PTC Announces Fiscal Fourth Quarter 2019 Results; Provides Fiscal 2020 Outlook

Solid Q4’19 Revenue and Operating Margin Performance

BOSTON--(BUSINESS WIRE)--PTC (NASDAQ: PTC) today reported financial results for its fiscal fourth quarter and fiscal year ended September 30, 2019.

James Heppelmann, President and CEO said “PTC’s ARR grew 12% in fiscal 2019 reflecting the strength of our technology in the markets we serve and the value we provide to our customers. We also successfully completed the transition to subscription licensing and ended the year strong across key financial metrics including revenue and margins.”

Heppelmann added, “Today, we also announced PTC’s intention to acquire Onshape, creators of the first SaaS product development platform that unites next-generation CAD, data management, and collaboration tools. Onshape’s proven talent and technology are the perfect complement to PTC’s market leading on-premise CAD and PLM solutions, and will dramatically strengthen PTC’s ability to participate in the highest growth part of the market with a unique SaaS-based product offering. Most importantly, Onshape will put PTC in a position to lead the market’s inevitable shift to SaaS.”

Fourth quarter and fiscal year 2019 highlights¹
Additional operating and financial highlights are set forth below. For additional details, please refer to the prepared remarks and financial data tables that have been posted to the Investor Relations section of our website at [e-mail]. Note that all references to revenue and margins are under ASC 605.

• License and subscription bookings in Q4’19 were $150 million, $5 million above the high end of our guidance range driven by strong bookings in IoT and AR, including a mega deal with our strategic alliance partner Rockwell Automation.² FY’19 license and subscription bookings were $472 million, up 1% year over year or 4% on a constant currency basis.

• ARR per the new definition was $1,116 million, or $1,134 million at the guidance Fx rate, at the end of Q4’19, in line with the targets we provided in September. This is a 10% increase, or 12% increase consistent with the guidance rate, compared to Q4’18, reflecting the strength of our recurring revenue business.

• Operating cash flow was $55 million in Q4’19; FY’19 operating cash flow was $285 million. FY’19 free cash flow was $221 million and adjusted free cash flow was $245 million, increases of 4% and 13%, respectively, over Q4’18. FY’19 adjusted free cash flow excludes $25 million of restructuring payments related to our workforce realignment and headquarters relocation.

• Recurring software revenue was $284 million in Q4’19, an increase of 9% year over year or 11% in constant currency. FY’19 recurring software revenue was $1,079 million, an increase of 10% year over year or 13% in constant currency.
• Operating margin: Q4’19 GAAP operating margin was 11%, compared to 4% in Q4’18; Q4’19 non-GAAP operating margin was 22%, compared to 21% in Q4’18. FY’19 GAAP operating margin was 8%, compared to 6% in FY’18; FY’19 non-GAAP operating margin was 22%, compared to 18% in FY’18.

• Total cash, cash equivalents, and marketable securities: As of the end of Q4’19 total cash, cash equivalents, and marketable securities was $327 million and total debt, net of deferred issuance costs, was $669 million³. We repurchased approximately 378,000 shares in the fourth quarter of fiscal 2019 and 1.4 million shares in fiscal 2019, spending $25 million and $115 million, respectively. Additionally, in Q4’19, we repaid $30 million on our revolving credit facility. In Q3 of fiscal 2019, we also retired 3 million shares at no cost related to the ASR initiated in the fourth quarter of fiscal 2018.

Fiscal 2020 Operational Outlook
Our fiscal 2020 operational outlook includes the following general considerations:

• ARR guidance:
  • Allows for potential impact of moderate weakening of macroeconomic conditions
  • Onshape contribution of approximately 100 bps of incremental growth
  • Contribution from ramp deals and deals with FY’20 start dates
  • Modest improvement to churn
• FCF and adjusted FCF guidance reflects:
  • Operating cash flow of $248M - $268M
  • $30M of Capex
  • $37M of restructuring and headquarters relocation charges⁴
  • Short-term impacts of $65M including:
    • $25M of incremental interest expense related to the Onshape acquisition
    • $25M of higher cash taxes driven by the timing of ASC 606 revenue recognition
    • $15M of negative impact due to Fx

In millions	Operating Metrics
ARR	$1,245 - $1,280
YoY in CC	12% - 15%
Free cash flow	$218-$238
YoY in CC	(1%) - 8%
Adjusted free cash flow	$255-$275
YoY in CC	4% - 12%

Fiscal 2020 Financial Outlook
Our fiscal 2020 financial outlook includes the following general considerations:

• The Onshape acquisition (excluding the impact of purchase accounting and acquisition-related costs).
• Operating expenses are expected to grow roughly 9%, slightly elevated due to the Onshape acquisition. We expect the run-rate to decline in the back half of FY’20.
• Allows for potential impact of moderate weakening of macroeconomic conditions
• Based on Fx rates as of September 30, 2019.
• Sharecount will be roughly flat compared to FY’19. We are suspending the share repurchase program for one year to accelerate debt repayment.
• ASC 606 creates quarterly and annual volatility for on-premise subscription companies due to factors that affect revenue recognition such as:
  • Term length for new and renewal bookings
  • Contract start-date timing
  • Quarterly spread of new and renewal bookings
  • Support to subscription conversions
  • Potential future changes to revenue recognition for certain products as they become further cloud enabled
• As such, we are providing a wide range on revenue and EPS.

