be realized until the second quarter of 2013. Estimated cost savings of this restructuring are included in the 2013 financial targets above.

Also, our results have been impacted, and we expect will continue to be impacted, by the presence or absence of large transactions. The amount of revenue, particularly license revenue, attributable to large transactions, and the number of such transactions, may vary significantly from quarter to quarter based on customer purchasing decisions and macroeconomic conditions. Our growth rates have become increasingly dependent on adoption of our Enterprise solutions among large direct customers. Such transactions tend to be larger in size and may have long lead times as they often follow a lengthy product selection and evaluation process. This may cause volatility in our results. Impact of an Investigation in China
We have been investigating payments and expenses by certain business partners and employees in China that raise questions of compliance with laws, including the Foreign Corrupt Practices Act, and/or compliance with our business policies. In connection with this matter, we have terminated certain employees and business partners in China, which may have an adverse impact on our level of sales in China until replacements for those employees and business partners are in place and productive. Revenue from China has historically represented 6% to 7% of our total revenue. We have voluntarily disclosed the results of our investigation and associated remedial actions to the United States Department of Justice and the Securities and Exchange Commission and are continuing to provide additional information as requested by those agencies with respect to this matter. Resolution of this matter could include fines or other sanctions but we are unable to estimate an amount, if any. Revenue, Operating Margin, Earnings per Share and Cash Flow The following table shows the financial measures that we consider the most significant indicators of the performance of our business. In addition to providing operating income, operating margin, and diluted earnings per share as calculated under generally accepted accounting principles ("GAAP"), it shows non-GAAP operating income, operating margin, and diluted earnings per share for the reported periods. These non-GAAP measures exclude a fair value adjustment related to acquired deferred maintenance revenue, stock-based compensation expense, amortization of acquired intangible assets expense, acquisition-related charges, restructuring charges, one-time gains or charges included in non-operating other income (expense) and the related tax effects of the preceding items, as well as the tax items identified. Excluding those expenses and items provides investors another view of our operating results that is aligned with management budgets and with performance criteria in our incentive compensation plans. Management uses, and investors should use, non-GAAP measures in conjunction with our GAAP results. We discuss the non-GAAP measures in detail under Results of Operations - Income and Margins; Earnings per Share below.


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                                                      Percent Change 2011 to 2012                        Percent Change 2010 to 2011
                                                                         Constant                                            Constant
                         2012           2011          Actual             Currency          2010           Actual             Currency
                                                     (Dollar amounts in millions, except per share data)
License revenue      $    348.4     $    342.1            2 %                 4 %      $    296.0            16 %                12 %
Consulting and
training service
revenue                   295.3          267.1           11 %                13 %           217.6            23 %                19 %
Maintenance revenue       612.0          557.7           10 %                12 %           496.4            12 %                 9 %
Total revenue           1,255.7        1,166.9            8 %                10 %         1,010.0            16 %                12 %
Total costs and
expenses (1)            1,127.6        1,049.8            7 %                 9 %           935.2            12 %                10 %
Operating income (1) $    128.1     $    117.1            9 %                15 %      $     74.8            57 %                35 %
Non-GAAP operating
income (1)           $    246.8     $    206.6           20 %                23 %      $    157.7            31 %                21 %
Operating margin (1)       10.2 %         10.0 %                                              7.4 %
Non-GAAP operating
margin (1)                 19.6 %         17.7 %                                             15.6 %
GAAP diluted
earnings(loss) per
share (2)            $    (0.30 )   $     0.71                                         $     0.20
Non-GAAP diluted
earnings per share
(2)                  $     1.51     $     1.26                                         $     1.00
Cash flow from
operations (3)       $    218.0     $     78.7                                         $    156.6

(1) Costs and expenses in 2012 included $24.9 million of restructuring charges and $3.8 million of acquisition-related costs compared to $7.8 million of acquisition-related costs in 2011. These restructuring and acquisition-related costs have been excluded from non-GAAP operating income. In the first quarter of 2011, we entered into a strategic contract with an automotive customer for which we expected costs to exceed revenue by approximately $5 million. This loss was recorded in the first quarter of 2011 and resulted in a decrease in GAAP and non-GAAP operating income of approximately $5 million in 2011 compared to both 2012 and 2010.

