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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

☑

ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended: September 30, 2024

OR

 

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from_ to_

Commission File Number: 0-18059

 

PTC Inc.

(Exact name of registrant as specified in its charter)

 

 

Massachusetts

 

04-2866152

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

121 Seaport Boulevard, Boston, MA 02210

(Address of principal executive offices, including zip code)

(781) 370-5000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading

Symbol

Name of each exchange on which registered

Common Stock, $.01 par value per share

PTC

NASDAQ Global Select Market

Securities registered pursuant

to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☑

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

☑

Accelerated Filer

☐

Non-accelerated Filer

☐

Smaller Reporting Company

☐

 

 

 

 

 

 

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

The aggregate market value of our voting stock held by non-affiliates was approximately $22,558,974,797 on March 28, 2024 based on the last reported sale price of our common stock on the Nasdaq Global Select Market on that date. There were 119,716,947 shares of our common stock outstanding on that day and 120,129,080 shares of our common stock outstanding on November 12, 2024.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement in connection with the 2025 Annual Meeting of Shareholders (2025 Proxy Statement) are incorporated by reference into Part III.


 

 

PTC Inc.

ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR 2024

Table of Contents

 

 

 

Page

PART I.

 

 

Item 1.

Business

1

Item 1A.

Risk Factors

8

Item 1B.

Unresolved Staff Comments

18

Item 1C.

Cybersecurity

18

Item 2.

Properties

20

Item 3.

Legal Proceedings

20

Item 4.

Mine Safety Disclosures

20

PART II.

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

20

Item 6.

Reserved

20

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

37

Item 8.

Financial Statements and Supplementary Data

39

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

39

Item 9A.

Controls and Procedures

39

Item 9B.

Other Information

40

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspection

41

PART III.

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

42

Item 11.

Executive Compensation

42

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

43

Item 13.

Certain Relationships and Related Transactions, and Director Independence

43

Item 14.

Principal Accounting Fees and Services

43

PART IV.

 

 

Item 15.

Exhibits and Financial Statement Schedules

44

Item 16.

Form 10-K Summary

44

Exhibit Index

45

Signatures

47

APPENDIX A

 

 

 

Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP, Boston, MA, PCAOB ID: 238)

F-1

 

Consolidated Financial Statements

F-4

 

Notes to Consolidated Financial Statements

F-9

 

 

 

 

 


 

 

Cautionary Note About Forward-Looking Statements

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. In particular, statements that are not historical facts, including but not limited to, statements about our anticipated financial results, capital development and growth, stock repurchases, our environmental sustainability initiatives, and the development of our products, markets and workforce, are forward-looking statements. These forward-looking statements are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions, whether in the negative or affirmative. Forward-looking statements are based on our current plans, expectations and assumptions and are not guarantees of future performance. Factors that may cause our actual results to differ materially from these statements include, but are not limited to, the risks and uncertainties discussed in Item 1A. “Risk Factors” and elsewhere throughout this Annual Report. Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.

Unless otherwise indicated, all references to a year reflect our fiscal year that ends on September 30.

Website References

References to our PTC.com website in this Annual Report and to our 2024 Impact Report, to be published in early 2025, are provided for convenience. The content on PTC.com and in our 2024 Impact Report is not incorporated by reference into this Annual Report unless expressly stated.

PART I

ITEM 1. Business

Our Business

PTC is a global software company that enables manufacturers and product companies to digitally transform how they design, manufacture, and service the physical products that the world relies on. Headquartered in Boston, Massachusetts, PTC employs over 7,000 people and supports more than 30,000 customers globally.

We primarily serve customers in the following industry verticals:

•
Industrials
•
Federal, Aerospace and Defense
•
Electronics and High Tech
•
Automotive
•
Medical Technology and Life Sciences

Our customers are focused on improving their competitiveness in the face of global competition and increasing product complexity, and our suite of software offerings is a strategic enabler of this and their digital transformation initiatives. We enable our customers to establish a strong product data foundation and leverage that foundation to drive cross-functional collaboration, accelerate new product introduction timelines and deliver higher product quality.

Our offerings include CAD (Computer Aided Design) solutions for product data authoring and PLM (Product Lifecycle Management) solutions for product data management and process orchestration.

1

 

Within the overall PLM category, our offerings also include ALM (Application Lifecycle Management) and SLM (Service Lifecyle Management).

Given the breadth and openness of our portfolio, we can enable end-to-end digital thread initiatives, which leverage a connected flow of product data across design, manufacturing, service, and, ultimately, reuse. A digital thread enables product companies to break down silos, streamline workflows, and achieve interoperability across departments, functions and systems with a single version of truth. It also secures the quality, consistency and traceability of product-related data, ensuring that the data is up-to-date, accessible, reliable and actionable. With a digital thread, the right data is delivered to the right people at the right time and in the right context across the value chain.

Our business is based on a subscription model, with 93% of our 2024 revenue being recurring in nature. Compared to a perpetual license model, our subscription model naturally drives higher customer engagement and retention and provides better business predictability. This, in turn, enables us to make steady and sustained investments to pursue mid-to-long-term growth opportunities.

Our Principal Products and Services

PLM software products for product data management and process orchestration

Our Windchill® PLM application suite manages all aspects of the product development lifecycle—from concept through service and end-of-life. Windchill provides real-time information sharing, dynamic data visualization, and the ability to collaborate across geographically distributed teams, enabling manufacturers to elevate their product development, manufacturing, field service, and end-of-life processes.

Our Codebeamer® and pure::variantsTM application lifecycle management (ALM) solutions enable companies to accelerate the development of products that contain software, including software-defined products which require multiple software variants to be created and updated over the life of the product.

Our ServiceMax® service lifecycle management (SLM) solution enables companies to improve asset uptime with optimized in-person and remote service, boost technician productivity with the latest mobile tools, and deliver metrics for confident decision making.

Our Servigistics® service parts management solution enables companies to effectively manage their service parts inventory, enabling them to optimize equipment availability and uptime, and increase customer satisfaction.

Our Arena® Software as a Service (SaaS) PLM solution enables product teams to collaborate virtually anytime and anywhere, making it easier to share the latest product and quality information with internal teams and supply chain partners and deliver innovative products to customers faster. Our Arena quality management system software connects quality and product designs into a single system to simplify regulatory compliance.

CAD software products for product data authoring

Our Creo® 3D CAD technology enables the digital design, testing, and modification of product models. With its design simulation, additive manufacturing, and generative design innovations, we enable our customers to be first to market with differentiated products. From initial concept to design, simulation, and analysis, Creo provides designers with innovative tools to efficiently create better products, faster.

2

 

Our Onshape® SaaS product development platform unites computer-aided design with data management, collaboration tools, and real-time analytics. A cloud-native multi-tenant solution that can be instantly deployed on virtually any computer or mobile device, Onshape enables teams to work together from just about anywhere. Real-time design reviews, commenting, and simultaneous editing enable a collaborative workflow where multiple design iterations can be completed in parallel and merged into the final design.

Enabling technologies

Our principal products and services are enhanced by a collection of enabling technologies, including SaaS versions of our Creo® CAD and Windchill® PLM software, artificial intelligence software, our ThingWorx® Internet of Things software, and our Vuforia® augmented reality software. The primary focus of these technologies is to deliver value-added capabilities to our principal products and services, such as the improved security and collaboration environment of a SaaS platform; unlocking productivity with artificial intelligence; moving product data more quickly across engineering, manufacturing, and service using IoT; or automatically analyzing the quality of a manufactured product with augmented reality.

Our Markets and How We Address Them

Our strategy aims to create value for our customers, increase our Annual Run Rate (ARR) and cash flow, and deliver long-term value for shareholders. We focus our resources on the following five solutions, where we believe we can create the greatest customer value:

•
PLM
•
ALM
•
SLM
•
CAD
•
SaaS or Software as a Service

Our growth is primarily driven by existing customers that continue to expand their PTC footprint, largely relating to their focus on improving their competitiveness through digital transformation. To a lesser extent, our growth is also supported by new customers and price increases.

We derive approximately 75% of our sales from products and services sold directly by our sales force to end-user customers. The rest of our sales of products and services are through third-party resellers. Our sales force focuses on large accounts, while our reseller channel provides a cost-effective means of covering the small- and medium-size business markets. Our strategic reseller and software partners enable us to increase our market reach, offer broader solutions, and add compelling technology to our offerings. Our strategic services partners provide service offerings to help customers implement our product offerings and transition to SaaS.

Additional financial information about our international and domestic operations may be found in Note 3. Revenue from Contracts with Customers of Notes to Consolidated Financial Statements in this Annual Report, which information is incorporated herein by reference.

Competition

We compete with a number of companies whose offerings address one or more specific functional areas covered by our solutions. For enterprise CAD and PLM solutions, we compete with large established companies including Autodesk, Dassault Systèmes SA, and Siemens AG. For our ALM products, we compete with IBM, Jama Software, Inc. and Siemens AG. For our SLM products, we compete with enterprise software companies such as Oracle, SAP and IFS AB, and with companies that offer point solutions.

