PTC INC.

PTC
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PTC INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

11/22/2021 | 06:05am

Forward-Looking Statements




Statements in this Annual Report about anticipated financial results, capital
developments and growth, as well as about the development of our products,
markets and workforce, 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.



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 increased 16% (actual and constant currency) to $1,475 million in FY'21
compared to the end of FY'20. Excluding the impact of Arena, which was acquired
in the second quarter of FY'21, our organic constant currency ARR growth was 12%
in FY'21 compared to FY'20. Organic churn improved approximately 130 basis
points year over year, primarily driven by strong execution in CAD, PLM, FSG and
modest continued improvement in IoT and AR.

FY'21 revenue of $1.81 billion increased 24% over FY'20 (20% in constant
currency). Our FY'21 revenue was positively impacted by ASC 606 as longer
contract durations and support to subscription conversions increased the amount
of upfront subscription license revenue recognized in the year. FY'21 operating
margin of 21% increased approximately 700 basis points over FY'20 due to strong
revenue performance as strong product differentiation improved sales and
renewals, while maintaining good discipline on our operating expense
structure. FY'21 diluted EPS more than doubled year over year to $4.03, due in
part to a gain of $69 million related to common stock we own in a
publicly-traded company, the release of a $137 million valuation allowance
related to our deferred tax assets in the U.S., and a non-cash tax benefit of
$42 million related to our Arena acquisition.

FY'21 operating cash flow of $369 million grew 58% over FY'20; FY'21 free cash
flow of $344 million grew 61% over FY'20. Operating cash flow and free cash flow
included an $18 million outflow related to a foreign tax dispute, $15 million of
acquisition-related costs, and $15 million of restructuring payments. We ended
FY'21 with cash and cash equivalents of $327 million. In addition, we held a $78
million
equity investment in Matterport, Inc., currently subject to trading
restrictions. We ended FY'21 with gross debt of $1.45 billion, with an aggregate
interest rate of 3.2%.

Results of Operations

The following table shows the financial measures that we consider the most
significant indicators of our business performance. In addition to providing
operating income, operating margin, diluted earnings per share and cash from
operations as calculated under GAAP, we provide non-GAAP operating income,
non-GAAP operating margin, non-GAAP diluted earnings per share, and free cash
flow for the reported periods. We also provide a view of our actual results on a
constant currency basis. These non-GAAP financial measures exclude the items
described in Non-GAAP Financial Measures below. Investors should use these
non-GAAP financial measures only in conjunction with our GAAP results.

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For discussion of FY'20 results and comparison with FY'19 results, refer to
Management's Discussion and Analysis of Financial Conditions and Results of
Operations in our Annual Report on Form 10-K for the fiscal year ended September
30, 2020
.






(Dollar amounts in millions, except
per share data) Year ended September 30, Percent Change
Constant
2021 2020 Actual Currency(1)
ARR $ 1,474.7 $ 1,270.0 16 % 16 %

Total recurring revenue $ 1,616.3 $ 1,281.9 26 % 22 %
Perpetual license 33.0 32.7 1 % (1 )%
Professional services 157.8 143.8 10 % 5 %
Total revenue 1,807.2 1,458.4 24 % 20 %
Total cost of revenue 371.1 334.3 11 % 9 %
Gross margin 1,436.1 1,124.1 28 % 23 %
Operating expenses 1,055.3 913.2 16 % 14 %
Operating income $ 380.7 $ 210.9 81 % 63 %
Non-GAAP operating income(1) $ 634.4 $ 423.4 50 % 42 %
Operating margin 21.1 % 14.5 %
Non-GAAP operating margin(1) 35.1 % 29.0 %
Diluted earnings per share $ 4.03 $ 1.12
Non-GAAP diluted earnings per
share(1)(2) $ 3.97 $ 2.57
Cash flow from operations(3) $ 368.8 $ 233.8
Free cash flow(4) $ 344.1 $ 213.6





(1) See Non-GAAP Financial Measures below for a reconciliation of our GAAP



results to our non-GAAP 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.



(2) In FY'21 and FY'20 our GAAP results included tax benefits of $179.7 million



and $21.2 million, respectively. The FY'21 results include a $137.4 million



benefit related to the release of the valuation allowance on the majority of



our U.S. deferred tax assets and a $42.3 million benefit related to the



release of a valuation allowance resulting from the Arena acquisition. The



FY'20 results include a $21.2 million benefit related to the release of a



valuation allowance resulting from the Onshape acquisition. As the non-GAAP



tax provision is calculated assuming that there is no valuation allowance,



these benefits have been excluded. 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.



Additionally, our non-GAAP results for FY'21 exclude tax expense of $34.8



million related to a non-U.S. prior period tax exposure, primarily related to



foreign withholding taxes.



(3) Cash flow from operations for FY'21 and FY'20 includes $14.5 million and $42



million of restructuring payments, respectively. Cash from operations for



FY'21 and FY'20 includes $15.0 million and $9.6 million of



acquisition-related payments, respectively. Cash from operations for FY'21



includes $17.9 million in un-forecasted payments related to the prior period



tax exposure from a non-U.S. tax dispute.



(4) Free cash flow is cash from operations net of capital expenditures of $24.7



million and $20.2 million in FY'21 and FY'20, respectively.


