Edgar Filing: PTC INC.

PTC 04/04/2015-Q2

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________

FORM 10-Q

____________________________________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 4, 2015

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)

140 Kendrick Street, Needham, MA 02494

(Address of principal executive offices, including zip code)

(781) 370-5000

(Registrant’s telephone number, including area code)

____________________________________________________

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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ 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	þ	Accelerated filer	¨	Non-accelerated filer	¨	Smaller reporting company	¨
				(Do not check if a smaller reporting company)

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

There were 114,986,644 shares of our common stock outstanding on May 7, 2015.

PTC Inc.

INDEX TO FORM 10-Q

For the Quarter Ended April 4, 2015



		Page Number
Part I—FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Financial Statements:
	Consolidated Balance Sheets as of April 4, 2015 and September 30, 2014	3
	Consolidated Statements of Operations for the three and six months ended April 4, 2015 and March 29, 2014	4
	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended April 4, 2015 and March 29, 2014	5
	Consolidated Statements of Cash Flows for the six months ended April 4, 2015 and March 29, 2014	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	42


Part II—OTHER INFORMATION
Item 1A.	Risk Factors	44
Item 6.	Exhibits	44
Signature		45

PART I—FINANCIAL INFORMATION


ITEM 1.	UNAUDITED CONDENSED FINANCIAL STATEMENTS

PTC Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(unaudited)



	April 4, 2015			September 30, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	267,815		$	293,654
Accounts receivable, net of allowance for doubtful accounts of $1,236 and $1,622 at April 4, 2015 and September 30, 2014, respectively	201,379			235,688
Prepaid expenses and other current assets	203,726			171,526
Deferred tax assets	33,332			31,299
Total current assets	706,252			732,167
Property and equipment, net	65,191			67,783
Goodwill	984,953			1,012,527
Acquired intangible assets, net	301,443			336,873
Deferred tax assets	20,639			8,958
Other assets	30,152			41,646
Total assets	$	2,108,630		$	2,199,954
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	13,879		$	19,802
Accrued expenses and other current liabilities	58,986			57,536
Accrued compensation and benefits	132,008			144,875
Accrued income taxes	14,316			9,329
Deferred tax liabilities	183			854
Current portion of long term debt	37,500			25,000
Deferred revenue	403,864			369,271
Total current liabilities	660,736			626,667
Long term debt, net of current portion	493,125			586,875
Deferred tax liabilities	30,880			36,601
Deferred revenue	16,963			13,273
Other liabilities	52,706			82,649
Total liabilities	1,254,410			1,346,065
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000 shares authorized; none issued	—			—
Common stock, $0.01 par value; 500,000 shares authorized; 114,985 and 115,025 shares issued and outstanding at April 4, 2015 and September 30, 2014, respectively	1,150			1,150
Additional paid-in capital	1,599,646			1,597,277
Accumulated deficit	(614,495		)	(650,171		)
Accumulated other comprehensive loss	(132,081		)	(94,367		)
Total stockholders’ equity	854,220			853,889
Total liabilities and stockholders’ equity	$	2,108,630		$	2,199,954

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

PTC Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	Three months ended						Six months ended
	April 4, 2015			March 29, 2014			April 4, 2015			March 29, 2014
Revenue:
License and subscription solutions	$	85,952		$	88,545		$	164,923		$	171,411
Support	168,727			166,249			350,356			336,391
Total software revenue	254,679			254,794			515,279			507,802
Professional services	59,440			73,906			124,282			145,823
Total revenue	314,119			328,700			639,561			653,625
Cost of revenue:
Cost of license and subscription solutions revenue	13,190			10,889			26,519			21,208
Cost of support revenue	21,328			21,564			42,724			41,480
Total cost of software revenue	34,518			32,453			69,243			62,688
Cost of professional services revenue	51,536			61,344			109,753			124,065
Total cost of revenue	86,054			93,797			178,996			186,753
Gross margin	228,065			234,903			460,565			466,872
Operating expenses:
Sales and marketing	82,024			85,934			169,631			170,172
Research and development	60,158			55,631			121,255			108,704
General and administrative	34,235			34,140			71,242			65,071
Amortization of acquired intangible assets	9,173			7,985			18,586			15,774
Restructuring charges	38,487			—			38,232			1,067
Total operating expenses	224,077			183,690			418,946			360,788
Operating income	3,988			51,213			41,619			106,084
Interest and other income (expense), net	(3,601		)	(2,692		)	(6,825		)	(4,446		)
Income before income taxes	387			48,521			34,794			101,638
(Benefit) Provision for income taxes	(5,005		)	4,765			(882		)	18,225
Net income	$	5,392		$	43,756		$	35,676		$	83,413
Earnings per share—Basic	$	0.05		$	0.37		$	0.31		$	0.70
Earnings per share—Diluted	$	0.05		$	0.36		$	0.31		$	0.69
Weighted average shares outstanding—Basic	114,944			118,978			115,147			118,973
Weighted average shares outstanding—Diluted	115,922			120,698			116,479			120,916