3

 

Proprietary Rights

Our software products and related technical know-how, along with our trademarks, including our company names, product names and logos, are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection. The nature and extent of such legal protection depends in part on the type of intellectual property right and the relevant jurisdiction. In the U.S., we are generally able to maintain our trademark registrations for as long as the trademarks are in use and to maintain our patents for up to 20 years from the earliest effective filing date. We also use license management and other anti-piracy technology measures, as well as contractual restrictions, to curtail the unauthorized use and distribution of our products.

Our proprietary rights are subject to the risks and uncertainties described under Item 1A. Risk Factors below, which is incorporated into this section by reference.

Environmental Sustainability

At PTC, we’re working to contribute to the decarbonization and circularity of global manufacturing. While we have a climate action plan committed to reducing our company’s “footprint,” we believe far larger benefits will flow from our “handprint” stemming from our software offerings. Our software solutions enable manufacturers to design, build, and service their products more sustainably.

Footprint

Our emission reduction plan was validated by the Science Based Targets initiative (SBTi) in September 2024. Our near-term commitment is to reduce by 2030 combined Scope 1 (direct emissions from owned/controlled operations) and Scope 2 (indirect energy use) emissions by 50% and reduce Scope 3 - Category 1 (Purchased Goods and Services) by 25% compared to our 2022 baseline. Our long-term net-zero commitment is to reach net-zero across all scope emissions by 2050, with absolute reductions of over 90% across Scopes 1-3, with accredited carbon removal offsets for the remaining 10% (or less) as needed.

We have already begun to implement programs and pursue initiatives to reduce our emissions and carbon footprint, including:

•
entering into a Virtual Power Purchase Agreement (VPPA) to reduce our future carbon footprint;
•
prioritizing energy efficiency and accessibility to public transportation when selecting office space;
•
providing a subsidy for employee’s public transportation commute costs; and
•
selecting suppliers with decarbonization targets.

Handprint

Environmental sustainability is integral to our product offerings. With our software, manufacturers can support their sustainability and compliance initiatives, including by designing with less material, enhancing product repairability and circularity, improving factory efficiency, and enabling remote service.

4

 

People and Culture

Within our work environment we seek to create an equitable and inclusive culture in which all employees can thrive. This is a key aspect of our talent strategy. Our approach is focused on promoting an agile culture, an increased sense of belonging, engaged work environments, and high-performing teams.

img187907668_0.jpg

5

 

PTC at-a-Glance

As of September 30, 2024, PTC had 7,501 full-time employees. Our employee population is geographically diverse and serves a geographically diverse customer and partner network.

Worldwide Employee Representation

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United States Employee Representation

img187907668_2.jpg

 

 

 

6

 

Compensation and Benefits

PTC provides a comprehensive and competitive compensation and benefits package designed to attract, retain, motivate, and engage talent around the world, including base salaries, and, for eligible roles, incentive and equity compensation. Employees also have the opportunity to purchase PTC stock at a discount through our Employee Stock Purchase Plan.

Our benefit offerings are designed to meet the needs of our employees and their families around the world. Specific offerings differ country by country due to cultural norms, market dynamics, and legal requirements, but we provide a wide variety of core health and financial programs such as healthcare, life and disability insurance, employee assistance plans, retirement savings and pension benefit plans, and generous paid family leave and vacation time.

Talent Development & Employee Engagement

As we focus on enhancing the employee experience, we are increasing our efforts to invest in our people and create meaningful opportunities to learn, grow, develop, and advance their careers. We have specific development programs and coaching programs, as well as numerous other self-led learning paths. The variety of options means that employees have the ability to focus on the development path most meaningful to them.

Diversity, Equity, and Inclusion (DEI)

Commitment to our values and diversity in our workforce is supported by various ongoing efforts. We mitigate bias by coaching managers and leaders in fostering psychologically safe environments. We also review and revise our processes based on feedback and engagement scores from employee pulse surveys. We embed equitable practices into the planning and execution of how we attract, select, develop, and retain talent. Meanwhile, our DEI ambassadors are aligned with business functions to amplify and enhance our efforts in these areas. Finally, to cultivate a community of belonging, our 11 Employee Resource Groups foster an inclusive culture and facilitate safe spaces for employees to navigate social issues and challenges.

Additional Information About Our Employee Initiatives

You can find more information about our employee initiatives in our 2024 Impact Report, which we expect to release in early 2025.

Available Information

We make available free of charge on our website at www.ptc.com the following reports as soon as reasonably practicable after electronically filing them with, or furnishing them to, the SEC: our Annual Reports on Form 10-K; our Quarterly Reports on Form 10-Q; our Current Reports on Form 8-K; and amendments to those reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934. Our Proxy Statements for our Annual Meetings and Section 16 trading reports on SEC Forms 3, 4 and 5 also are available on our website.

Corporate Information

PTC was incorporated in Massachusetts in 1985 and is headquartered in Boston, Massachusetts.

7

 

ITEM 1A. Risk Factors

The following are important factors we have identified that could affect an investment in our securities. You should consider them carefully when evaluating an investment in PTC securities, because these factors could cause actual results to differ materially from historical results or any forward-looking statements. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, operating results, and prospects.

I. Risks Related to Our Business Operations and Industry

We face significant competition, which could adversely affect our business, financial condition, operating results, and prospects if we are unable to successfully compete.

The markets for our products and solutions are rapidly changing and characterized by intense competition, disruptive technology developments, evolving distribution models and increasingly lower barriers to entry. If we are unable to provide products and solutions that address customers’ needs as well as our competitors’ products and solutions do, or to align our pricing, licensing and delivery models with customer preferences, we could lose customers and/or fail to attract new customers, which could adversely affect our business, financial condition, operating results, and prospects.

For example, customer demand for SaaS solutions is increasing. While our Arena, ServiceMax, and Onshape solutions are cloud-native SaaS solutions, and we have introduced our Windchill+, Creo+, and Kepware+ SaaS solutions, customers may not adopt them as we expect. If we are unable to compete successfully with competitors offering SaaS solutions, we could lose customers and/or fail to attract new customers, which could adversely affect our business, financial condition, operating results, and prospects.

Our current and potential competitors range from large and well-established companies to emerging start-ups. Some of our competitors and potential competitors have greater name recognition in the markets we serve and greater financial, technical, sales and marketing, and other resources, which could limit our ability to gain customer recognition and confidence in our products and solutions and successfully sell our products and solutions, which could adversely affect our ability to grow our business.

A breach of security in our products or computer systems, or those of our third-party service providers, could compromise the integrity of our products, cause loss of data, harm our reputation, create additional liability and adversely affect our business, financial condition, operating results, and prospects.

We have implemented and continue to implement measures intended to maintain the security and integrity of our products, source code and IT systems. The potential for a security breach or system disruption has significantly increased over time as the scope, number, intensity and sophistication of attempted cyberattacks and cyber intrusions have increased – particularly cyberattacks and intrusions designed to access and exfiltrate information and to disrupt and lock up access to systems for the purpose of demanding a ransom payment. It is impossible for us to eliminate the risk of a successful cyberattack or intrusion, and, in fact, we regularly deal with security issues and have experienced security incidents from time to time. Accordingly, there is a risk that a cyberattack or intrusion will be successful and that such event will be material.

In addition, we offer cloud services to our customers and some of our products, including our SaaS products, are hosted by third-party service providers, which expose us to additional risks as those repositories of our customers’ proprietary data may be targeted and a cyberattack or intrusion may be successful and material. Interception of data transmission, misappropriation or modification of data, corruption of data and attacks against our service providers may adversely affect our products or product and service delivery. Malicious code, viruses or vulnerabilities that are undetected by us or our service providers may disrupt our business operations generally and may have a disproportionate effect on those of our products that are developed and delivered in the cloud environment.

8

 

While we devote resources to maintaining the security and integrity of our products and systems, as well as performing due diligence of our third-party service providers, security breaches that have not had a material effect on our business or that of our customers have occurred, and we will continue to face cybersecurity threats and exposure. A significant breach of the security and/or integrity of our products or systems, or those of our third-party service providers, whether intentional or by human error by our employees or others, could disrupt our business operations or those of our customers, could prevent our products from functioning properly, could enable access to sensitive, proprietary or confidential information of our customers, or could enable access to our sensitive, proprietary or confidential information. This could require us to incur significant costs of investigation, remediation and/or payment of a ransom; harm our reputation; cause customers to stop buying our products; and cause us to face lawsuits and potential liability, any of which could have a material adverse effect on our business, financial condition, operating results, and prospects.

We have a large ecosystem of strategic, technology, and software partners and system integrators that enable us to enhance our products and offerings, expand our market reach, and accelerate our customers’ digital transformation journeys. Failures by those partners or termination of those relationships could adversely affect our business, financial condition, operating results, and prospects.

We have many strategic, technology, and software partner and system integrator relationships with other companies that provide technologies and software that we embed in our solutions, that provide implementation services to our customers, that we work with to offer complementary solutions and services, and that market and sell our solutions. If these companies fail to perform as we expect, or if a company terminates or substantially alters the terms of the relationship, we could experience delays in product development, reduced or delayed sales, customer dissatisfaction, and additional expenses, and our business, financial condition, results of operations, and prospects could be materially adversely affected.