Impact of Foreign Currency Exchange on Results of Operations

Approximately 60% of our revenue and 40% of our expenses are transacted in
currencies other than the U.S. dollar. Because we report our results of
operations in U.S. Dollars, currency translation, particularly changes in the
Euro, Yen, Shekel, and Rupee relative to the U.S. Dollar, affects our reported
results. Our constant currency disclosures are calculated by multiplying the
results in local currency for FY'21 and FY'20 by the exchange rates in effect on
September 30, 2020, excluding the effect of any hedging. If FY'21 reported
results were converted into U.S. dollars based on this methodology, FY'21
revenue would have been lower by $20 million and expenses would have been lower
by $8 million. The net impact on year-over-year results would have been a
decrease in operating income of $12 million in FY'21.

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

Our revenue results period to period are impacted by contract terms, including
the duration and start dates of our subscription contracts, due to up-front
recognition of subscription license revenue. We are expanding our SaaS offerings
and are releasing additional cloud functionality into our products. As a

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result, our revenue will be impacted over time as a higher portion of our sales
will be from cloud services, which are recognized ratably.



Revenue by Line of Business






(Dollar amounts in millions) Year ended September 30, Percent Change
Constant
2021 2020 Actual Currency
License (1) $ 738.1 $ 509.8 45 % 40 %
Support (2) and cloud services 911.3 804.8 13 % 10 %
Total software revenue 1,649.3 1,314.6 25 % 22 %
Professional services 157.8 143.8 10 % 5 %
Total revenue $ 1,807.2 $ 1,458.4 24 % 20 %





(1) Includes perpetual licenses and the license portion of subscription sales.



(2) Includes support on perpetual licenses and the support portion of



subscription sales.





Software revenue increased in FY'21 compared to FY'20 due to subscription
revenue growth of 42% (38% constant currency), offset by an 18% decline in
perpetual support revenue (21% constant currency) due to conversions of
perpetual support contracts to subscriptions. Arena; acquired in the second
quarter, contributed approximately $29 million in FY'21. In FY'21, license
revenue growth was primarily driven by contracts with longer durations.




Professional services engagements typically result from sales of new licenses
and software upgrades; revenue is recognized over the term of the engagement.
Our 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.

Professional services revenue grew in FY'21 by 10% (5% constant currency); where
FY'20 revenue was negatively impacted by the COVID-19 pandemic, FY'21 benefited
from increased delivery activity associated with PLM deployments.


Revenue and ARR by Product Group






Software Revenue by Product Group
(Dollar amounts in millions) Year ended September 30, Percent Change
Constant
2021 2020 Actual Currency
Core (CAD and PLM) $ 1,161.7 $ 947.1 23 % 19 %
Growth (IoT, AR, Onshape, Arena) 277.4 183.8 51 % 48 %
FSG (Focused Solutions Group) 210.2 183.7 14 % 11 %
Total Software revenue $ 1,649.3 $ 1,314.6 25 % 22 %


Core product software revenue growth in FY'21 compared to FY'20 was driven by
subscription revenue growth of 39% (34% constant currency), offset by expected
declines in perpetual support revenue of 20% (23% constant currency) due in part
to ongoing perpetual support contract conversions to subscription.


ARR increased 11% (12% constant currency) for FY'21 compared to FY'20,
reflecting solid ARR growth for both PLM (13% actual,14% constant currency) and
CAD (10% actual and constant currency) as customers pursue their digital
transformation initiatives.



Growth product software revenue growth in FY'21 was driven by subscription
revenue growth of 67% (63% constant currency) compared to the year-ago period,
driven primarily by IoT and contribution from Arena.



Growth product ARR increased 50% (actual and constant currency) for FY'21
compared to FY'20, due in part to a $59 million contribution from Arena.
Excluding Arena, organic ARR growth was 17% (18%



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constant currency), reflecting 15% (16% constant currency) growth in IoT and 16%
(actual and constant currency) growth in AR.




FSG product software revenue growth in FY'21 compared to FY'20 was primarily
driven by subscription revenue growth of 34% (31% constant currency), offset by
a decline in perpetual support revenue of 15% (17% constant currency) due to
conversions of perpetual support contracts to subscriptions.


FSG product ARR increased 6% (actual and constant currency) for FY'21 compared
to FY'20.



Software Revenue & ARR by Geographic Region




A significant portion of our software revenue is generated outside the U.S. In
both FY'21 and FY'20, approximately 40% to 45% of software revenue was generated
in the Americas, 35% to 40% in Europe, and 20% in Asia Pacific.



(Dollar amounts in millions) Year ended September 30, Percent Change
Constant
2021 2020 Actual Currency
Americas $ 710.7 $ 592.7 20 % 20 %
Europe 645.8 482.5 34 % 25 %
Asia Pacific 292.8 239.4 22 % 19 %
Total Software revenue $ 1,649.3 $ 1,314.6 25 % 22 %




Americas software revenue growth in FY'21 was driven by growth in subscription
revenue of 34% (actual and constant currency) as compared to FY'20, partially
offset by a decline of 26% (actual and constant currency) in perpetual support
revenue, due to conversions of perpetual support contracts to subscriptions,
resulting in recurring revenue growth of 21% (actual and constant currency).