(2) The GAAP loss per share in 2012 includes a non-cash net tax charge of $124.5 million recorded in the fourth quarter to establish a valuation allowance against our U.S. net deferred tax assets; and the following additional items:
$5.4 million, net primarily related to foreign tax credits which would be fully realized on a non-GAAP basis; $3.3 million primarily related to acquired legal entity integration activities; and $1.4 million related to the impact from a reduction in the statutory tax rate in Japan on deferred tax assets from a litigation settlement. GAAP earnings per share in 2011 includes foreign currency losses of $4.4 million related to our acquisition of MKS; $0.7 million of foreign currency losses related to a litigation settlement; and a one-time non-cash tax provision of $1.9 million in connection with a legal entity reorganization. GAAP earnings per share in 2010 includes a gain of $9.0 million resulting from a litigation settlement and a one-time non-cash tax provision of $43.4 million in connection with a legal entity reorganization. The items above have been excluded from non-GAAP diluted earnings per share for each respective period.

(3) In the first quarter of 2011, we used $48 million, net, of cash in connection with the resolution of a litigation matter.

2012 compared to 2011

Revenue in 2012 grew 8% (10% on a constant currency basis) and license revenue grew 2% (4% on a constant currency basis) compared to 2011. On an organic basis, excluding the 2012 and 2011 revenue from our 2011 MKS and 4CS acquisitions, our total revenue grew 3% (5% on a constant currency basis) and our license revenue declined 3% in 2012 compared to 2011. For 2012, our large deal activity (license and consulting and training service revenue of more than $1 million recognized from a single customer in a quarter) was approximately flat year over year with a lower mix of license revenue in 2012, which we attribute to the uncertain economy and unfavorable currency movements in 2012 as compared to 2011. Our Enterprise maintenance and consulting services business continued to be strong on both a reported and organic basis.

Our Desktop license revenue and Desktop total revenue declined 10% and 3%, respectively, in 2012 compared to 2011, attributable to a decrease in the dollar amount of large deals with direct customers. Our Desktop license revenue in 2011 benefited from our launch of PTC Creo and renewed demand for CAD products which had been soft in 2009 and 2010. Our Enterprise license revenue and Enterprise total revenue grew 17% and 20%, respectively, in 2012 compared to 2011. Excluding the impact of MKS and 4CS, Enterprise license revenue was up 7% and Enterprise total revenue was up 10%. In the small- and


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medium-size business market, we saw continued demand, with indirect license revenue and indirect total revenue both up 8% in 2012 compared to 2011.

Costs and expenses in 2012, compared to 2011, were impacted by a number of factors, including the impact of foreign currency, the full year impact of our MKS and 4CS acquisitions acquired in the second half of 2011, restructuring charges, investments in our direct sales force, and a company-wide merit pay increase. These items are described in more detail in Costs and Expenses below.

Our GAAP and non-GAAP operating income increased in 2012 compared to 2011 primarily due to increased revenue and operating scale improvements, particularly in our services business margins and in research and development. During 2012, we also made investments in our sales capacity to capitalize on long-term growth opportunities. While non-GAAP operating income increased significantly in 2012 compared to 2011, GAAP operating income improvements were partially offset by restructuring charges recorded in 2012. GAAP earnings per share was a loss of $0.30 in 2012 compared to earnings of $0.71 in 2011 due primarily to the recording of a valuation allowance against U.S. net deferred tax assets, which resulted in a non-cash income tax charge of $124.5 million, and restructuring charges of $25 million. Non-GAAP diluted earnings per share grew 20% to $1.51 in 2012 compared to 2011 due primarily to operating improvements.