We increasingly rely on third-party providers of cloud infrastructure services to deliver our offerings to users on our platform, and any disruption of or interference with our use of these services could adversely affect our business, financial condition, operating results, and prospects.

Our continued growth depends in part on the ability of our existing and potential customers to use and access our cloud services or our website in order to download our software or encrypted access keys for our software within an acceptable amount of time. We use a number of third-party service providers that we do not control for key components of our infrastructure, particularly with respect to development and delivery of our cloud-based products. The use of these service providers gives us greater flexibility in efficiently delivering a more tailored, scalable customer experience, but also exposes us to additional risks and vulnerabilities. Third-party service providers operate their own platforms that we access, and we are, therefore, vulnerable to their service interruptions. We may experience interruptions, delays and outages in service and availability from time to time as a result of problems with our third-party service providers’ infrastructure. Lack of availability of this infrastructure could be due to a number of potential causes including technical failures, natural disasters, fraud or security attacks that we cannot predict or prevent. Such outages could adversely impact our business, financial condition, results of operations, and prospects.

If we are unable to renew our agreements with our cloud service providers on commercially reasonable terms, or any of our agreements are prematurely terminated, or we need to add new cloud services providers to increase capacity and uptime, we could experience interruptions, downtime, delays, and additional expenses related to transferring to and providing support for these new platforms. Any of the above circumstances or events may harm our reputation and brand, reduce the availability or usage of our platforms and impair our ability to attract new users, any of which could adversely affect our business, financial condition, results of operations, and prospects.

9

 

We may be unable to hire or retain employees with the necessary skills to operate and grow our business, which could adversely affect our ability to compete and adversely affect our business, financial condition, results of operations, and prospects.

Our success depends upon our ability to attract and retain highly skilled employees to develop and sell our products and solutions and to operate and grow our business. Competition for such employees in our industry is intense worldwide.

If we are unable to attract and retain employees with the requisite skills to develop and sell our products and solutions, or to guide, operate and support our business, we may be unable to compete successfully, which would adversely affect our business, financial condition, results of operations, and prospects.

We depend on sales within the discrete manufacturing sector and our business could be adversely affected if manufacturing activity does not grow or if it contracts, or if manufacturers are adversely affected by other macroeconomic factors.

A large amount of our sales are to customers in the discrete manufacturing sector. Manufacturers worldwide continue to face uncertainty about the global macroeconomic environment due to, among other factors, the effects of earlier and ongoing supply chain disruptions, high interest rates and inflation, volatile foreign exchange rates and the current relative strength of the U.S. Dollar, and the U.S. government’s focus on technology transactions with non-U.S. entities. Customers may delay, reduce, or forego purchases of our solutions due to these challenges and concerns, which could adversely affect our business, financial condition, results of operations, and prospects.

If we fail to successfully transform our operations to support the sale of SaaS solutions and to develop competitive SaaS solutions, our business and prospects could be adversely affected.

Transforming our business to offer and support SaaS solutions requires considerable additional investment in our organization. Whether we will be successful and will accomplish our business and financial objectives is subject to risks and uncertainties, including but not limited to: our ability to further develop and scale infrastructure, our ability to include functionality and usability in such offerings that address customer requirements, our ability and the ability of our partners to transition existing customer implementations to SaaS, customer demand, attach and renewal rates, channel adoption, and our costs. If we are unable to successfully establish these new offerings and navigate our business transition, our business, financial condition, results of operations, and prospects could be adversely affected.

Because our sales and operations are globally dispersed, we face additional compliance risks, and any compliance failure could adversely affect our business and prospects.

We sell and deliver software and services, and maintain support operations, in many countries whose laws and practices differ from one another and are subject to unexpected changes. Managing these geographically dispersed operations requires significant attention and resources to ensure compliance with laws of those countries and those of the U.S. governing our activities in non-U.S. countries.

Those laws include, but are not limited to, anti-corruption laws and regulations (including the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act 2010), data privacy laws and regulations (including the European Union's General Data Privacy Regulation), and trade and economic sanctions laws and regulations (including laws administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control, the U.S. State Department, the U.S. Department of Commerce, the United Nations Security Council and other sanctions authorities). Our compliance risks are heightened due to the go-to-market approach for our business that relies heavily on a partner ecosystem, the fact that some of the countries we operate in have a higher incidence of corruption and fraudulent business practices, the fact that we sell to governments and state-owned business enterprises, and the fact that global enforcement of laws has significantly increased.

10

 

Accordingly, while we strive to maintain a comprehensive compliance program, an employee, agent or business partner may violate our policies or U.S. or other applicable laws, as has occurred in the past, or we may inadvertently violate such laws. Investigations of alleged violations of those laws can be expensive and disruptive. Violations of such laws can lead to civil and/or criminal prosecutions, substantial fines and other sanctions, including the revocation of our rights to continue certain operations, and also cause business loss and reputational harm, which could adversely affect our business, financial condition, results of operations, and prospects.

We and our customers are subject to an increasing number of laws and regulations related to sustainability matters, compliance with which could adversely affect our business, financial condition, results of operations, and prospects.

We are subject to an increasing number of laws and regulations promulgated by multiple countries and jurisdictions that require new and expansive disclosure on sustainability topics and, in some cases, remediation of adverse effects, that will increase our compliance costs and expose us to risks associated with regulatory compliance.

These laws and regulations include those promulgated pursuant to the European Union’s Corporate Sustainability Reporting Directive (“CSRD”) and its Corporate Sustainability Due Diligence Directive (“CSDDD”). CSRD requires new and expansive disclosures related to sustainability risks and opportunities. CSDDD will require us to conduct due diligence to identify, prevent, mitigate, and account for actual and potential adverse impacts on human rights and the environment arising from our own operations and our value chains and to remediate any such adverse impacts. Compliance with these directives requires significant investment in resources, including the implementation of new reporting systems, data collection processes, and due diligence procedures.

As many of our customers and potential customers, particularly those in Germany and elsewhere in the European Union, are also subject to such laws and directives, those companies will increasingly be required to assess our sustainability efforts and impacts; if we are unable to satisfactorily address their requests for information or other sustainability related requests, contracting periods with those companies may be extended or those companies may elect to use other suppliers or switch suppliers, which could adversely affect our business, financial condition, results of operations, and prospects.

The regulatory landscape for sustainability continues to evolve and expand and the introduction of additional laws or regulatory requirements may impose further compliance burdens and further increase our compliance costs. We are committed to meeting existing and future regulatory requirements; however, the financial and operational impact of current and future laws and regulations remains uncertain and could materially adversely affect our business, financial condition, results of operations and prospects.

Increased scrutiny and expectations around environmental, social, and governance (“ESG”) matters may require us to incur additional costs or otherwise adversely impact our reputation, business, and prospects.

Our stakeholders, including investors, customers, suppliers, and employees, are placing greater emphasis on our ESG performance and transparency. This increasing stakeholder attention to and expectations around ESG matters, particularly sustainability matters, and our response to the same, may result in higher costs (including higher costs related to compliance, stakeholder engagement, and contracting), adversely impact our reputation, or otherwise negatively affect our business performance and prospects.

Our statements about our sustainability, environmental and human capital initiatives and goals, and progress against those goals, may be based on standards for measuring progress that are still developing, internal controls and processes that continue to evolve, and assumptions that are subject to change. If our related data, processing and reporting are incomplete or otherwise inaccurate, or if we fail to achieve progress on our stated targets or initiatives when or as expected, our business, financial condition, operating results, and prospects could be adversely affected.

11

 

II. Risks Related to Our Intellectual Property

We may be unable to adequately protect our proprietary rights, which could adversely affect our business and our prospects.

Our software products are proprietary. We protect our intellectual property rights in these items by relying on copyrights, trademarks, patents and common law safeguards, including trade secret protection, as well as restrictions on disclosures and transferability contained in our agreements with other parties. Despite these measures, the laws of all relevant jurisdictions may not afford adequate protection to our products and other intellectual property. In addition, we frequently encounter attempts by individuals and companies to pirate our software. If our measures to protect our intellectual property rights fail, others may be able to use those rights, which could reduce our competitiveness and adversely affect our business, financial condition, operating results, and prospects.

In addition, any legal action to protect our intellectual property rights that we may bring or be engaged in could be costly, may distract management from day-to-day operations and may lead to additional claims against us, and we may not succeed, all of which could adversely affect our business, financial condition, operating results, and prospects.

Intellectual property infringement claims could be asserted against us, which could be expensive to defend, could result in limitations on our use of the claimed intellectual property, and could adversely affect our business and prospects.

The software industry is characterized by frequent litigation regarding copyright, patent and other intellectual property rights. We have faced such lawsuits from time to time. Any such claim could result in significant expense to us and divert the efforts of our technical and management personnel. We cannot be sure that we would prevail against any such asserted claims. If we did not prevail, we could be prevented from using the claimed intellectual property or be required to enter into royalty or licensing agreements, which might not be available on terms acceptable to us. In addition to possible claims with respect to our proprietary products, some of our products contain technology developed by and licensed from third parties and we may likewise be susceptible to infringement claims with respect to these third-party technologies.