Americas ARR was up 19%, led by double-digit growth in Core products and Arena.




Europe software revenue growth in FY'21 was driven by growth in subscription
revenue of 56% (46% constant currency) as compared to FY'20, partially offset by
a decline of 16% (21% constant currency) in perpetual support revenue, resulting
in recurring revenue growth of 35% (26% constant currency).

ARR in Europe was up 13% constant currency, led by high-single digit growth in
Core products, low-40s growth in Growth products, and double-digit growth in
FSG.

Asia Pacific software revenue growth in FY'21 was driven by subscription revenue
growth of 36% (32% constant currency) as compared to FY'20, partially offset by
a decline of 9% (12% constant currency) in perpetual support revenue, resulting
in recurring revenue growth of 22% (18% constant currency).


ARR in Asia Pacific was up 17% constant currency, led by mid-teens growth in
Core products and low-30s growth in Growth products.



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Gross Margin



(Dollar amounts in millions) Year ended


September 30,



2021 2020 Percent Change
Gross margin:
License gross margin $ 676.3 $ 456.6 48 %
License gross margin percentage 92 % 90 %
Support and cloud services gross margin $ 747.2 $ 659.4 13 %
Support and cloud services gross margin percentage 82 % 82 %
Professional services $ 12.6 $ 8.1 55 %
Professional services gross margin percentage 8 %


6 %




Total gross margin $ 1,436.1 $ 1,124.1 28 %
Total gross margin percentage 79 %


77 %




Non-GAAP gross margin(1) $ 1,485.1 $ 1,165.5 27 %
Non-GAAP gross margin percentage(1) 82 % 80 %





(1) Non-GAAP financial measures are reconciled to GAAP results under Non-GAAP



Financial Measures below.





License gross margin increased in FY'21 compared to FY'20 due to subscription
license revenue increasing significantly as a result of longer subscription term
durations, offset by increased royalty expense due to the mix of products sold
and higher intangible amortization due to the Arena acquisition.

Support and cloud services gross margin percentage is flat in FY'21 compared to
FY'20, while gross margin contribution increased from FY'20 to FY'21 reflecting
an increase in subscription support and cloud revenue, offset by a decrease in
perpetual support revenue, higher compensation costs, and an increase in costs
associated with our cloud services business due to greater demand for those
services.

Professional services gross margin increased in FY'21 compared to FY'20
primarily due to the impact of the COVID-19 pandemic on FY'20 resulting in a
year-over-year increase in revenue and lower travel costs in FY'21, partially
offset by higher compensation and outside services costs.



Operating Expenses



(Dollar amounts in millions) Year ended September


30,



2021 2020 Percent Change
Sales and marketing $ 517.8 $ 435.5 19 %
% of total revenue 29 % 30 %
Research and development 299.9 256.6 17 %
% of total revenue 17 % 18 %
General and administrative 206.0 159.8 29 %
% of total revenue 11 % 11 %
Amortization of acquired intangible assets 29.4 28.7 2 %
% of total revenue 2 % 2 %
Restructuring and other charges, net 2.2 32.7 (93 )%
% of total revenue 0 % 2 %
Total operating expenses $ 1,055.3 $ 913.3 16 %





Total headcount increased by 7.5% in FY'21 to 6,709 from 6,243 at the end of
FY'20. Headcount at the end of FY'21 includes approximately 180 people from
Arena and other smaller acquisitions.



Operating expenses in FY'21 compared to FY'20 increased primarily due to the
following:



• a $142.3 million increase in compensation expense (including benefit



costs), primarily driven by:




• a $56.8 million (56%) increase in stock-based compensation expense,


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• a $55.4 million (14%) increase in salaries due to higher headcount and



merit increases as well as $10.3 million from Arena,



• a $15.8 million increase (17%) in benefits, of which $1.8 million is



related to Arena,



• a $12.3 million (114%) increase in cash bonus expense due to higher



attainment and includes $1.2 million from Arena,


• a $9.7 million (17%) increase in commissions due to additional
amortization of capitalized commissions;




• a $7.8 million (39%) increase in professional fees;


• a $6.8 million (55%) increase in internal hosting costs;



• a $6.4 million increase in acquisition-related charges, which are included



in general and administrative costs; and


• a $4.3 million (16%) increase in marketing expense;



partially offset by:



• a $28.8 million decrease in restructuring charges.





Stock-based compensation was higher in FY'21 compared to FY'20 primarily due to
higher estimated attainment under performance-based incentive compensation and
more time-based awards outstanding in FY'21. Cash bonus expense was also higher
in FY'21 compared to FY'20 due to higher attainment under the FY'21 bonus plan.

Interest Expense



(Dollar amounts in millions) Year ended September 30,
2021 2020 Percent Change
Interest and debt premium expense $ (50.5 ) $ (76.4 ) (34 )%




Interest expense includes interest under our credit facility and senior notes.
Interest expense was lower in FY'21 as FY'20 included $15 million of expense
related to penalties for the early redemption of the 6.000% Senior Notes due
2024, with higher balances in FY'21 partially offset by lower rates. We had
$1,450 million of total debt at September 30, 2021, compared to $1,018 million
at September 30, 2020. For additional detail on the changes in our debt
structure, see Note 9. Debt, included in the Notes to Consolidated Financial
Statements in this Annual Report.