  ---

  ¹ We include operating and non-GAAP financial measures in our operational highlights. We revised the definition of ARR on September 5, 2019. The detailed definitions of these items and reconciliations of Non-GAAP financial measures to comparable GAAP measures are included below and in the reconciliation tables at the end of this press release.
  ² The mega deal from Rockwell Automation was issued to satisfy a portion of expected FY’20 demand and will be credited against committed ACV minimums due in FY’20 under the parties’ strategic alliance agreement, as amended. Excluding the mega deal, bookings for the quarter were within the guidance range.
  ³ We plan to increase the revolving credit facility from $700 million to $1 billion in FY’20.
  ⁴ Adjusted free cash flow excludes $37 million of estimated restructuring payments related primarily to our workforce realignment associated with expected synergies and operational efficiencies related to the Onshape acquisition, and headquarters relocation.

For fiscal year ending September 30, 2020, the company expects:

In millions except per share amounts	GAAP	Non-GAAP^(1)
Revenue	$1,410-$1,510	$1,410-$1,510
Effective tax rate	20%	19%
Diluted shares outstanding	116	116
Diluted earnings per share	$0.59-$1.22	$1.95-$2.60

⁽¹⁾ The FY’20 non-GAAP revenue and non-GAAP EPS guidance exclude the estimated items outlined in the table below, as well as any tax effects and discrete tax items (which are not known nor reflected).

In millions	FY’20
Restructuring charges	$25
Intangible asset amortization expense	$49
Stock-based compensation expense	$119
Total Estimated Pre-Tax GAAP adjustments	$193

Estimates for the effect of acquisition accounting on fair value of acquired deferred revenue, intangible amortization and acquisition-related charges related primarily to the Onshape acquisition are not reflected in the FY’20 revenue and EPS guidance table above.

PTC’s Fiscal Fourth Quarter Results Conference Call, Prepared Remarks and Data Tables
Prepared remarks and financial data tables have been posted to the Investor Relations section of our website at ptc.com. The Company will host a conference call to discuss results at 5:00 pm ET on Wednesday, October 23, 2019. To access the live webcast, please visit PTC’s Investor Relations website at investor.ptc.com at least 15 minutes before the scheduled start time to download any necessary audio or plug-in software. To participate in the live conference call, dial 773-799-3757 or 800-857-5592 and provide the passcode PTC. The call will be recorded, and a replay will be available for 10 days following the call by dialing 800-873-2012 and entering the passcode 9752. The archived webcast will also be available on PTC’s Investor Relations website.

PTC Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
				Three Months Ended
				September 30,			September 30,			September 30,
					2019			2019			2018
				ASC 606			ASC 605			ASC 605
Revenue:
	Subscription license			$	84,936
	Subscription support & cloud services				97,641
Total Subscription					182,577		$	185,483		$	142,376
	Perpetual support				100,007			98,577			117,819
Total recurring revenue					282,584			284,060			260,195
	Perpetual license				9,347			8,530			27,030
Total software revenue					291,931			292,590			287,225
	Professional services				43,073			42,238			25,296
Total revenue^(1)					335,004			334,828			312,521
Cost of revenue: ^(2) (3)
	Cost of software revenue				48,813			48,415			43,765
	Cost of professional services revenue				36,604			35,343			34,361
Total cost of revenue					85,417			83,758			78,126
Gross margin					249,587			251,070			234,395
Operating expenses: ^(2)(3)
	Sales and marketing				101,307			111,701			109,198
	Research and development				64,113			64,113			62,396
	General and administrative				25,911			25,911			41,558
	Amortization of acquired intangible assets				6,055			6,055			7,784
	Restructuring and other charges, net				5,650			5,650			1,918
Total operating expenses					203,036			213,430			222,854
Operating income					46,551			37,640			11,541
	Other expense, net ^(3)				(12,767	)		(12,790	)		(10,872	)
Income before income taxes					33,784			24,850			669
	Provision (benefit) for income taxes^(4)				23,958			40,794			(12,522	)
Net income (loss)				$	9,826		$	(15,944	)	$	13,191
Earnings (loss) per share:
	Basic			$	0.09		$	(0.14	)	$	0.11
			Weighted average shares outstanding		115,025			115,025			117,823
	Diluted			$	0.08		$	(0.14	)	$	0.11
			Weighted average shares outstanding		115,897			115,025			119,580
	(1	)	See supplemental financial data for revenue by license, support, and professional services.
	(2	)	See supplemental financial data for additional information about stock-based compensation.
	(3	)	Periods prior to 2019 reflect immaterial expense reclassifications in connection with the adoption of new pension accounting prescribed in Accounting Standards Update 2017-07.
	(4	)	Our tax provision for the fourth quarter of 2019 is based on estimates that are subject to final review.