Cash flow from operating activities was $218.0 million in 2012, compared with $78.7 million in 2011. The increase in cash provided by operating activities in 2012 compared to 2011 was due primarily to the resolution of a litigation matter in 2011, which reduced our cash balance by approximately $48 million in the first quarter of 2011, increased profitability in 2012, and the timing of cash collections on accounts receivable in 2012. Accounts receivable was $217.4 million and $230.2 million at September 30, 2012 and 2011, respectively. 2011 compared to 2010
Revenue in 2011 grew 16% (12% on a constant currency basis) compared to 2010. Excluding the impact of acquisitions, total revenue was $1,140.1 million, up 13%, and license revenue was $331.7 million, up 12% over 2010. We had growth in all lines of business, reflecting increased demand for our products and services. Enterprise maintenance and consulting services revenue increased in 2011 following a strong Enterprise license revenue year in 2010. Additionally, the launch of PTC Creo and renewed demand after depressed spending in 2009 and 2010 positively impacted Desktop license revenue and maintenance revenue as customers expanded their adoption and renewed seats under maintenance, and new customers, particularly in the small- and medium-size business space, purchased PTC Creo.
During 2011, we saw a year-over-year increase in the amount of revenue from customers for which license and/or consulting and training revenue exceeded $1 million in a quarter. License and/or consulting and training service revenue of $1 million or more recognized from individual customers in a quarter during 2011 totaled $270.3 million compared with $208.5 million in 2010. Our Desktop license revenue and Desktop total revenue grew 33% and 15%, respectively, in 2011 compared to 2010, attributable to an increase in the amount of large deals with direct customers. Our Enterprise license revenue was down slightly year over year (following 73% growth from 2009 to 2010), while total Enterprise revenue grew 16% in 2011 compared to 2010. Excluding the impact of MKS and 4CS, Enterprise license revenue was down 7% year over year and total Enterprise revenue was up 10% compared to 2010. Enterprise results reflected year over year declines in license revenue in the first half of 2011 and improvement during the second half of fiscal 2011, with fourth quarter year over year license revenue growth of 30% (11% when excluding the impact of acquisitions). In the small- and medium-size business market, indirect license revenue and total indirect revenue were up 23% and 12%, respectively, in 2011 compared to 2010.
Costs and expenses in 2011 increased 12%, compared to 2010, and were impacted by a number of factors, including higher cost of service in support of services revenue growth, investments in our direct sales force, incremental headcount, costs from acquisitions, and a company-wide merit pay increase. These items are described in more detail in Costs and Expenses below.
Our GAAP and non-GAAP operating income increased in 2011 compared to 2010 primarily due to increased revenue and operating scale improvements, particularly in research and development. During 2011, we also made measured investments in sales capacity to capitalize on long-term growth opportunities. While operating income increased significantly in 2011 compared to 2010, GAAP diluted earnings per share increased 248% in 2011 compared to 2010 due to a significantly higher income tax rate in 2010 and improved profitability. Our tax rate was 18% in 2011 compared with 70% in 2010, due in part to the tax items described in footnote 2 in the table above. Non-GAAP diluted earnings per share grew 26% in 2011 compared to 2010.


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Cash flow from operating activities was $78.7 million in 2011, compared with $156.6 million in 2010. The decrease in cash provided by operating activities was primarily due to the resolution of a litigation matter, which reduced our cash balance by approximately $48 million in the first quarter of 2011, and the timing of cash collections on accounts receivable. Accounts receivable was $230.2 million and $169.3 million at September 30, 2011 and 2010, respectively. This increase in accounts receivable was due primarily to revenue in the fourth quarter of 2011 being $71.4 million higher than the fourth quarter of 2010.

Results of Operations
Acquisitions
We acquired MKS, a global application lifecycle management (ALM) technology leader, on May 31, 2011. We acquired 4C Solutions, Inc. (4CS), a developer of warranty management and service lifecycle management (SLM) software in September 2011.
The results of operations of these businesses have been included in PTC's consolidated financial statements beginning on their respective acquisition dates. These acquisitions added $81.5 million to our 2012 revenue ($84.0 million on a non-GAAP basis) compared to $26.8 million to our 2011 revenue ($29.4 million on a non-GAAP basis). MKS and 4CS revenue is classified as "Enterprise" revenue.
Impact of Foreign Currency Exchange on Results of Operations Approximately two thirds of our revenue and half of our expenses are transacted in currencies other than the U.S. dollar. Currency translation affects our reported results because we report our results of operations in U.S. Dollars. Changes in currency exchange rates in 2012 compared to 2011, particularly for the Euro, reduced both revenue and expenses. Conversely, in 2011 and 2010, our revenue and expenses increased as a result of changes in currency rates. If actual reported results were converted into U.S. dollars based on the corresponding prior year's foreign currency exchange rates, 2012 revenue and expenses would have been higher by $25.2 million and $19.2 million, respectively, 2011 and 2010 revenue would have been lower by $36.8 million and $15.5 million, respectively, and 2011 and 2010 expenses would have been lower by $21.0 million and $11.5 million, respectively. The net impact on year-over-year results would have been an increase in operating income of $6.0 million in 2012 and a decrease in operating income of $15.8 million and $4.0 million in 2011 and 2010, respectively. The results of operations, revenue by line of business and revenue by geographic region in the tables that follow present both actual percentage changes year over year and percentage changes on a constant currency basis.
Revenue
Our revenue consists of software license revenue and service revenue. Service revenue includes software maintenance revenue (from providing our customers software updates and technical support) as well as consulting and training revenue (including implementation services).
Desktop revenue includes our CAD Solutions: PTC Creo Parametric, PTC Creo Elements/Direct, PTC Arbortext authoring products and PTC Mathcad. Enterprise revenue includes our PLM solutions: PTC Windchill, PTC Arbortext enterprise products, PTC Creo View, and PTC Integrity.
Direct revenue includes sales made primarily by our direct sales force to large businesses. Indirect revenue includes sales by our reseller channel, primarily to small- and medium-size businesses, as well as revenue from other accounts that we have classified as indirect. If the classification of a customer changes between direct and indirect, we reclassify the historical revenue associated with that customer to align with the current period classification. Such reclassifications were not material in any of the years presented.