The average interest rate on our total borrowings was 3.3% in FY'21 and 4.3% in
FY'20.




Other Income (Expense)



(Dollar amounts in millions) Year ended September 30,
2021 2020 Percent Change
Interest income $ 1.8 $ 3.8 (54 )%
Other income (expense), net 59.7 (3.5 ) (1830 )%
Other income, net $ 61.5 $ 0.3 16464 %





Interest income represents earnings on the investment of our available cash and
marketable securities.




Other expense, net includes foreign currency gains and losses and other
non-operating gains and losses. In FY'21, we recorded a $69 million
non-operating gain related to an equity investment in Matterport, Inc., which
will continue to fluctuate. Foreign currency gains and losses include costs of
hedging contracts, certain realized and unrealized foreign currency transaction
gains or losses, and foreign exchange gains or losses resulting from the
required period-end currency remeasurement of the assets and liabilities of our
subsidiaries that use the U.S. dollar as their functional currency.

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Income Taxes



(Dollar amounts in millions) Year ended September 30,
2021 2020 Percent Change
Income before income taxes $ 391.8 $ 134.7 191 %
Provision (benefit) for income taxes (85.2 ) 4.0 (2223 )%
Effective income tax rate (22 )% 3 %




In FY'21 and FY'20, our tax rate differed from the U.S. statutory federal
income tax rate due to our corporate structure in which our foreign taxes are at
a net effective tax rate lower than the U.S. rate. A significant amount of our
foreign earnings is generated by our subsidiaries organized in Ireland and the
Cayman Islands. In FY'21 and FY'20 the foreign rate differential predominantly
relates to those earnings.

In FY'21, in addition to the foreign rate differential, our tax rate differed
from the statutory federal income tax rate due to the release of the valuation
allowance on the majority of our U.S. net deferred tax assets, the net effects
of the Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible
Income (FDII) regimes (together referred to as U.S. Tax reform), and the excess
tax benefit related to stock-based compensation.

In FY'20, in addition to the foreign rate differential, our tax rate differed
from the statutory federal income tax rate due to U.S. tax reform, the excess
tax benefit related to stock-based compensation and the indirect effects of the
adoption of ASC 606. Additionally, we recorded benefits for the reduction of the
U.S. valuation allowance as a result of the Onshape acquisition. A further
reduction to the valuation allowance was also recorded to reflect the impact
from the scheduling of the reversal of existing temporary differences resulting
in deferred tax liabilities that cannot be offset against deferred tax assets.

Our results for the twelve months ended September 30, 2021 include a charge of
$37.3 million related to the effects of a tax matter in the Republic of Korea
(South Korea) of $34.4 million, and the resulting impact on U.S. income taxes of
$2.9 million. The charge relates to an assessment with respect to various tax
issues, primarily foreign withholding taxes, that was under appeal in South
Korea
. We received an assessment of approximately $12 million from the tax
authorities in South Korea in the fourth quarter of 2016 for the years 2011 to
2015 and paid the assessment in the first quarter of 2017. We appealed that
assessment to an intermediate appellate court. In December 2020, our appeal to
that court - the Seoul High Court - was rejected. We appealed this decision to
the Supreme Court of the Republic of Korea. In May 2021, the Supreme Court
denied our request for a review of the case. Therefore, the decision of the
Seoul High Court was deemed final. We made additional payments of approximately
$20 million to the tax authorities in South Korea in FY'21 for the years 2016 to
2021 in settlement of the amounts previously accrued.

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



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


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• 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; and income tax adjustments.

The items excluded from these non-GAAP financial measures are normally included
in the comparable measures calculated and presented in accordance with GAAP. Our
management excludes these items when evaluating our ongoing performance and/or
predicting our earnings trends, and therefore excludes them when presenting
non-GAAP financial measures. Management uses non-GAAP financial measures in
conjunction with our GAAP results, as should investors.

Stock-based compensation is a non-cash expense relating to stock-based awards
issued to executive officers, employees and outside directors, consisting of
restricted stock units. We exclude this expense as it is a non-cash expense and
we assess our internal operations excluding this expense and believe it
facilitates comparisons to the performance of other companies in our industry.

Amortization of acquired intangible assets is a non-cash expense that is
impacted by the timing and magnitude of our acquisitions. We believe the
assessment of our operations excluding these costs is relevant to our assessment
of internal operations and comparisons to the performance of other companies in
our industry.

Acquisition-related and other transactional charges included in general and
administrative expenses are direct costs of potential and completed acquisitions
and expenses related to acquisition integration activities, including
transaction fees, due diligence costs, severance and professional fees.
Subsequent adjustments to our initial estimated amount of contingent
consideration associated with specific acquisitions are also included within
acquisition-related charges. Other transactional charges include third-party
costs related to structuring unusual transactions. We do not include these costs
when reviewing our operating results internally. The occurrence and amount of
these costs will vary depending on the timing and size of acquisitions.


Restructuring and other charges, net includes excess facility restructuring
charges (credits); impairment and accretion expense charges related to the lease
assets of exited facilities; sublease income from previously impaired
facilities; and severance costs resulting from reductions of personnel and
third-party professional consulting fees related to modifications of our
business strategy. These costs may vary in size based on our restructuring plan.