PTC Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
				Twelve Months Ended
				September 30,			September 30,			September 30,
					2019			2019			2018
				ASC 606			ASC 605			ASC 605
Revenue:
	Subscription license			$	253,698
	Subscription support & cloud services				348,452
Total Subscription					602,150		$	667,597		$	482,027
	Perpetual support				415,248			411,030			496,826
Total recurring revenue					1,017,398			1,078,627			978,853
	Perpetual license				70,702			72,191			109,634
Total software revenue					1,088,100			1,150,818			1,088,487
	Professional services				167,531			160,676			153,337
Total revenue^(1)					1,255,631			1,311,494			1,241,824
Cost of revenue: ^(2)(3)
	Cost of software revenue				185,414			183,218			182,843
	Cost of professional services revenue				139,964			134,936			143,659
Total cost of revenue					325,378			318,154			326,502
Gross margin					930,253			993,340			915,322
Operating expenses:^(2)(3)
	Sales and marketing				417,449			441,958			414,764
	Research and development				246,888			246,888			249,786
	General and administrative				127,919			127,919			143,045
	Amortization of acquired intangible assets				23,841			23,841			31,350
	Restructuring and other charges, net				51,114			51,114			3,764
Total operating expenses					867,211			891,720			842,709
Operating income					63,042			101,620			72,613
	Other expense, net ^(3)				(42,742	)		(42,916	)		(43,957	)
Income before income taxes					20,300			58,704			28,656
	Provision (benefit) for income taxes^(4)				47,760			55,725			(23,331	)
Net income (loss)				$	(27,460	)	$	2,979		$	51,987
Earnings (loss) per share:
	Basic			$	(0.23	)	$	0.03		$	0.45
			Weighted average shares outstanding		117,724			117,724			116,390
	Diluted			$	(0.23	)	$	0.03		$	0.44
			Weighted average shares outstanding		117,724			118,714			118,158
	(1	)	See supplemental financial data for revenue by license, support, and professional services.
	(2	)	See supplemental financial data for additional information about stock-based compensation.
	(3	)	Periods prior to 2019 reflect immaterial expense reclassifications in connection with the adoption of new pension accounting prescribed in Accounting Standards Update 2017-07.
	(4	)	Our tax provision for fiscal 2019 is based on estimates that are subject to final review. Our 2018 year-to-date tax rate includes a benefit of $12 million relating to the enactment of the Tax Cuts and Jobs Act.

PTC Inc.
SUPPLEMENTAL FINANCIAL DATA FOR REVENUE AND STOCK-BASED COMPENSATION
(in thousands)
Revenue by license, support and services is as follows:
		Three Months Ended
		September 30,		September 30,		September 30,
		2019		2019		2018
		ASC 606		ASC 605		ASC 605
License revenue^(1)		$	94,283	$	173,514	$	152,675
Support and cloud services revenue			197,648		119,076		134,550
Professional services revenue			43,073		42,238		25,296
	Total revenue	$	335,004	$	334,828	$	312,521
		Twelve Months Ended
		September 30,		September 30,		September 30,
		2019		2019		2018
		ASC 606		ASC 605		ASC 605
License revenue^(1)		$	324,400	$	666,770	$	529,265
Support and cloud services revenue			763,700		484,048		559,222
Professional services revenue			167,531		160,676		153,337
	Total revenue	$	1,255,631	$	1,311,494	$	1,241,824
	(1) Under ASC 605, we have classified all subscription revenue as license revenue.
The amounts in the income statement include stock-based compensation as follows:
		Three Months Ended
		September 30,		September 30,		September 30,
		2019		2019		2018
		ASC 606		ASC 605		ASC 605
Cost of software revenue		$	1,791	$	1,791	$	1,180
Cost of professional services revenue			1,361		1,361		2,233
Sales and marketing			6,912		6,912		10,066
Research and development			7,168		7,168		3,862
General and administrative			(2,440)		(2,440)		13,583
	Total stock-based compensation	$	14,792	$	14,792	$	30,924
		Twelve Months Ended
		September 30,		September 30,		September 30,
			2019		2019		2018
		ASC 606		ASC 605		ASC 605
Cost of software revenue		$	5,513	$	5,513	$	4,446
Cost of professional services revenue			6,426		6,426		7,079
Sales and marketing			32,026		32,026		24,893
Research and development			22,019		22,019		13,488
General and administrative			20,416		20,416		33,033
	Total stock-based compensation	$	86,400	$	86,400	$	82,939