12

 

III. Risks Related to Acquisitions

Businesses we acquire may not generate the sales and earnings we anticipate and may otherwise adversely affect our business and prospects.

We have acquired, and intend to continue to acquire, new businesses and technologies. If we fail to successfully integrate and manage the businesses and technologies we acquire, if an acquisition does not further our business strategy or return a level of sales as we expect, or if a business we acquire has unexpected legal or financial liabilities, our business, financial condition, results of operations, and prospects could be adversely affected.

The types of issues that we may face in integrating and operating the acquired business include:

•
difficulties managing an acquired company’s technologies or lines of business or entering new markets where we have limited or no prior experience or where competitors may have stronger market positions;
•
unanticipated operating difficulties in connection with the acquired entities, including potential declines in sales of the acquired entity;
•
complications relating to the assumption of pre-existing contractual relationships of an acquired company that we would not have otherwise entered into, the termination or modification of which may be costly or disruptive to our business;
•
litigation arising from the transaction, including potential intellectual property claims or disputes following an acquisition;
•
diversion of management and employee attention;
•
challenges with implementing adequate and appropriate controls, procedures and policies in an acquired business;
•
potential loss of key personnel in connection with an acquisition; and
•
potential incompatibility of business cultures.

Further, if we do not achieve the expected return on our investments, it could impair the intangible assets and goodwill that we recorded as part of an acquisition, which could require us to record a reduction to the value of those assets.

We may incur significant debt or issue a material amount of debt or equity securities to finance an acquisition, which could adversely affect our operating flexibility, business and prospects.

If we were to incur a significant amount of debt—whether by borrowing funds under our credit facility or otherwise or issuing new debt securities—to finance an acquisition, our interest expense, debt service requirements and leverage would increase significantly. The increases in these expenses and in our leverage could constrain our ability to operate as we might otherwise or to borrow additional amounts and could adversely affect our business, financial condition, results of operations, and prospects.

If we were to issue a significant amount of equity securities in connection with an acquisition, existing stockholders would be diluted and our stock price could decline.

13

 

IV. Risks Related to Our Indebtedness

Our substantial indebtedness could adversely affect our business, financial condition, results of operations, and prospects, as well as our ability to meet our payment obligations under our debt.

We have a substantial amount of indebtedness. As of November 14, 2024, our total debt outstanding was approximately $1,668 million, $1 billion of which was associated with the 3.625% Senior Notes and 4.000% Senior Notes (together, “Senior Notes”) issued in February 2020, which mature in February 2025 and 2028, respectively, and are unsecured; $177 million of which was borrowed under our credit facility revolving line, which matures in January 2028; and $491 million of which was borrowed under our credit facility term loan [which began amortizing in March 2024]. All amounts outstanding under the credit facility and the Senior Notes will be due and payable in full on their respective maturity dates. As of November 14, 2024, we had unused commitments under our credit facility of approximately $1,073 million. PTC Inc. and one of our foreign subsidiaries are eligible borrowers under the credit facility and certain other foreign subsidiaries may become borrowers under our credit facility in the future, subject to certain conditions.

Specifically, our level of debt could:

•
make it more difficult for us to satisfy our debt obligations and other ongoing business obligations, which may result in defaults;
•
result in an event of default if we fail to comply with the financial and other covenants contained in the agreements governing our debt instruments, which could result in all of our debt becoming immediately due and payable or require us to negotiate an amendment to financial or other covenants that could cause us to incur additional fees and expenses;
•
limit our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements;
•
reduce the availability of our cash to fund working capital, capital expenditures, acquisitions and other general corporate purposes and limit our ability to obtain additional financing for these purposes;
•
increase our vulnerability to adverse economic and industry conditions;
•
amplify the risk of increased interest rates as certain of our borrowings, including borrowings under our credit facility, are at variable rates of interest;
•
limit our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industries in which we operate, and the overall economy; and
•
place us at a competitive disadvantage compared to other, less leveraged competitors.

Any of the above-listed factors could have an adverse effect on our business, financial condition, results of operations, and prospects, and our ability to meet our payment obligations under our debt agreements.

Despite our current level of indebtedness, we and our subsidiaries might incur substantially more debt and other obligations. This could further exacerbate the risks to our business, financial condition, and prospects described above.

We and our subsidiaries might incur significant additional indebtedness and other obligations in the future, including secured debt. Although the credit agreement governing our credit facility contains restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions. The additional indebtedness incurred in compliance with these restrictions could be substantial. In addition, the credit agreement and the indenture governing our Senior Notes due 2025 and 2028, will not prevent us from incurring obligations that do not constitute indebtedness. If new

14

 

debt is added to our current debt levels, or we incur other obligations, the related risks that we now face could increase.

We may not be able to generate enough cash to service all our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful, and could harm our business and prospects.

Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors, some of which are beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital, or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. Our debt agreements restrict our ability to dispose of assets and use the proceeds from those dispositions and may also restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then due.

Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our ability to satisfy our debt obligations.

If we cannot make scheduled payments on our debt, we will be in default and the lenders under our credit facility could terminate their commitments to loan money, the lenders could foreclose against the assets securing their borrowings, the holders of our Senior Notes could declare all outstanding principal, premium, if any, and interest to be due and payable, and we could be forced into bankruptcy or liquidation. These events could result in a loss of your investment.

We are required to comply with certain financial and operating covenants under our debt agreements. Any failure to comply with those covenants could cause amounts borrowed to become immediately due and payable and/or prevent us from borrowing under the credit facility.

We are required to comply with specified financial and operating covenants under our debt agreements and to make payments under our debt, which limit our ability to operate our business as we otherwise might operate it. Our failure to comply with any of these covenants or to meet any debt payment obligations could result in an event of default which, if not cured or waived, would result in any amounts outstanding, including any accrued interest and/or unpaid fees, becoming immediately due and payable. We might not have enough working capital or liquidity to satisfy any repayment obligations if those obligations were accelerated. In addition, if we are not in compliance with the financial and operating covenants under the credit facility when we wish to borrow funds, we will be unable to borrow funds to pursue certain corporate initiatives, including strategic acquisitions, which could adversely affect our business and prospects.

15

 

V. Risks Related to Our Common Stock

Our stock price has been volatile, which may make it harder to resell shares at a favorable time and price.

Market prices for securities of software companies are generally volatile and are subject to significant fluctuations that may be unrelated or disproportionate to the operating performance of these companies. Accordingly, the trading prices and valuations of software companies’ stocks, and of ours, may not be predictable. Negative changes in the public’s perception of the prospects of software companies, or of PTC or the markets we serve, could depress our stock price regardless of our operating results.

Also, a large percentage of our common stock is held by institutional investors. Purchases and sales of our common stock by these investors could have a significant impact on the market price of our stock.

If our results of operations do not meet market or analysts’ expectations, our stock price could decline.

Our quarterly operating results fluctuate depending on many factors, including the effect of ASC 606 on revenue recognition for the on-premises software subscriptions we offer, variability in the timing of start dates for our subscription offerings, length of contracts, and renewals, and significant unexpected expenses in a quarter. Accordingly, our quarterly results are difficult to predict and we may be unable to confirm or adjust expectations with respect to our operating results for a quarter until that quarter has closed. If our quarterly operating results do not meet market or analysts’ expectations, our stock price could decline.

VI. General Risk Factors

Our international businesses present economic and operating risks, which could adversely affect our business and prospects.

We expect that our international operations will continue to expand and to account for a significant portion of our total revenue. Because we transact business in various foreign currencies, the volatility of foreign exchange rates has had and may in the future have a material adverse effect on our revenue, expenses, cash flows and operating results.

Other risks inherent in our international operations include, but are not limited to, the following:

•
difficulties in staffing and managing foreign sales and development operations;
•
exposure of our operations and employees to political instability and armed conflict in the countries and regions in which we operate, including Israel;
•
increased financial accounting and reporting burdens and complexities;
•
increased regulatory and compliance risks;
•
inadequate local infrastructure; and
•
greater difficulty in protecting our intellectual property.

16

 

We may have exposure to additional tax liabilities and our effective tax rate may increase or fluctuate, which could increase our income tax expense, reduce our net income, and increase our tax payment obligations.

As a multinational organization, we are subject to income taxes as well as non-income based taxes in the U.S. and in various foreign jurisdictions. Significant judgment is required in determining our worldwide income tax provision and other tax liabilities. In the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. Our tax returns are subject to review by various taxing authorities. Although we believe that our tax estimates are reasonable, the final determination of tax audits or tax disputes could be different from what is reflected in our reported income tax provisions and accruals.

Our effective tax rate and tax payment obligations can be adversely affected by several factors, many of which are outside of our control, including:

•
changes in tax laws (for example, the introduction of an amendment to Section 174 of the U.S. tax legislation), regulations, and interpretations in multiple jurisdictions in which we operate;
•
assessments, and any related tax interest or penalties, by taxing authorities;
•
changes in the relative proportions of revenues and income before taxes in the various jurisdictions in which we operate that have differing statutory tax rates;
•
changes to the financial accounting rules for income taxes;
•
unanticipated changes in tax rates; and
•
changes to a valuation allowance on net deferred tax assets, if any.