Non-operating charges (credits). In Q4'21, we recorded a $69 million gain
related to our equity investment in Matterport, Inc., which will continue to
fluctuate based on the market value of the investment. In FY'20, we incurred an
early redemption interest penalty and wrote off debt issuance costs, both of
which were related to the settlement of the 6.000% Senior Notes due 2024. These
items are excluded from our non-GAAP financial measures as they are non-ordinary
course in nature and not included in management's review of our results.

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Income tax adjustments include the tax impact of the items above and assumes
that we are profitable on a non-GAAP basis in the U.S. and one foreign
jurisdiction. It also eliminates the effect of the valuation allowance recorded
against our net deferred tax assets in those jurisdictions. Additionally, we
exclude other material tax items that we do not include when reviewing our
operating results internally.

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 and such items often recur. Accordingly, the
non-GAAP financial measures included in this Annual Report 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) Year ended September 30,
2021 2020
GAAP gross margin $ 1,436.1 $ 1,124.1
Stock-based compensation 19.3 14.0
Amortization of acquired intangible assets included
in cost of revenue 29.8 27.4
Non-GAAP gross margin $ 1,485.1 $ 1,165.5
GAAP operating income $ 380.7 $ 210.9
Stock-based compensation 177.3 115.1



Amortization of acquired intangible assets included
in cost of revenue


29.8


27.4



Amortization of acquired intangible assets 29.4


28.7



Acquisition-related and other transactional charges
included in general and administrative expenses


15.0


8.6



Restructuring and other charges, net 2.2 32.7
Non-GAAP operating income $ 634.4 $ 423.4
GAAP net income $ 476.9 $ 130.7
Stock-based compensation 177.3 115.1



Amortization of acquired intangible assets included
in cost of revenue


29.8


27.4



Amortization of acquired intangible assets 29.4


28.7



Acquisition-related and other transactional charges
included in general and administrative expenses


15.0


8.6



Restructuring and other charges, net 2.2


32.7



Non-operating charges (credits)(1) (68.8 ) 18.5
Income tax adjustments(2) (191.6 ) (63.3 )
Non-GAAP net income $ 470.2 $ 298.4
GAAP diluted earnings per share $ 4.03 $ 1.12
Stock-based compensation 1.50


0.99



Total amortization of acquired intangible assets 0.50


0.48



Acquisition-related and other transactional charges
included in general and administrative expenses


0.13


0.07



Restructuring and other charges, net 0.02


0.28



Non-operating charges (credits)(1) (0.58 )


0.16



Income tax adjustments(2) (1.62 ) (0.54 )
Non-GAAP diluted earnings per share $ 3.97 $ 2.57





(1) In FY'21, we recorded a $69 million gain on common stock we own in a public



company. In FY'20, we recognized $15 million of expense related to penalties



for the early redemption of the 6.000% Senior Notes due in 2024 and wrote off



approximately $3 million of related debt issuance costs.



(2) In FY'21 and FY'20 our GAAP results included tax benefits of $179.7 million



and $21.2 million, respectively. The FY'21 results include a $137.4 million



benefit related to the release of the valuation allowance on the majority of



our U.S. deferred tax assets and a $42.3 million benefit related to the



release of a valuation allowance resulting from the Arena acquisition. The



FY'20 results include a $21.2 million benefit related to the release of a



valuation allowance resulting from the Onshape acquisition. As the non-GAAP



tax provision is calculated assuming that there is no valuation allowance,



these benefits have been excluded.


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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. Additionally, our non-GAAP results for



FY'21 exclude tax expense of $34.8 million related to a non-U.S. prior period



tax exposure, primarily related to foreign withholding taxes.



Operating margin impact of non-GAAP adjustments:






Year ended September 30,
2021 2020
GAAP operating margin 21.1 % 14.5 %
Stock-based compensation 9.8 % 7.9 %
Total amortization of acquired intangible assets 3.3 %


3.8 %
Acquisition-related and other transactional charges
included in general and administrative expenses


0.8 % 0.6 %
Restructuring and other charges, net 0.1 % 2.2 %
Non-GAAP operating margin 35.1 % 29.0 %




Critical Accounting Policies and Estimates

We have prepared our consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. In
preparing our financial statements, we make estimates, assumptions and judgments
that can have a significant impact on our reported revenues, results of
operations, and net income, as well as on the value of certain assets and
liabilities on our balance sheet. These estimates, assumptions and judgments are
made based on our historical experience and on other assumptions that we believe
to be reasonable under the circumstances. These estimates may change as new
events occur or additional information is obtained, and we may periodically be
faced with uncertainties, the outcomes of which are not within our control and
may not be known for a prolonged period of time.

The accounting policies, methods and estimates used to prepare our financial
statements are described generally in Note 2. Summary of Significant Accounting
Policies of Notes to Consolidated Financial Statements in this Annual Report.
The most important accounting judgments and estimates that we made in preparing
the financial statements involved:

• revenue recognition;


• accounting for income taxes; and



• valuation of assets and liabilities acquired in business combinations.