PTC Inc.
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS (UNAUDITED)
(in thousands, except per share data)
				Three Months Ended
				September 30,			September 30,			September 30,
					2019			2019			2018
				ASC 606			ASC 605			ASC 605
GAAP revenue				$	335,004		$	334,828		$	312,521
	Fair value adjustment of acquired deferred subscription revenue				-			-			75
	Fair value adjustment of acquired deferred services revenue				192			192			223
	Settlement adjustment - subscription revenue ^(2)				-			-			(5,250	)
	Settlement adjustment - services revenue ^(2)				-			-			14,546
Non-GAAP revenue				$	335,196		$	335,020		$	322,115
GAAP gross margin				$	249,587		$	251,070		$	234,395
	Fair value adjustment of acquired deferred revenue				192			192			298
	Settlement adjustment - revenue ^(2)				-			-			9,296
	Fair value adjustment to deferred services cost				(88	)		(88	)		(91	)
	Stock-based compensation				3,152			3,152			3,413
	Amortization of acquired intangible assets included in cost of revenue				6,874			6,874			6,677
Non-GAAP gross margin				$	259,717		$	261,200		$	253,988
GAAP operating income				$	46,551		$	37,640		$	11,541
	Fair value adjustment of acquired deferred revenue				192			192			298
	Settlement adjustment - revenue ^(2)				-			-			9,296
	Fair value adjustment to deferred services cost				(88	)		(88	)		(91	)
	Stock-based compensation				14,792			14,792			30,924
	Amortization of acquired intangible assets included in cost of revenue				6,874			6,874			6,677
	Amortization of acquired intangible assets				6,055			6,055			7,784
	Acquisition-related and other transactional charges included in general and administrative costs				1,895			1,895			135
	Restructuring and other charges, net				5,650			5,650			1,918
Non-GAAP operating income ^(1)				$	81,921		$	73,010		$	68,482
GAAP net income (loss)				$	9,826		$	(15,944	)	$	13,191
	Fair value adjustment of acquired deferred revenue				192			192			298
	Settlement adjustment - revenue ^(2)				-			-			9,296
	Fair value adjustment to deferred services cost				(88	)		(88	)		(91	)
	Stock-based compensation				14,792			14,792			30,924
	Amortization of acquired intangible assets included in cost of revenue				6,874			6,874			6,677
	Amortization of acquired intangible assets				6,055			6,055			7,784
	Acquisition-related and other transactional charges included in general and administrative costs				1,895			1,895			135
	Restructuring and other charges, net				5,650			5,650			1,918
	Income tax adjustments ^(3)				29,317			32,673			(16,843	)
Non-GAAP net income				$	74,513		$	52,099		$	53,289
GAAP diluted earnings (loss) per share				$	0.08		$	(0.14	)	$	0.11
	Fair value adjustment of acquired deferred revenue				-			-			-
	Settlement adjustment - revenue ^(2)				-			-			0.08
	Stock-based compensation				0.13			0.13			0.26
	Amortization of acquired intangibles				0.11			0.11			0.12
	Acquisition-related and other transactional charges				0.02			0.02			-
	Restructuring and other charges, net				0.05			0.05			0.02
	Income tax adjustments				0.25			0.28			(0.14	)
Non-GAAP diluted earnings per share				$	0.64		$	0.45		$	0.45
GAAP diluted weighted average shares outstanding					115,897			115,025			119,580
	Dilutive effect of stock-based compensation plans				-			872			-
Non-GAAP diluted weighted average shares outstanding					115,897			115,897			119,580
	(1	)	Operating margin impact of non-GAAP adjustments:
				Three Months Ended
				September 30,			September 30,			September 30,
					2019			2019			2018
				ASC 606			ASC 605			ASC 605
	GAAP operating margin				13.9	%		11.2	%		3.7	%
			Fair value adjustment of acquired deferred revenue		0.1	%		0.1	%		0.1	%
			Settlement adjustment - revenue ^(2)		0.0	%		0.0	%		2.4	%
			Fair value adjustment to deferred services cost		0.0	%		0.0	%		0.0	%
			Stock-based compensation		4.4	%		4.4	%		9.9	%
			Amortization of acquired intangibles		3.9	%		3.9	%		4.6	%
			Acquisition-related and other transactional charges		0.6	%		0.6	%		0.0	%
			Restructuring and other charges, net		1.7	%		1.7	%		0.6	%
	Non-GAAP operating margin				24.4	%		21.8	%		21.3	%
	(2	)	Our Q4'18 and FY'18 GAAP revenue results include the impact of a settlement of a customer dispute concerning a professional services receivable. The settlement, reached in September 2018, included partial payment of the receivable and new software purchases. The net revenue write-down recorded in the fourth quarter of 2018 was $9.3 million, comprised of a $14.5 million services revenue write-down, partially offset by new subscription revenue of $5.2 million. We have excluded these amounts from our Non-GAAP results.
	(3	)	We have recorded a full valuation allowance against our U.S. net deferred tax assets. As we are profitable on a non-GAAP basis, the 2019 and 2018 non-GAAP tax provisions are being calculated assuming there is no valuation allowance. 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. The fourth quarter of 2018 excludes the GAAP benefit of a $3 million valuation allowance release in a foreign jurisdiction as the jurisdiction was profitable on a non-GAAP basis.