17

 

ITEM 1B. Unresolved Staff Comments

None.

Item 1C. Cybersecurity

We are subject to various cybersecurity risks in connection with our business. For more information on our cybersecurity related risks, see the section entitled “Risks Related to Our Business Operations and Industry” in Item 1A of this Annual Report.

Our Approach

PTC takes a holistic, multi-layered approach to cybersecurity and privacy that combines traditional Defense-in-Depth methods with next-generation Zero Trust principles. In today’s globally interconnected world, we consider every entry point on the attack surface critical, and we aim to secure the points under our control. In developing our cybersecurity risk management program, we are informed by industry benchmarks and standards, including the cybersecurity framework created by the National Institute of Standards and Technology (“NIST”). We also have various security-related certifications and authorizations, including ISO 27001, SOC 2 Type II and FedRAMP, for certain of our products and services.

People. PTC recognizes that technology alone cannot mitigate all security threats, so we focus on developing our most critical resource: our people. Security is the responsibility of everyone employed by PTC and is independent of departmental affiliation. PTC’s corporate cybersecurity awareness activities are combined with enterprise-wide and department-specific tools and mandatory employee training, providing everyone employed by PTC with the knowledge and resources to support our efforts to mitigate security threats.

Process. An educated workforce needs a governance framework to guide and monitor its activities. PTC has processes and policies in place to try to anticipate security risks and facilitate compliance with applicable contractual obligations, regulations and standards, as well as address any incidents or violations. PTC focuses on continuous improvement and is constantly maturing its processes to keep pace with the rapidly evolving cybersecurity threat landscape.

Technology. PTC seeks to automate these processes and remove the potential for human error to the extent feasible by implementing technology solutions. From fundamental IT security to development of our software products and keeping our customers’ data safe in the cloud, PTC aims to maintain a secure infrastructure that is continuously monitored for possible threats.

These three key elements of people, process, and technology are tightly interwoven to support our aim to secure our environments and data.

Governance

Cybersecurity is a risk area with oversight at the highest levels of the organization, including the Executive and Board Level. The overall operational program is led by the Cybersecurity Strategy Council, a cross-functional team of executives and subject matter experts, including our Chief Product Security Officer, Chief Information Security Officer and Chief Compliance Officer. The Cybersecurity Strategy Council oversees a “Three Lines Model” of Operations, Risk Monitoring and Oversight, and Audit, to effectively address cybersecurity, risk management and control. All Cybersecurity, Risk and Internal Audit functions report to the PTC Executive Leadership Team.

18

 

PTC’s Cybersecurity Program is supported by robust processes and procedures at all levels. Our matrixed cybersecurity organization is governed by industry-standard frameworks, and to ensure that they are executed, we involve the Executive Leadership Team, the Cybersecurity Strategy Council, and business unit security leads and cybersecurity analysts across the enterprise. We provide regular updates on our cybersecurity strategic plans, programs, and initiatives, and vulnerabilities and any applicable remediation efforts to the Cybersecurity Committee of the Board of Directors at its four regularly scheduled meetings per year. Our Incident Response Plans provide for notice, and continued updates, to the Cybersecurity Committee of applicable incidents on a timely basis. Ongoing program assessments are performed to monitor progress and identify opportunities for growth.

Risk Assessment

PTC conducts an annual cybersecurity maturity assessment. Periodically, we engage a third-party security consulting firm to conduct an Enterprise Security Maturity Assessment. This independent assessment provides a mechanism to benchmark our current risk profile and enables us to measure progress as we make program improvements. Identified cybersecurity risks are reviewed by the Cybersecurity Strategy Council, which ensures that risk tolerances are established and used to appropriately manage risks.

Third-Party Vendor Risk Management

Our Vendor Risk Management (VRM) program supports PTC in meeting its cybersecurity, privacy, regulatory and compliance obligations and managing risk associated with third-party vendors who have access to PTC IT systems and data. Prior to outsourcing or allowing third-party access to PTC or customer systems, IP, or data; risks associated with such activity are clearly identified and documented. The process of selecting a third-party vendor includes due diligence of the vendor service or product in question. Third-party companies using PTC facilities or accessing PTC’s IT Systems are subject to PTC’s VRM review and are required to demonstrate that proper security measures are in place before they have access to any PTC IT systems or data. All such vendors are to be approved by PTC’s VRM process and contractually bound to maintain appropriate cybersecurity technical and organization measures and to protect PTC’s data to which they may have access.

Incident Response

PTC maintains a formal Cybersecurity Incident Response Policy to address cybersecurity incidents. The Policy is tested on a regular basis, including a continuous improvement program involving periodic tabletop exercises. Cybersecurity incident handling is managed by individual organizations with cybersecurity responsibility and monitored/guided by applicable corporate functions. All Cybersecurity Incident Response Plans under the Policy are based on industry standards, such as the NIST Computer Security Incident Handling Guide – Special Publication 800-61.

Management’s Role in Assessing and Managing Our Risks from Cybersecurity Threats

Our Cybersecurity Program is overseen by executives on our Executive Leadership Team and managed by our Cybersecurity Strategy Council, including our Senior Vice President, Chief Information Security Officer (CISO), who reports to our Executive Vice President, Chief Digital Officer (CDO). Our CISO is responsible for day-to-day risk management activities, including staying informed about and monitoring prevention, detection, mitigation, and remediation efforts through regular communication and reporting from professionals in the information security team, and the use of technological tools and software. Our CDO is responsible for our broader IT program, which includes PTC’s ability to remediate and recover from a cybersecurity incident while reducing impacts to the business and operations. Our CDO and CISO regularly report directly to the Cybersecurity Committee of the Board of Directors on our Cybersecurity Program and efforts to prevent, detect, mitigate, and remediate issues. In addition, we have an escalation process in place to inform senior management and the Cybersecurity Committee and the Board of Directors of material issues.

19

 

Management Experience

Our CDO and CISO have extensive experience assessing and managing cybersecurity programs and cybersecurity risk. Our CDO joined PTC as Chief Digital Officer in January 2022 and is responsible for PTC’s global information technology (IT) team, overseeing PTC’s digital infrastructure and working with business leaders to guide PTC’s digital process optimization strategy. He has more than two decades of IT and operations leadership. Before joining PTC, he served as Global Vice President and Chief Information Officer for Avaya, where he led a globally-dispersed team of 1,200 IT professionals to support the entire global Avaya enterprise. Prior to Avaya, he held technology leadership roles at Arise Virtual Solutions Inc., Oracle, and Colorado College.

Our CISO joined PTC as Cyber Information Security Officer in April 2022 and, before joining PTC, was the Vice President, Information Technology, North America and Europe for Alorica, where he led Alorica’s transformation to a secure endpoint architecture for 90,000 global remote and hybrid employees.

ITEM 2. Properties

We currently have 75 office locations used in operations in the United States and internationally, predominately as sales and/or support offices and for research and development work. Of our total of approximately 1,060,000 square feet of leased facilities used in operations, approximately 401,000 square feet are located in the U.S., including approximately 250,000 square feet at our headquarters facility located in Boston, Massachusetts, and approximately 268,000 square feet are located in India, where a significant amount of our research and development is conducted.

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the Nasdaq Global Select Market under the symbol "PTC."

On September 30, 2024, the close of our fiscal year, and on November 12, 2024, our common stock was held by 884 and 877 shareholders of record, respectively.

ITEM 6. [Reserved]

20

 

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

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

Despite the overall demand environment, which has been challenging for many quarters now, ARR grew 14% (12% constant currency) to $2.25 billion as of the end of FY'24 compared to FY’23.

Cash provided by operating activities grew 23% to $750 million in FY'24 compared to FY'23. Free cash flow grew 25% to $736 million in FY'24 compared to FY'23. Our cash flow growth is attributable to solid top-line growth due to our subscription business model and operational discipline. Interest payments were $47 million higher in FY'24 compared to FY'23, mainly due to the payment of $30 million of imputed interest on a deferred acquisition payment associated with our 2023 acquisition of ServiceMax and incremental interest expense associated with borrowings in FY'23 and FY'24. We ended FY’24 with cash and cash equivalents of $266 million and gross debt of $1.75 billion, which debt carried an aggregate weighted average interest rate of 5.1%.

Revenue grew 10% (9% constant currency) in FY'24 compared to FY'23. Our acquisition of ServiceMax in early Q2'23 contributed to FY'24 revenue growth. Under ASC 606, the timing of revenue recognition for on-premises subscription revenue can vary significantly, impacting reported revenue and growth rates.

Results of Operations

The following table shows the 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 our ARR operating measure and 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. Our non-GAAP financial measures exclude the items described in Non-GAAP Financial Measures below. Investors should use our non-GAAP financial measures only in conjunction with our GAAP results.

21

 

For discussion of our FY'23 results and comparison to our FY'22 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 year ended September 30, 2023.