A critical accounting policy is one that is both material to the presentation of
our financial statements and requires us to make subjective or complex judgments
that could have a material effect on our financial condition and results of
operations. Critical accounting policies require us to make assumptions about
matters that are uncertain at the time of the estimate, and different estimates
that we could have used, or changes in the estimates that are reasonably likely
to occur, may have a material impact on our financial condition or results of
operations. Because the use of estimates is inherent in the financial reporting
process, actual results could differ from those estimates.

Accounting policies, guidelines and interpretations related to our critical
accounting policies and estimates are generally subject to numerous sources of
authoritative guidance and are often reexamined by accounting standards rule
makers and regulators. These rule makers and/or regulators may promulgate
interpretations, guidance or regulations that may result in changes to our
accounting policies, which could have a material impact on our financial
position and results of operations.

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Revenue Recognition




We record revenues in accordance with the guidance provided by ASC 606, Revenue
from Contracts with Customers. For a full description of our revenue accounting
policy, refer to Note 2. Summary of Significant Accounting Policies, included in
the Notes to Consolidated Financial Statements in this Annual Report.


Our sources of revenue include: (1) subscriptions, (2) perpetual licenses, (3)
support for perpetual licenses and (4) professional services. Subscriptions
include term-based on-premises licenses, Software-as-a-Service (SaaS), and
hosting services.



Judgments and Estimates




Determination of performance obligations. Our subscriptions are frequently sold
as a bundle of products and services, typically pairing on-premises term
software licenses with support and/or cloud services over the same term.
On-premises software is typically determined to be a distinct performance
obligation and is thus recognized separately from the support and/or cloud
components. On-premises license software revenue is generally recognized at the
point in time that the software is made available to the customer, while the
support and cloud software revenue components are recognized over the term of
the contract. In cases where subscriptions include cloud functionality and
on-premises software, an assessment has been performed to determine whether the
cloud services are distinct from the on-premises software. In the substantial
majority of instances, cloud services provide incremental functionality to
customers and have been considered distinct and recognized separately from the
on-premises software. This assessment could have a significant impact on the
timing of revenue recognition and may change as our product offerings evolve.

Allocation of transaction price. We estimate the standalone selling price of
each identified performance obligation and use that estimate to allocate the
transaction price among said performance obligations. The estimated standalone
selling price is determined using all information reasonably available to us,
including market conditions and other observable inputs. Significant judgment is
used in determining the standalone selling prices of the on-premises license,
support, and cloud components of our subscription products. These estimates are
subject to change as our product offerings change and could have a significant
impact due to the difference in the timing of revenue recognition for
on-premises licenses and support and/or cloud.

Right to exchange. Our multi-year, non-cancellable on-premises subscription
contracts provide customers with an annual right to exchange software within the
original subscription with other software. We account for this right as a refund
liability. For most contracts, we use the expected value method to determine the
refund liability associated with this right across a portfolio of contracts.
Where contracts are outside of the standard portfolio of contracts due to
contract size, longer contract duration, or other unique contractual terms, we
use the most likely amount method to determine the refund liability for each
individual contract. In both circumstances, the transaction price is constrained
based on our estimates, which impacts the amount of revenue recognized. Changes
in these estimates could significantly impact revenue for any given period.


Accounting for Income Taxes




As part of the process of preparing our consolidated financial statements, we
are required to calculate our income tax expense based on taxable income by
jurisdiction. There are many transactions and calculations about which the
ultimate tax outcome is uncertain; as a result, our calculations involve
estimates by management. Some of these uncertainties arise as a consequence of
revenue-sharing, cost-reimbursement and transfer pricing arrangements among
related entities and the differing tax treatment of revenue and cost items
across various jurisdictions. If we were compelled to revise or to account
differently for our arrangements, that revision could affect our recorded tax
liabilities.

The income tax accounting process also involves estimating our actual current
tax liability, together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included within our
consolidated balance sheets. We must then assess the likelihood that our
deferred tax assets will be

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recovered from future taxable income and, to the extent we believe that it is
more likely than not that all or a portion of our deferred tax assets will not
be realized, we must establish a valuation allowance as a charge to income tax
expense.

As of September 30, 2021, we have a valuation allowance of $17.7 million against
net deferred tax assets in the U.S. and a valuation allowance of $34.4 million
against net deferred tax assets in certain foreign jurisdictions. We have
concluded, based on the weight of available evidence, that a full valuation
allowance is no longer required against our U.S. net deferred tax assets as they
are more likely than not to be realized in the future. We will continue to
reassess our valuation allowance requirements each financial reporting period.


The valuation allowance recorded against net deferred tax assets of certain
foreign jurisdictions is established primarily for our capital loss
carryforwards, the majority of which do not expire. However, there are
limitations imposed on the utilization of such capital losses that could further
restrict the recognition of any tax benefits.




Prior to the passage of the U.S. Tax Act, the Company asserted that
substantially all of the undistributed earnings of its foreign subsidiaries were
considered indefinitely invested and accordingly, no deferred taxes were
provided. Pursuant to the provisions of the U.S. Tax Act, these earnings were
subjected to a one-time transition tax and there is therefore no longer a
material cumulative basis difference associated with the undistributed earnings.
We maintain our assertion to permanently reinvest these earnings outside the
U.S. unless repatriation can be done substantially tax-free, with the exception
of a foreign holding company formed in 2018 and our Taiwan subsidiary. If we
decide to repatriate any additional non-U.S. earnings in the future, we may be
required to establish a deferred tax liability on such earnings. The amount of
unrecognized deferred tax liability on the undistributed earnings would not be
material.