PTC Inc.
NON-GAAP FINANCIAL MEASURES AND RECONCILIATIONS (UNAUDITED)
(in thousands, except per share data)
				Twelve Months Ended
				September 30,			September 30,			September 30,
					2019			2019			2018
				ASC 606			ASC 605			ASC 605
GAAP revenue				$	1,255,631		$	1,311,494		$	1,241,824
	Fair value adjustment of acquired deferred subscription revenue				66			66			341
	Fair value adjustment of acquired deferred services revenue				721			721			929
	Settlement adjustment - subscription revenue ^(2)				-			-			(5,250	)
	Settlement adjustment - services revenue ^(2)				-			-			14,546
Non-GAAP revenue				$	1,256,418		$	1,312,281		$	1,252,390
GAAP gross margin				$	930,253		$	993,340		$	915,322
	Fair value adjustment of acquired deferred revenue				787			787			1,270
	Settlement adjustment - revenue ^(2)				-			-			9,296
	Fair value adjustment to deferred services cost				(308	)		(308	)		(384	)
	Stock-based compensation				11,939			11,939			11,525
	Amortization of acquired intangible assets included in cost of revenue				27,306			27,306			26,706
Non-GAAP gross margin				$	969,977		$	1,033,064		$	963,735
GAAP operating income				$	63,042		$	101,620		$	72,613
	Fair value adjustment of acquired deferred revenue				787			787			1,270
	Settlement adjustment - revenue ^(2)				-			-			9,296
	Fair value adjustment to deferred services cost				(308	)		(308	)		(384	)
	Stock-based compensation				86,400			86,400			82,939
	Amortization of acquired intangible assets included in cost of revenue				27,306			27,306			26,706
	Amortization of acquired intangible assets				23,841			23,841			31,350
	Acquisition-related and other transactional charges included in general and administrative costs				3,110			3,110			1,853
	Restructuring and other charges, net				51,114			51,114			3,764
Non-GAAP operating income ^(1)				$	255,292		$	293,870		$	229,407
GAAP net income (loss)				$	(27,460	)	$	2,979		$	51,987
	Fair value adjustment of acquired deferred revenue				787			787			1,270
	Settlement adjustment - revenue ^(2)				-			-			9,296
	Fair value adjustment to deferred services cost				(308	)		(308	)		(384	)
	Stock-based compensation				86,400			86,400			82,939
	Amortization of acquired intangible assets included in cost of revenue				27,306			27,306			26,706
	Amortization of acquired intangible assets				23,841			23,841			31,350
	Acquisition-related and other transactional charges included in general and administrative costs				3,110			3,110			1,853
	Restructuring and other charges, net				51,114			51,114			3,764
	Income tax adjustments ^(3)				29,719			11,816			(37,581	)
Non-GAAP net income				$	194,509		$	207,045		$	171,200
GAAP diluted earnings (loss) per share				$	(0.23	)	$	0.03		$	0.44
	Fair value adjustment of acquired deferred revenue				0.01			0.01			0.01
	Settlement adjustment - revenue ^(2)				-			-			0.08
	Stock-based compensation				0.73			0.73			0.70
	Amortization of acquired intangibles				0.43			0.43			0.49
	Acquisition-related and other transactional charges				0.03			0.03			0.02
	Restructuring and other charges, net				0.43			0.43			0.03
	Income tax adjustments				0.25			0.10			(0.32	)
Non-GAAP diluted earnings per share				$	1.64		$	1.74		$	1.45
GAAP diluted weighted average shares outstanding					117,724			118,714			118,158
	Dilutive effect of stock-based compensation plans				990			-			-
Non-GAAP diluted weighted average shares outstanding					118,714			118,714			118,158
	(1	)	Operating margin impact of non-GAAP adjustments:
				Twelve Months Ended
				September 30,			September 30,			September 30,
					2019			2019			2018
				ASC 606			ASC 605			ASC 605
	GAAP operating margin				5.0	%		7.7	%		5.8	%
			Fair value adjustment of acquired deferred revenue		0.1	%		0.1	%		0.1	%
			Settlement adjustment - revenue ^(2)		0.0	%		0.0	%		0.6	%
			Fair value adjustment to deferred services cost		0.0	%		0.0	%		0.0	%
			Stock-based compensation		6.9	%		6.6	%		6.7	%
			Amortization of acquired intangibles		4.1	%		3.9	%		4.7	%
			Acquisition-related and other transactional charges		0.2	%		0.2	%		0.1	%
			Restructuring and other charges, net		4.1	%		3.9	%		0.3	%
	Non-GAAP operating margin				20.3	%		22.4	%		18.3	%
	(2	)	Our Q4'18 and FY'18 GAAP revenue results include the impact of a settlement of a customer dispute concerning a professional services receivable. The settlement, reached in September 2018, included partial payment of the receivable and new software purchases. The net revenue write-down recorded in the fourth quarter of 2018 was $9.3 million, comprised of a $14.5 million services revenue write-down, partially offset by new subscription revenue of $5.2 million. We have excluded these amounts from our Non-GAAP results.
	(3	)	We have recorded a full valuation allowance against our U.S. net deferred tax assets. As we are profitable on a non-GAAP basis, the 2019 and 2018 non-GAAP tax provisions are being calculated assuming there is no valuation allowance. 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. The fourth quarter of 2018 excludes the GAAP benefit of a $3 million valuation allowance release in a foreign jurisdiction as the jurisdiction was profitable on a non-GAAP basis and a non-cash benefit of approximately $12 million related to the enactment of the Tax Cuts and Jobs Act.