 

(Dollar amounts in millions, except per share data)

 

Year ended September 30,

 

 

Percent Change

 

 

 

2024

 

 

2023

 

 

Actual

 

 

Constant Currency(1)

 

ARR

 

$

2,254.7

 

 

$

1,978.6

 

 

 

14

%

 

 

12

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total recurring revenue(2)

 

$

2,134.0

 

 

$

1,907.9

 

 

 

12

%

 

 

12

%

Perpetual license

 

 

32.2

 

 

 

38.6

 

 

 

(17

)%

 

 

(16

)%

Professional services

 

 

132.2

 

 

 

150.5

 

 

 

(12

)%

 

 

(12

)%

Total revenue

 

 

2,298.5

 

 

 

2,097.1

 

 

 

10

%

 

 

9

%

Total cost of revenue

 

 

444.8

 

 

 

441.0

 

 

 

1

%

 

 

1

%

Gross margin

 

 

1,853.7

 

 

 

1,656.0

 

 

 

12

%

 

 

12

%

Operating expenses

 

 

1,265.6

 

 

 

1,197.6

 

 

 

6

%

 

 

6

%

Operating income

 

$

588.1

 

 

$

458.5

 

 

 

28

%

 

 

27

%

Non-GAAP operating income(1)

 

$

894.3

 

 

$

758.9

 

 

 

18

%

 

 

17

%

Operating margin

 

 

25.6

%

 

 

21.9

%

 

 

 

 

 

 

Non-GAAP operating margin(1)

 

 

38.9

%

 

 

36.2

%

 

 

 

 

 

 

Diluted earnings per share

 

$

3.12

 

 

$

2.06

 

 

 

 

 

 

 

Non-GAAP diluted earnings per share(1)

 

$

5.08

 

 

$

4.34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash provided by operating activities

 

$

750.0

 

 

$

610.9

 

 

 

 

 

 

 

Capital expenditures

 

 

(14.4

)

 

 

(23.8

)

 

 

 

 

 

 

Free cash flow

 

$

735.6

 

 

$

587.0

 

 

 

 

 

 

 

 

(1)
See Non-GAAP Financial Measures below for a reconciliation of our GAAP results to our non-GAAP financial measures and Impact of Foreign Currency Exchange on Results of Operations below for a description of how we calculate our results on a constant currency basis.
(2)
Recurring revenue is comprised of on-premises subscription, perpetual support, SaaS, and hosting services revenue.

Impact of Foreign Currency Exchange on Results of Operations

Approximately 50% of our revenue and 35% of our expenses are transacted in currencies other than the U.S. Dollar. Because we report our results of operations in U.S. Dollars, currency translation, particularly changes in the Euro, Yen, Shekel, and Rupee relative to the U.S. Dollar, affects our reported results. Changes in foreign currency exchange rates were a slight tailwind to reported income statement results in FY’24. ARR was positively impacted by improvements in currency exchange rates, particularly the Euro to U.S. Dollar exchange rate, as of September 30, 2024 compared to September 30, 2023.

The results of operations in the table above, and the tables and discussions below about revenue by line of business and product group present both actual percentage changes year over year and percentage changes on a constant currency basis. Our constant currency disclosures are calculated by multiplying the results in local currency for FY'24 and FY'23 by the exchange rates in effect on September 30, 2023. If FY'24 reported results were converted into U.S. Dollars using the rates in effect as of September 30, 2023, ARR would have been lower by $47 million, revenue would have been lower by $22 million, and expenses would have been lower by $10 million. If FY'23 reported results were converted into U.S. Dollars using the rates in effect as of September 30, 2023, ARR would have been the same, revenue would have been lower by $17 million, and expenses would have been lower by $12 million.

22

 

Revenue

Under ASC 606, the volume, mix, and duration of contract types (support, SaaS, on-premises subscription) starting or renewing in any given period can have a material impact on revenue in the period, and as a result can impact the comparability of reported revenue period over period. We recognize revenue for the license portion of on-premises subscription contracts up front when we deliver the licenses to the customer, typically on the start date, and we recognize revenue on the support portion of on-premises subscription contracts and stand-alone support contracts ratably over the term. We continue to convert existing support contracts to on-premises subscriptions, resulting in a shift to up-front recognition of on-premises subscription license revenue in the period converted compared to ratable recognition for a perpetual support contract. Revenue from our cloud services (primarily SaaS) contracts is recognized ratably. We expect that over time a higher portion of our revenue will be recognized ratably as we expand our SaaS offerings, release additional cloud functionality into our products, and migrate customers from on-premises subscriptions to SaaS. Given the different mix, duration and volume of new and renewing contracts in any period, year-over-year or sequential revenue can vary significantly.

Revenue by Line of Business

 

(Dollar amounts in millions)

 

Year ended September 30,

 

 

Percent Change

 

 

 

2024

 

 

2023

 

 

Actual

 

 

Constant
Currency

 

License(1)

 

$

806.9

 

 

$

747.0

 

 

 

8

%

 

 

8

%

Support and cloud services(2)

 

 

1,359.4

 

 

 

1,199.5

 

 

 

13

%

 

 

13

%

Software revenue

 

 

2,166.2

 

 

 

1,946.6

 

 

 

11

%

 

 

11

%

Professional services

 

 

132.2

 

 

 

150.5

 

 

 

(12

)%

 

 

(12

)%

Total revenue

 

$

2,298.5

 

 

$

2,097.1

 

 

 

10

%

 

 

9

%

 

(1)
Includes perpetual licenses and the license portion of on-premises subscription sales.
(2)
Includes support on perpetual licenses, the support portion of on-premises subscription sales, SaaS, and hosting services.

Software revenue growth in FY'24 was driven by PLM, which included the contribution from ServiceMax (acquired in early Q2'23), and CAD.

License revenue growth in FY'24 was mainly driven by CAD and PLM growth in Europe and Asia Pacific, offset by lower license revenue in the Americas, particularly in PLM. A higher proportion of sales in FY'24 were SaaS, which adversely affected license revenue growth in the Americas and Europe.

Support and cloud services revenue growth in FY'24 was mainly driven by PLM (which included contribution from ServiceMax) in the Americas and Europe.

Professional services revenue decreased in FY'24 as we continue to execute on our strategy of leveraging partners to deliver services rather than contracting to deliver services ourselves.

23

 

Software Revenue by Product Group

 

(Dollar amounts in millions)

 

Year ended September 30,

 

 

Percent Change

 

 

 

2024

 

 

2023

 

 

Actual

 

 

Constant
Currency

 

PLM

 

$

1,333.4

 

 

$

1,186.0

 

 

 

12

%

 

 

12

%

CAD

 

 

832.8

 

 

 

760.6

 

 

 

9

%

 

 

10

%

Software revenue

 

$

2,166.2

 

 

$

1,946.6

 

 

 

11

%

 

 

11

%

PLM software revenue growth in FY'24 was driven by growth in Europe and the contribution from ServiceMax (acquired in early Q2'23). Year-over-year PLM software revenue growth for FY'24 excluding Q1'24 ServiceMax revenue would have been 9% (9% constant currency).

PLM ARR grew 15% (13% constant currency) from September 30, 2023 to September 30, 2024.

CAD software revenue growth in FY'24 was primarily driven by revenue growth in Europe and Asia Pacific.

CAD ARR grew 13% (10% constant currency) from September 30, 2023 to September 30, 2024.

Gross Margin

 

(Dollar amounts in millions)

 

Year ended September 30,

 

 

 

 

 

 

2024

 

 

2023

 

 

Percent Change

 

License gross margin

 

$

760.0

 

 

$

693.8

 

 

 

10

%

License gross margin percentage

 

 

94

%

 

 

93

%

 

 

 

Support and cloud services gross margin

 

$

1,084.8

 

 

$

954.5

 

 

 

14

%

Support and cloud services gross margin percentage

 

 

80

%

 

 

80

%

 

 

 

Professional services gross margin

 

$

8.9

 

 

$

7.7

 

 

 

15

%

Professional services gross margin percentage

 

 

7

%

 

 

5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross margin

 

$

1,853.7

 

 

$

1,656.0

 

 

 

12

%

Total gross margin percentage

 

 

81

%

 

 

79

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP gross margin(1)

 

$

1,913.6

 

 

$

1,712.6

 

 

 

12

%

Non-GAAP gross margin percentage(1)

 

 

83

%

 

 

82

%

 

 

 

 

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

License gross margin grew at a higher rate than license revenue in FY'24 due mainly to lower intangible amortization expense. Excluding intangible amortization expense, license gross margin percentage was consistent year over year.

Support and cloud services gross margin growth in FY'24 was in line with support and cloud services revenue growth. Cost of support and cloud services in FY'24 grew at a similar rate to revenue, driven by higher intangible amortization expense, compensation expense, and royalty expense.

Professional services gross margin increased in FY’24 compared to FY’23, primarily due to lower outside service costs, partially offset by decreases in professional services revenue. The decreases in professional services revenue and costs are due to our continued execution on our strategy of leveraging partners to deliver services rather than contracting to deliver services ourselves.