In the normal course of business, PTC and its subsidiaries are examined by
various taxing authorities, including the Internal Revenue Service (IRS) in the
U.S. We regularly assess the likelihood of additional assessments by tax
authorities and provide for these matters as appropriate. We are currently under
audit by tax authorities in several jurisdictions. Audits by tax authorities
typically involve examination of the deductibility of certain permanent items,
transfer pricing, limitations on net operating losses and tax credits. Although
we believe our tax estimates are appropriate, the final determination of tax
audits and any related litigation could result in material changes in our
estimates.


Valuation of Assets and Liabilities Acquired in Business Combinations




In accordance with business combination accounting, we allocate the purchase
price of acquired companies to the tangible and intangible assets acquired and
liabilities assumed based on their estimated fair values. Determining these fair
values requires management to make significant estimates and assumptions,
especially with respect to intangible assets.

Our identifiable intangible assets acquired consist of developed technology,
core technology, tradenames, customer lists and contracts, and software support
agreements and related relationships. Developed technology consists of products
that have reached technological feasibility. Core technology represents a
combination of processes, inventions and trade secrets related to the design and
development of acquired products. Customer lists and contracts and software
support agreements and related relationships represent the underlying
relationships and agreements with customers of the acquired company's installed
base. We have generally valued intangible assets using a discounted cash flow
model. Critical estimates in valuing certain of the intangible assets include
but are not limited to:


• future expected cash flows from software license sales, customer support



agreements, customer contracts and related customer relationships and
acquired developed technologies and trademarks and trade names and



• discount rates used to determine the present value of estimated future cash



flows.





In addition, we estimate the useful lives of our intangible assets based upon
the expected period over which we anticipate generating economic benefits from
the related intangible asset.

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Net tangible assets consist of the fair values of tangible assets less the fair
values of assumed liabilities and obligations. Except for deferred revenues, net
tangible assets were generally valued by us at the respective carrying amounts
recorded by the acquired company, if we believed that their carrying values
approximated their fair values at the acquisition date. The values assigned to
deferred revenue reflect an amount equivalent to the estimated cost plus an
appropriate profit margin to perform the services related to the acquired
company's software support contracts.

In addition, uncertain tax positions and tax-related valuation allowances
assumed in connection with a business combination are initially estimated as of
the acquisition date and we reevaluate these items quarterly with any
adjustments to our preliminary estimates being recorded to goodwill provided
that we are within the measurement period (up to one year from the acquisition
date) and we continue to collect information in order to determine their
estimated values. Subsequent to the measurement period or our final
determination of the estimated value of uncertain tax positions or tax-related
valuation allowances, whichever comes first, changes to these uncertain tax
positions and tax-related valuation allowances will affect our provision for
income taxes in our Consolidated Statements of Operations.

Our estimates of fair value are based upon assumptions believed to be reasonable
at that time, but which are inherently uncertain and unpredictable. Assumptions
may be incomplete or inaccurate, and unanticipated events and circumstances may
occur, which may affect the accuracy or validity of such assumptions, estimates
or actual results.

When events or changes in circumstances indicate that the carrying value of a
finite-lived intangible asset may not be recoverable, we perform an assessment
of the asset for potential impairment. This assessment is based on projected
undiscounted future cash flows over the asset's remaining life. If the carrying
value of the asset exceeds its undiscounted cash flows, we record an impairment
loss equal to the excess of the carrying value over the fair value of the asset,
determined using projected discounted future cash flows of the asset.

Liquidity and Capital Resources



(in millions) September 30,
2021 2020
Cash and cash equivalents $ 326.5 $ 275.5
Restricted cash 0.5 0.5
Marketable securities - 59.1
Total $ 327.0 $ 335.1
Activity for the year included the following:
Cash provided by operating activities $ 368.8 $ 233.8
Cash used in investing activities (687.9 ) (526.0 )
Cash provided by financing activities 370.3 297.4





Cash, cash equivalents and restricted cash




We invest our cash with highly rated financial institutions and in diversified
domestic and international money market mutual funds. Cash and cash equivalents
include highly liquid investments with original maturities of three months or
less. At September 30, 2021, cash and cash equivalents totaled $327 million,
compared to $275 million at September 30, 2020.

A significant portion of our cash is generated and held outside the U.S. As of
September 30, 2021, we had cash and cash equivalents of $37 million in the U.S.,
$111 million in Europe, $145 million in Asia Pacific (including India) and $34
million
in other non-U.S. countries. All our marketable securities are held in
the U.S. We have substantial cash requirements in the U.S., but we believe that
the combination of our existing U.S. cash and cash equivalents, marketable
securities, our ability to repatriate cash to the U.S. more cost effectively,
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 $369 million in FY'21 compared to $234
million
in FY'20. The year-over-year increase is primarily due to approximately
$190 million of higher cash collections and $20

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million in contribution from Arena, offset by $80 million more in salary and
salary-related payment and an $18 million foreign tax payment.



Restructuring payments totaled $14 million in FY'21, compared to $42 million in
FY'20. Cash paid for income taxes was $58 million in FY'21 compared to $53
million
in FY'20.