PTC Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS^(1)
(in thousands)
			September 30,		September 30,		September 30,
			2019		2019		2018
			ASC 606^(2)		ASC 605		ASC 605
ASSETS
Cash and cash equivalents			$	269,579	$	269,579	$	259,946
Marketable securities				57,435		57,435		55,951
Accounts receivable, net				372,743		107,921		129,297
Property and equipment, net				105,531		105,531		80,613
Goodwill and acquired intangible assets, net				1,408,128		1,408,128		1,382,659
Other assets				452,600		523,314		420,556
Total assets			$	2,666,016	$	2,471,908	$	2,329,022
LIABILITIES AND STOCKHOLDERS' EQUITY
Deferred revenue			$	396,632	$	578,748	$	499,442
Debt, net of deferred issuance costs				669,134		669,134		643,268
Other liabilities				398,252		347,693		311,723
Stockholders' equity				1,201,998		876,333		874,589
Total liabilities and stockholders' equity			$	2,666,016	$	2,471,908	$	2,329,022
(1	)	Our consolidated balance sheet as of September 30, 2019 under ASC 606 is preliminary, pending final adjustments required as a result of our adoption of ASC 606. In addition, the tax balances are based on estimates that are subject to final review. We expect the adjustments to be finalized prior to the filing of our Form 10-K for fiscal 2019.
(2	)	The adoption of ASC 606 resulted in up front license recognition under our subscription contracts, resulting in unbilled receivables, and an increase in receivables previously included in other current assets under ASC 605 related to billed but uncollected support and subscription receivables that had corresponding deferred revenue. The adoption also resulted in a decrease in deferred revenue primarily due to the up front license recognition to accumulated deficit at the time of adoption related to on-premise subscription software licenses.