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Revenue by Product Group and Distribution Channel

                                       Desktop                                                   Enterprise                                                   Total Revenue
                               Year Ended September 30,                                   Year Ended September 30,                                      Year Ended September 30,
                           Percent                 Percent                             Percent                Percent                               Percent                   Percent
                 2012       Change      2011       Change       2010        2012       Change       2011       Change      2010         2012         Change        2011        Change       2010
Direct
License
revenue        $  98.2       (16 )%   $ 117.3        44 %     $  81.6     $ 152.1        14 %     $ 133.9        (5 )%   $ 140.5     $   250.3         -  %     $   251.2        13  %   $   222.1
Service
revenue:
Consulting and
training
service
revenue           32.4       (15 )%      38.1        25 %        30.4       246.1        13 %       217.2        25  %     173.1         278.5         9  %         255.2        25  %       203.6
Maintenance
revenue          215.3         1  %     212.2         7 %       197.7       174.1        29 %       134.9        27  %     106.1         389.4        12  %         347.1        14  %       303.8
Total service
revenue          247.8        (1 )%     250.3        10 %       228.1       420.2        19 %       352.0        26  %     279.3         668.0        11  %         602.3        19  %       507.4
Total revenue  $ 345.9        (6 )%   $ 367.5        19 %     $ 309.7     $ 572.3        18 %     $ 485.9        16  %   $ 419.8     $   918.3         8  %     $   853.5        17  %   $   729.4
Indirect
License
revenue        $  70.0        (1 )%   $  70.5        19 %     $  59.4     $  28.1        38 %     $  20.4        40  %   $  14.6     $    98.1         8  %     $    90.9        23  %   $    73.9
Service
revenue:
Consulting and
training
service
revenue            6.1        (4 )%       6.4         6 %         6.0        10.7        92 %         5.6       (31 )%       8.1          16.8        41  %          11.9       (15 )%        14.0
Maintenance
revenue          185.0         2  %     180.7         8 %       167.3        37.5        25 %        30.0        18  %      25.4         222.5         6  %         210.6         9  %       192.6
Total service
revenue          191.1         2  %     187.0         8 %       173.3        48.2        36 %        35.5         6  %      33.4         239.3         8  %         222.5         8  %       206.7
Total revenue  $ 261.1         1  %   $ 257.6        11 %     $ 232.6     $  76.3        36 %     $  55.9        17  %   $  48.0     $   337.4         8  %     $   313.5        12  %   $   280.6
Total Revenue
License
revenue        $ 168.2       (10 )%   $ 187.8        33 %     $ 140.9     $ 180.2        17 %     $ 154.3         -  %   $ 155.1     $   348.4         2  %     $   342.1        16  %   $   296.0
Service
revenue:                                                                                                                                     -                          -                        -
Consulting and
training
service
revenue           38.5       (13 )%      44.4        22 %        36.4       256.8        15 %       222.7        23  %     181.2         295.3        11  %         267.2        23  %       217.6
Maintenance
revenue          400.4         2  %     392.8         8 %       364.9       211.6        28 %       164.8        25  %     131.5         611.9        10  %         557.7        12  %       496.4
Total service
revenue          438.9         -  %     437.3         9 %       401.3       468.4        21 %       387.6        24  %     312.7         907.3        10  %         824.8        16  %       714.0
Total revenue  $ 607.0        (3 )%   $ 625.1        15 %     $ 542.3     $ 648.6        20 %     $ 541.9        16  %   $ 467.8     $ 1,255.7         8  %     $ 1,166.9        16  %   $ 1,010.0


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Revenue by Line of Business

Revenue as a Percentage of Total Revenue   2012    2011    2010
License                                     28 %    29 %    29 %
Consulting and training service             23 %    23 %    22 %
Maintenance                                 49 %    48 %    49 %
                                           100 %   100 %   100 %



Year over Year Percentage Changes
in Revenue                                 2012 compared to 2011             2011 compared to 2010
. . .
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