Cash used in investing activities






(in millions) Year ended September 30,
2021 2020
Additions to property and equipment $ (24.7 ) $ (20.2 )
Proceeds (purchases) of short- and long-term
marketable securities, net 58.4 (1.8 )
Acquisitions of businesses, net of cash acquired (718.0 ) (483.5 )
Purchases of investments (4.0 ) -
Purchase of intangible assets (0.6 ) (11.1 )
Settlement of net investment hedges 1.0 (9.4 )
Net cash used in investing activities $ (687.9 ) $ (526.0 )




Cash used in investing activities reflects $718 million used for acquisitions in
FY'21, primarily related to Arena compared to $483 million in FY'20 ($469
million
of which related to Onshape). For additional detail on our acquisitions,
see Note 6. Acquisitions, included in the Notes to Consolidated Financial
Statements in this Annual Report. Our expenditures for property and equipment
consist primarily of facility improvements, office equipment, computer
equipment, and software.


Cash provided by financing activities






(in millions) Year ended September 30,
2021 2020
Borrowings on debt, net $ 432.0 $ 344.9
Repurchases of common stock (30.0 ) -
Proceeds from issuance of common stock 21.6


18.3



Debt issuance costs - (17.1 )
Debt early redemption premium - (15.0 )
Payments of withholding taxes in connection with
stock-based awards (53.0 ) (33.7 )
Payments of principal for financing leases (0.4 ) -
Net cash provided by financing activities $ 370.3 $ 297.4




FY'21 net borrowings of $432 million were primarily used to fund the Arena
acquisition. FY'20 net borrowings were primarily related to the acquisition of
Onshape. FY'20 net borrowings reflect the issuance of $1 billion in new notes in
February 2020 and the repayment of $500 million of earlier issued notes in May
2020
, as well as net repayments of $155 million under our revolving credit
facility.


Outstanding Debt



As of September 30, 2021, we had:






(in millions) September 30, 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 (10.5 )
Total debt, net of issuance costs $


1,439.5




Undrawn under credit facility revolver $


550.0



Undrawn under credit facility revolver available for borrowing $



533.7




As of September 30, 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

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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 are described in Note 9. Debt to the
Condensed Consolidated Financial Statements in this Form 10-K.



Share Repurchase Authorization




Our Articles of Organization authorize us to issue up to 500 million shares of
our common stock. Our Board of Directors has authorized us to repurchase up to
$1 billion of our common stock through September 30, 2023. We may use cash from
operations and borrowings under our credit facility to make any such
repurchases. All shares of our common stock repurchased are automatically
restored to the status of authorized and unissued.


In FY'21, we repurchased approximately 226 thousand shares in the open market
for $30 million. We did not repurchase any shares in FY'20.



Expectations for Fiscal 2022




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 $50 million to $55 million in restructuring
cash payments related to our recently announced restructuring charge as well as
previous restructuring charges. In FY'22, we expect to return approximately 25%
of our estimated free cash flow excluding restructuring payments, which is
expected to be approximately $450 million, to our shareholders through stock
repurchases of our common stock.

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.

Contractual Obligations

At September 30, 2021, our future contractual obligations were related to debt,
leases, pension liabilities, unrecognized tax benefits, and purchase
obligations. See Note 9. Debt, Note 19. Leases, Note 14. Pension Plans, and Note
8. Income Taxes of Notes to Consolidated Financial Statements in this Annual
Report for information about those obligations, which Notes are incorporated by
reference into this section. Our purchase obligations were approximately $90.4
million
, with $43.7 million expected to be paid in FY'22 and $46.8 million
thereafter. Purchase obligations represent minimum commitments due to third
parties, including royalty contracts, research and development contracts,
telecommunication contracts, information technology maintenance contracts in
support of internal-use software and hardware, financing leases, operating
leases with original terms of less than 12 months, and other marketing and
consulting contracts. Contracts for which our commitment is variable, based on
volumes, with no fixed minimum quantities, and contracts that can be canceled
without payment penalties are not included in the purchase obligation amounts
above. The purchase obligations included above are in addition to amounts
included in current liabilities and prepaid expenses recorded on our September
30, 2021
Consolidated Balance Sheet.


As of September 30, 2021, we had letters of credit and bank guarantees
outstanding of approximately $16.3 million (of which $0.5 million was
collateralized).



Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance
sheet entities for the purpose of raising capital, incurring debt or operating
parts of our business that are not consolidated (to

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the extent of our ownership interest therein) into our financial statements. We
have not entered into any transactions with unconsolidated entities whereby we
have subordinated retained interests, derivative instruments or other contingent
arrangements that expose us to material continuing risks, contingent
liabilities, or any other obligation under a variable interest in an
unconsolidated entity that provides financing, liquidity, market risk or credit
risk support to us.

Recent Accounting Pronouncements

In accordance with recently issued accounting pronouncements, we will be
required to comply with certain changes in accounting rules and regulations,
none of which are expected to have a material impact on our consolidated
financial statements. Refer to Note 2. Summary of Significant Accounting
Policies to the Condensed Consolidated Financial Statements in this Form 10-K
for all recently issued accounting pronouncements, which is incorporated herein
by reference.

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