PTC Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
			Three Months Ended						Twelve Months Ended
			September 30,			September 30,			September 30,			September 30,
				2019			2018			2019			2018
Cash flows from operating activities:
		Net income (loss)	$	9,826		$	13,191		$	(27,460	)	$	51,987
		Stock-based compensation		14,792			30,924			86,400			82,939
		Depreciation and amortization		19,190			22,105			77,824			87,408
		Accounts receivable		(58,808	)		(799	)		29,446			20,396
		Accounts payable and accruals		23,420			37,150			4,102			(1,737	)
		Deferred revenue		20,550			(26,653	)		45,875			56,141
		Income taxes		14,717			(16,228	)		1,940			(46,233	)
		Other ^(1)		11,529			2,270			67,018			(3,149	)
Net cash provided by operating activities^(4)				55,216			61,960			285,145			247,752
Capital expenditures				(4,832	)		(17,375	)		(64,411	)		(36,041	)
Acquisition of businesses, net of cash acquired ^(2)				-			-			(86,737	)		(3,000	)
Purchase of intangible asset				-			-			-			(3,000	)
Borrowings (payments) on debt, net				(30,000	)		(50,000	)		25,000			(70,000	)
Net proceeds associated with issuance of common stock ^(3)				8,817			1,008,182			12,975			1,015,654
Repurchases of common stock ^(3)				(24,999	)		(1,000,000	)		(114,994	)		(1,100,000	)
Payments of withholding taxes in connection with
		vesting of stock-based awards		(175	)		(577	)		(44,366	)		(45,374	)
Proceeds from (purchase of) investments				-			-			(7,500	)		(1,000	)
Contingent consideration				-			(525	)		(1,575	)		(8,275	)
Purchases of marketable securities, net				(2,778	)		(1,748	)		(1,051	)		(6,171	)
Other financing & investing activities				5,166			(2,851	)		9,675			(2,851	)
Foreign exchange impact on cash				(4,708	)		(4,201	)		(2,565	)		(7,810	)
Net change in cash, cash equivalents, and restricted cash ^(1)				1,707			(7,135	)		9,596			(20,116	)
Cash, cash equivalents, and restricted cash, beginning of period				268,982			268,228			261,093			281,209
Cash, cash equivalents, and restricted cash, end of period			$	270,689		$	261,093		$	270,689		$	261,093
(1	)	In the first quarter of fiscal 2019, we adopted Accounting Standards Update (ASU) 2016-18 - Statement of Cash Flows (Topic 230). In accordance with this guidance, we excluded the $0.5 million increase and $0.1 million increase related to the change in restricted cash from the change in other current assets for the three months and twelve months ended September 30, 2018, respectively.
(2	)	On December 29, 2018, we acquired Frustum for $70 million, net of cash acquired.
(3	)	In the fourth quarter of 2018, Rockwell Automation made a $1.0 billion equity investment in PTC as part of a strategic alliance. Using the cash proceeds from this investment, PTC entered into a $1.0 billion accelerated share repurchase.
(4	)	Our consolidated cash flows as of September 30, 2019 are preliminary, pending final balance sheet adjustments required as a result of our adoption of ASC 606. In addition, our tax balances are based on estimates that are subject to final review. Any adjustments will impact components of operating cash flow, but not total cash from operating activities. We expect the adjustments to be finalized prior to the filing of our Form 10-K for fiscal year 2019.

Important Disclosures

Important Information About Our Operating and Non-GAAP Financial Measures
PTC provides non-GAAP supplemental information to its financial results. We use these non-GAAP 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 operating results. We believe that these non-GAAP 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 measures affords investors a view of our operating results that may be more easily compared to the results of peer companies. In addition, compensation of our executives is based in part on the performance of our business based on these non-GAAP measures. However, non-GAAP information should not be construed as an alternative to GAAP information as the items excluded from the non-GAAP measures often have a material impact on our financial results and such items often recur. Management uses, and investors should consider, non-GAAP measures in conjunction with our GAAP results.

Non-GAAP revenue, non-GAAP operating expense, non-GAAP operating margin, non-GAAP gross profit, non-GAAP gross margin, non-GAAP net income and non-GAAP EPS exclude the effect of the following items: fair value of acquired deferred revenue, fair value adjustment to deferred services cost, stock-based compensation, amortization of acquired intangible assets, acquisition-related and other transactional charges included in general and administrative costs, restructuring and headquarters relocation charges, and income tax adjustments. Additional information about the items we exclude from our non-GAAP financial measures and the reasons we exclude them can be found in “Non-GAAP Financial Measures” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

Free Cash Flow and Adjusted Free Cash Flow - PTC also provides information on “free cash flow” and “adjusted free cash flow” to enable investors to assess our ability to generate cash without incurring additional external financings and to evaluate our performance against our announced long-term goal of returning approximately 50% of our free cash flow to shareholders via stock repurchases. Free cash flow is net cash provided by (used in) operating activities less capital expenditures; adjusted free cash flow is free cash flow excluding restructuring payments and certain identified non-ordinary course payments. Free cash flow and adjusted free cash flow are not measures of cash available for discretionary expenditures.

Constant Currency Change Metric - Year-over-year changes in revenue and bookings on a constant currency basis compare reported results excluding the effect of any hedging converted into U.S. dollars based on the corresponding prior year’s foreign currency exchange rates to reported results for the comparable prior year period.

Operating Measures

ARR
To help investors understand and assess the success of our subscription transition, we provide an ARR operating measure. On September 5, 2019, we revised the ARR definition. ARR represents the annualized value of our portfolio of recurring customer arrangements as of the end of the reporting period, including subscription software, cloud, and support contracts. This is a change from our prior definition where ARR for a quarter was calculated by dividing the portion of non-GAAP software revenue attributable to subscription and support under ASC 605 for the quarter by the number of days in the quarter and multiplying by 365.