24

 

Operating Expenses

 

(Dollar amounts in millions)

 

Year ended September 30,

 

 

 

 

 

 

2024

 

 

2023

 

 

Percent Change

 

Sales and marketing

 

$

559.0

 

 

$

530.1

 

 

 

5

%

% of total revenue

 

 

24

%

 

 

25

%

 

 

 

Research and development

 

 

433.0

 

 

 

394.4

 

 

 

10

%

% of total revenue

 

 

19

%

 

 

19

%

 

 

 

General and administrative

 

 

232.4

 

 

 

233.5

 

 

 

(0

)%

% of total revenue

 

 

10

%

 

 

11

%

 

 

 

Amortization of acquired intangible assets

 

 

42.0

 

 

 

40.0

 

 

 

5

%

% of total revenue

 

 

2

%

 

 

2

%

 

 

 

Restructuring and other credits, net

 

 

(0.8

)

 

 

(0.5

)

 

 

74

%

% of total revenue

 

 

0

%

 

 

0

%

 

 

 

Total operating expenses

 

$

1,265.6

 

 

$

1,197.6

 

 

 

6

%

Total headcount increased by 4% between September 30, 2023 and September 30, 2024.

Operating expenses in FY'24 compared to FY'23 increased primarily due to the following:

•
a $47 million increase in compensation and benefits expense (excluding stock-based compensation), driven by higher headcount and our Q2'23 acquisition of ServiceMax, as well as higher health insurance costs in the U.S.;
•
a $16 million increase in stock-based compensation expense, driven in part by acceleration of expense on equity grants held by our former chief executive and chief operating officers (which expense is included in General and administrative and Sales and marketing), as well as the impact of an FY'24 change in eligibility for continued vesting upon retirement for a subset of prospective equity grants;
•
a $14 million increase in outside services, driven by consulting services related to corporate initiatives; and
•
a $10 million increase in software subscription related costs;

partially offset by:

•
a $16 million decrease in acquisition and transaction-related costs, largely driven by costs associated with our Q2'23 acquisition of ServiceMax; and
•
a $12 million decrease in marketing expense, primarily due to not holding our LiveWorx event in FY'24.

25

 

Interest Expense

 

(Dollar amounts in millions)

 

Year ended September 30,

 

 

 

 

 

 

2024

 

 

2023

 

 

Percent Change

 

Interest expense

 

$

(119.7

)

 

$

(129.4

)

 

 

(8

)%

 

Interest expense includes interest on our credit facility loans and our Senior Notes due 2025 and 2028. Interest expense in FY'23 also included $30 million of interest on a deferred acquisition payment associated with the ServiceMax acquisition. The decrease in interest expense was driven by the lower aggregate average of debt and deferred acquisition payment liability balances outstanding in FY'24 compared to FY'23.

Other Income

 

(Dollar amounts in millions)

 

Year ended September 30,

 

 

 

 

 

 

2024

 

 

2023

 

 

Percent Change

 

Interest income

 

$

4.4

 

 

$

5.4

 

 

 

(19

)%

Other expense, net

 

 

(3.8

)

 

 

(1.9

)

 

 

(103

)%

Other income, net

 

$

0.6

 

 

$

3.5

 

 

 

(84

)%

Other income, net was lower in FY'24 compared to FY'23 due to a $2.0 million impairment loss related to an available-for-sale debt security.

Income Taxes

 

(Dollar amounts in millions)

 

Year ended September 30,

 

 

 

 

 

 

2024

 

 

2023

 

 

Percent Change

 

Income before income taxes

 

$

469.0

 

 

$

332.6

 

 

 

41

%

Provision for income taxes

 

 

92.6

 

 

 

87.0

 

 

 

6

%

Effective income tax rate

 

 

20

%

 

 

26

%

 

 

 

The effective tax rate for FY’24 was lower than the effective rate for FY’23. In FY'24, the rate was impacted by a U.S. Tax Court ruling in Varian Medical Systems, Inc. v. Commissioner, issued on August 26, 2024. The ruling related to the U.S. taxation of deemed foreign dividends in the transition year of the Tax Act (our fiscal 2018). As a result, we recorded a $14.4 million benefit for additional foreign tax credits that have become available to us. Additionally, our rate included a net benefit of $4.4 million for the effects of Internal Revenue Service (IRS) procedural guidance requiring consent for previously automatic changes of accounting method. The IRS procedural guidance change significantly increased our estimated taxable income in the year ended September 30, 2024, resulting in an increase to the estimated tax benefit for the deductions associated with Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income. The benefit from this IRS procedural guidance change will reverse in a future fiscal period if we receive IRS consent for a change in the treatment of these deductions. These benefits were offset by a tax expense of $4.6 million related to a tax reserve in a foreign jurisdiction. FY'23 included tax expense of $21.8 million related to an uncertain tax position regarding transfer pricing in a foreign jurisdiction where we are currently under audit. Our FY'23 rate was also impacted by tax expense of $6.3 million related to non-deductible imputed interest related to the deferred payment on the acquisition of ServiceMax.

In the normal course of business, PTC and its subsidiaries are examined by various taxing authorities, including the IRS in the United States. 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 including Germany, Ireland, and Italy. Audits by tax authorities typically involve examination of the deductibility of certain permanent items, transfer pricing, limitations on net operating losses, and tax credits.

26

 

Liquidity and Capital Resources

 

(in millions)

 

September 30,

 

 

 

2024

 

 

2023

 

Cash and cash equivalents

 

$

265.8

 

 

$

288.1

 

Restricted cash

 

 

0.7

 

 

 

0.7

 

Total

 

$

266.5

 

 

$

288.8

 

 

(in millions)

 

Year ended September 30,

 

 

 

2024

 

 

2023

 

Net cash provided by operating activities

 

$

750.0

 

 

$

610.9

 

Net cash used in investing activities

 

$

(124.8

)

 

$

(866.1

)

Net cash provided by (used in) financing activities

 

$

(650.7

)

 

$

268.3

 

 

Cash, Cash Equivalents and Restricted Cash

We invest our cash with highly rated financial institutions. Cash and cash equivalents include highly liquid investments with original maturities of three months or less.

Due to the stability of our subscription model and consistency of annual, up-front billing, we aim to maintain a low cash balance. A significant portion of our cash is generated and held outside the U.S. As of September 30, 2024, we had cash and cash equivalents of $36 million in the U.S., $127 million in Europe, $86 million in Asia Pacific (including India), and $17 million in other non-U.S. countries. We have substantial cash requirements in the U.S. but believe that the combination of our existing U.S. cash and cash equivalents, cash available under our revolving credit facility, future U.S. operating cash flows, and our ability to repatriate cash to the U.S. 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 increased by $139.1 million in FY'24 compared to FY'23. This increase was driven by higher collections (including contribution from ServiceMax), which were partially offset by higher salary-related and interest payments. Interest payments in FY'24 were approximately $47.2 million higher than in FY'23 and include the payment of $30.0 million of imputed interest on the ServiceMax deferred acquisition payment.

Cash Used in Investing Activities

Cash used in investing activities in FY'24 was driven by the acquisition of pure-systems for $93.5 million in Q1'24. Cash used in investing activities in FY'23 was driven by a payment of $828.2 million in Q2'23 related to the acquisition of ServiceMax. Capital expenditures in FY'24 were lower than in FY'23 as we invest more in cloud-based rather than on-premises software.

Cash Provided by (Used in) Financing Activities

 

Cash used in financing activities in FY'24 included $620.0 million paid to settle a deferred acquisition payment associated with our acquisition of ServiceMax, Q1'24 borrowings of $739.8 million to fund that payment and the pure-systems acquisition, and subsequent net payments on debt of $693.9 million.

Cash provided by financing activities in FY’23 was primarily related to net new borrowings of $771.0 million (a $500.0 million term loan and a $271.0 million incremental revolving line) to fund the ServiceMax acquisition and net repayments of $428.0 million on the new revolving facility.

27

 

Outstanding Debt

(in millions)

 

September 30,

 

 

 

2024

 

 

2023

 

4.000% Senior Notes due 2028

 

$

500.0

 

 

$

500.0

 

3.625% Senior Notes due 2025

 

 

500.0

 

 

 

500.0

 

Credit facility revolver line

 

 

262.0

 

 

 

202.0

 

Credit facility term loan

 

 

490.6

 

 

 

500.0

 

Total debt

 

 

1,752.6

 

 

 

1,702.0

 

Unamortized debt issuance costs for the Senior Notes

 

 

(4.1

)

 

 

(6.2

)

Total debt, net of issuance costs

 

$

1,748.6

 

 

$

1,695.8

 

 

 

 

 

 

 

 

Undrawn under credit facility revolver

 

$

988.0

 

 

$

1,048.0

 

Undrawn under credit facility revolver available to borrow

 

$

972.1

 

 

$

384.6

 

 

As of September 30, 2024, we were in compliance with all financial and operating covenants of the credit facility and the Senior Note indentures. As of September 30, 2024, the annual rates for borrowings outstanding under the credit facility revolver line and term loan were 7.0% and 6.9%, respectively.

In addition to the debt shown in the above table, as of September 30, 2023, we had a $620 million deferred acquisition payment liability related to the fair value of the $650 million installment paid in October 2023 for the ServiceMax acquisition. Of the $650 million paid, $620 million was recorded as a financing outflow and the $30 million of imputed interest was recorded as an operating cash outflow.

Our credit facility and our Senior Notes, including the financial and operating covenants and limitations on the payment of dividends, are described in Note 9. Debt of Notes to the Consolidated Financial Statements in this Annual Report.

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 $2 billion of our common stock in the period October 1, 2024 through September 30, 2027. 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.

Our long-term goal is to return approximately 50% of our free cash flow to shareholders via share repurchases, while also taking into consideration the interest rate environment and strategic initiatives and acquisitions, which could cause us to reduce, suspend, or cease repurchases. We currently intend to repurchase approximately $300 million of our common stock in FY'25.

Expectations for 2025

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 through at least the next twelve months, including redemption of the 3.625% Senior Notes in February 2025, and to meet our known long-term capital requirements.

Our expected uses and sources of cash could change, our cash position could be reduced, and we could incur additional debt obligations if we retire other 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.

28

 

Contractual Obligations

At September 30, 2024, our future contractual obligations were related to debt, leases, pension liabilities, unrecognized tax benefits, and purchase obligations. See Note 9. Debt, Note 17. 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 $163.2 million, with $88.2 million expected to be paid in FY'25 and $75.0 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 or 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, 2024 Consolidated Balance Sheet.

As of September 30, 2024, we had letters of credit and bank guarantees outstanding of approximately $15.6 million (of which $0.6 million was collateralized).

29

 

Operating Measure

ARR

ARR (Annual Run Rate) represents the annualized value of our portfolio of active subscription software, SaaS, hosting, and support contracts as of the end of the reporting period. We calculate ARR as follows:

•
We consider a contract to be active when the product or service contractual term commences (the “start date”) until the right to use the product or service ends (the “expiration date”). Even if the contract with the customer is executed before the start date, the contract will not count toward ARR until the customer right to receive the benefit of the products or services has commenced.
•
For contracts that include annual values that increase over time, which we refer to as ramp contracts, we include in ARR only the annualized value of components of the contract that are considered active as of the date of the ARR calculation. We do not include any future committed increases in the contract value as of the date of the ARR calculation.
•
As ARR includes only contracts that are active at the end of the reporting period, ARR does not reflect assumptions or estimates regarding future customer renewals or non-renewals.
•
Active contracts are annualized by dividing the total active contract value by the contract duration in days (expiration date minus start date), then multiplying that by 365 days (or 366 days for leap years).

We believe ARR is a valuable operating measure to assess the health of a subscription business because it is aligned with the amount that we invoice the customer on an annual basis. We generally invoice customers annually for the current year of the contract. A customer with a one-year contract will typically be invoiced for the total value of the contract at the beginning of the contractual term, while a customer with a multi-year contract will be invoiced for each annual period at the beginning of each year of the contract.

ARR increases by the annualized value of active contracts that commence in a reporting period and decreases by the annualized value of contracts that expire in the reporting period.

As ARR is not annualized recurring revenue, it is not calculated based on recognized or unearned revenue and is not affected by variability in the timing of revenue under ASC 606, particularly for on-premises license subscriptions where a substantial portion of the total value of the contract is recognized as revenue at a point in time upon the later of when the software is made available, or the subscription term commences.

ARR should be viewed independently of recognized and unearned revenue and is not intended to be combined with, or to replace, either of those items. Investors should consider our ARR operating measure only in conjunction with our GAAP financial results.

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
•
non-GAAP gross margin—GAAP gross margin
•
non-GAAP operating income—GAAP operating income
•
non-GAAP operating margin—GAAP operating margin

30

 

•
non-GAAP net income—GAAP net income
•
non-GAAP diluted earnings per share—GAAP diluted earnings 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. Free cash flow is not a measure of cash available for discretionary expenditures.

The non-GAAP financial measures other than free cash flow exclude, as applicable: stock-based compensation expense; amortization of acquired intangible assets; acquisition and transaction-related charges included in General and administrative expenses; Restructuring and other charges (credits), net; non-operating charges (credits), net; and income tax adjustments.

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 and transaction-related 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 and transaction-related charges. Other transactional charges include third-party costs related to structuring merger and acquisition transactions outside of ordinary business operations. We do not include these costs when reviewing our operating results internally. The occurrence and amount of these costs varies depending on the timing and size of acquisitions and transactions.

Restructuring and other charges (credits), 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; severance charges resulting from substantial employee reduction actions; 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), net are gains or losses associated with sales or changes in value of assets or liabilities that are generally investing or financing in nature and are not indicative of our ongoing ordinary operating activities. In FY'24, we recognized an impairment charge related to an available-for-sale debt security. In FY'23, we recognized a financing charge for a debt commitment agreement associated with our acquisition of ServiceMax.

Income tax adjustments include the tax impact of the items above. Additionally, we exclude other material tax items that we do not include when reviewing our operating results internally. For example, in FY'24, adjustments include a charge related to a tax reserve related to prior years in a foreign jurisdiction. Adjustments in FY’23 include a charge related to an uncertain tax position in a foreign jurisdiction.

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)

31

 

for managing our business and evaluating our performance. We believe that providing non-GAAP financial measures also affords investors a view of our operating results that may be more easily compared to the results of other companies in our industry that use similar financial measures to supplement their GAAP results.

The items excluded from the non-GAAP financial measures often have a material impact on our financial results, certain of those items are recurring, and other such items often recur. Accordingly, the non-GAAP financial measures included in this 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,

 

 

 

2024

 

 

2023

 

GAAP gross margin

 

$

1,853.7

 

 

$

1,656.0

 

Stock-based compensation

 

 

21.4

 

 

 

20.9

 

Amortization of acquired intangible assets included in cost of revenue

 

 

38.5

 

 

 

35.7

 

Non-GAAP gross margin

 

$

1,913.6

 

 

$

1,712.6

 

GAAP operating income

 

$

588.1

 

 

$

458.5

 

Stock-based compensation

 

 

223.5

 

 

 

206.5

 

Amortization of acquired intangible assets

 

 

80.5

 

 

 

75.7

 

Acquisition and transaction-related charges

 

 

3.1

 

 

 

18.7

 

Restructuring and other credits, net

 

 

(0.8

)

 

 

(0.5

)

Non-GAAP operating income

 

$

894.3

 

 

$

758.9

 

GAAP net income

 

$

376.3

 

 

$

245.5

 

Stock-based compensation

 

 

223.5

 

 

 

206.5

 

Amortization of acquired intangible assets

 

 

80.5

 

 

 

75.7

 

Acquisition and transaction-related charges

 

 

3.1

 

 

 

18.7

 

Restructuring and other credits, net

 

 

(0.8

)

 

 

(0.5

)

Non-operating charges, net(1)

 

 

2.0

 

 

 

5.1

 

Income tax adjustments(2)

 

 

(71.2

)

 

 

(33.5

)

Non-GAAP net income

 

$

613.4

 

 

$

517.6

 

GAAP diluted earnings per share

 

$

3.12

 

 

$

2.06

 

Stock-based compensation

 

 

1.85

 

 

 

1.73

 

Amortization of acquired intangible assets

 

 

0.67

 

 

 

0.63

 

Acquisition and transaction-related charges

 

 

0.03

 

 

 

0.16

 

Restructuring and other credits, net

 

 

(0.01

)

 

 

—

 

Non-operating charges, net(1)

 

 

0.02

 

 

 

0.04

 

Income tax adjustments(2)

 

 

(0.59

)

 

 

(0.28

)

Non-GAAP diluted earnings per share

 

$

5.08

 

 

$

4.34

 

 

 

 

 

 

 

Cash provided by operating activities

 

$

750.0

 

 

$

610.9

 

Capital expenditures

 

 

(14.4

)

 

 

(23.8

)

Free cash flow

 

$

735.6

 

 

$

587.0

 

 

(1)
In FY'24, we recognized an impairment loss of $2.0 million on an available-for-sale debt security. In FY'23, we recognized $4.2 million of financing charges for a debt commitment agreement associated with our acquisition of ServiceMax.
(2)
Income tax adjustments reflect the tax effects of non-GAAP adjustments which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments listed above. In FY'24, adjustments exclude a tax expense of $4.4 million or $0.04 per share for a tax reserve related to prior years in a foreign jurisdiction. In FY'23, non-GAAP expense excludes $21.8 million or $0.18 per share related to uncertain tax positions in a foreign jurisdiction.

Operating margin impact of non-GAAP adjustments:

 

 

 

Year ended September 30,

 

 

 

2024

 

 

2023

 

GAAP operating margin

 

 

25.6

%

 

 

21.9

%

Stock-based compensation

 

 

9.7

%

 

 

9.8

%

Amortization of acquired intangible assets

 

 

3.5

%

 

 

3.6

%

Acquisition and transaction-related charges

 

 

0.1

%

 

 

0.9

%

Restructuring and other credits, net

 

 

(—

)%

 

 

(—

)%

Non-GAAP operating margin

 

 

38.9

%

 

 

36.2

%

 

32

 

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 r