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 new customers, existing customer expansions and includes the impact of churn (gross churn net of pricing).

Because this measure represents the annualized value of recurring customer contracts as of the end of a reporting period, ARR does not represent revenue for any particular period or remaining revenue that will be recognized in future periods.

New Subscription Annualized Contract Value (ACV)
New subscription ACV includes new subscription and support ARR from existing customer expansions and from new customers.

Churn
Churn is gross churn net of pricing, it does not include upsell and cross sell.

Cash Generation
Cash generation is ARR plus perpetual license revenue and professional services revenue.

Cost of Revenue
Cost of revenue includes cost of license, cost of support and cloud services, and cost of professional services.

Software Revenue
Any reference to “total recurring software revenue” or “recurring software revenue” means the sum of subscription revenue and support revenue. Any reference to “total software revenue” or “software revenue” means the sum of subscription revenue, support revenue and perpetual license revenue. “Subscription revenue” includes cloud services revenue.

Navigate Allocation
Revenue and bookings for the Navigate™ ThingWorx-based IoT solution for PLM are allocated 50% to Solutions and 50% to IoT.

Foreign Currency Impacts on our Business
We have a global business, with Europe and Asia historically representing approximately 60% of our revenue, and fluctuation in foreign currency exchange rates can significantly impact our results. We do not forecast currency movements; rather we provide detailed constant currency commentary.

Bookings Metrics
On Sept 5, 2019 we announced a revision to our reporting measures. We will no longer provide bookings but instead will provide ARR, which we believe provides a more comprehensive view of a subscription business. We offer both perpetual and subscription licensing options to our customers, as well as monthly software rentals for certain products. Given the difference in revenue recognition between the sale of a perpetual software license and a subscription, we use bookings for internal planning, forecasting and reporting of new license and cloud services transaction (as subscription bookings includes cloud services bookings).

In order to normalize between perpetual and subscription licenses, we define subscription bookings as the subscription annualized contract value (subscription ACV) of new subscription contracts multiplied by a conversion factor of 2. We arrived at the conversion factor of 2 by considering a number of variables including pricing, support, length of term, and renewal rates. We define subscription ACV as the total value of a new subscription contract (which may include annual values that increase over time) divided by the term of the contract (in days) multiplied by 365. If the term of the subscription contract is less than a year, and is not associated with an existing contract, the booking is equal to the total contract value. Beginning in Q3’18, minimum ACV commitments under our Strategic Alliance Agreement with Rockwell Automation are included in subscription ACV if the period-to-date minimum ACV commitment exceeds actual ACV sold under the Agreement.

License and subscription bookings equal subscription bookings (as described above) plus perpetual license bookings. Because subscription bookings is a metric we use to approximate the value of subscription sales if sold as perpetual licenses, it does not represent the actual revenue that will be recognized with respect to subscription sales or that would be recognized if the sales were perpetual licenses, nor does the annualized value of monthly software rental bookings represent the value of any such booking.

Forward-Looking Statements
Statements in this press release that are not historic facts, including statements about our future financial and growth expectations and targets, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks include: the macroeconomic and/or global manufacturing climates may deteriorate due to, among other factors, the geopolitical environment, including the focus on technology transactions with non-U.S. entities and potential expanded prohibitions, and ongoing trade tensions and tariffs; our businesses, including our Internet of Things (IoT) and Augmented Reality businesses, may not expand and/or generate the revenue we expect if customers are slower to adopt those technologies than we expect or adopt competing technologies; bookings associated with minimum ACV commitments under our Strategic Alliance Agreement with Rockwell Automation may not result in subscription contracts sold through to end-user customers; the Onshape acquisition may not close when or as we expect and may not provide the competitive benefit we expect; we may be unable to generate sufficient operating cash flow to repay the Onshape debt when or as we expect 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 repayments or share repurchases; we may be unable to expand our outstanding credit facility as we expect, which could adversely affect our liquidity and our credit rating; we may be unable to expand our partner ecosystem as we expect; and our partners may not generate the revenue we expect. In addition, our assumptions concerning our future GAAP and non-GAAP effective income tax rates are based on estimates and other factors that could change, including the geographic mix of our revenue, expenses and profits. Other risks and uncertainties that could cause actual results to differ materially from those projected are detailed from time to time in reports we file with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

About PTC (NASDAQ: PTC)
PTC unleashes industrial innovation with award-winning, market-proven solutions that enable companies to differentiate their products and services, improve operational excellence, and increase workforce productivity. With PTC, and its partner ecosystem, manufacturers can capitalize on the promise of today’s new technology to drive digital transformation.

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