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

PTC Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)



	Three months ended						Six months ended
	April 4, 2015			March 29, 2014			April 4, 2015			March 29, 2014
Net income	$	5,392		$	43,756		$	35,676		$	83,413
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment, net of tax of $0 for each period	(22,464		)	(2,487		)	(42,896		)	(850		)
Amortization of net actuarial pension loss included in net income, net of tax of $0.1 million and $0.3 million in the second quarter of 2015 and 2014, respectively, and $0.3 million and $0.6 million in the first six months of 2015 and 2014, respectively	1,026			525			2,078			1,048
Change in unamortized pension loss during the period related to changes in foreign currency	2,183			(3		)	3,104			(206		)
Total other comprehensive loss	(19,255		)	(1,965		)	(37,714		)	(8		)
Comprehensive income (loss)	$	(13,863	)	$	41,791		$	(2,038	)	$	83,405

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

PTC Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



	Six months ended
	April 4, 2015			March 29, 2014
Cash flows from operating activities:
Net income	$	35,676		$	83,413
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	42,205			38,273
Stock-based compensation	24,064			25,330
Excess tax benefits from stock-based awards	(163		)	(8,092		)
Other non-cash items, net	(1		)	626
Changes in operating assets and liabilities, excluding the effects of acquisitions:
Accounts receivable	22,711			16,737
Accounts payable, accrued expenses and other current liabilities	(9,976		)	(3,346		)
Accrued compensation and benefits	(7,222		)	(34,285		)
Deferred revenue	32,200			29,683
Accrued and deferred income taxes	(16,565		)	5,879
Other current assets and prepaid expenses	(4,942		)	(2,193		)
Other noncurrent assets and liabilities	(12,363		)	(5,061		)
Net cash provided by operating activities	105,624			146,964
Cash flows from investing activities:
Additions to property and equipment	(14,107		)	(10,342		)
Purchases of investments	(1,000		)	—
Acquisitions of businesses, net of cash acquired	180			(111,519		)
Net cash used by investing activities	(14,927		)	(121,861		)
Cash flows from financing activities:
Borrowings under credit facility	35,000			474,375
Repayments of borrowings under credit facility	(116,250		)	(414,375		)
Repurchases of common stock	—			(39,965		)
Proceeds from issuance of common stock	6			716
Excess tax benefits from stock-based awards	163			8,092
Credit facility origination costs	—			(4,120		)
Payments of withholding taxes in connection with vesting of stock-based awards	(21,864		)	(21,637		)
Net cash (used) provided by financing activities	(102,945		)	3,086
Effect of exchange rate changes on cash and cash equivalents	(13,591		)	368
Net (decrease) increase in cash and cash equivalents	(25,839		)	28,557
Cash and cash equivalents, beginning of period	293,654			241,913
Cash and cash equivalents, end of period	$	267,815		$	270,470
Supplemental disclosure of non-cash investing activities:
Fair value of contingent consideration recorded for acquisition	$	—		$	13,048

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

PTC Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

General

The accompanying unaudited condensed consolidated financial statements include the accounts of PTC Inc. and its wholly owned subsidiaries and have been prepared by management in accordance with accounting principles generally accepted in the United States of America and in accordance with the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. While we believe that the disclosures presented are adequate in order to make the information not misleading, these unaudited quarterly financial statements should be read in conjunction with our annual consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair statement of our financial position, results of operations and cash flows at the dates and for the periods indicated. Unless otherwise indicated, all references to a year mean our fiscal year, which ends on September 30. The September 30, 2014 consolidated balance sheet included herein is derived from our audited consolidated financial statements.

The results of operations for the six months ended April 4, 2015 are not necessarily indicative of the results expected for the remainder of the fiscal year.

Reclassifications

Through 2014, we classified revenue in three categories: 1) license; 2) service; and 3) support. Effective with the beginning of the first quarter of 2015, we are reporting revenue as follows: 1) license and subscription solutions; 2) support; and 3) professional services. License and subscription solutions revenue includes perpetual license revenue, subscription revenue and cloud services revenue. Cloud service offerings were previously reflected in service revenue and cost of service revenue. Consulting and training service revenue and consulting and training cost of service revenue are now referred to as professional services revenue and cost of professional services revenue in the accompanying Consolidated Statements of Operations. The following revenue and costs have been reclassified in the accompanying Consolidated Statements of Operations for the three and six months ended March 29, 2014 to conform to the current period presentation.



	Three months ended March 29, 2014		Six months ended March 29, 2014
Reclassifications within revenue	(in millions)
From Services to L&SS	$	3.3	$	6.9
From Support to L&SS	0.1		0.1
	$	3.4	$	7.0
Reclassifications within cost of revenue
From Services to L&SS	$	2.8	$	5.6

Revenue Recognition

Our sources of revenue include: (1) license and subscription solutions, (2) support and (3) professional services. We record revenues in accordance with the guidance provided by ASC 985-605, Software-Revenue Recognition when the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred (generally, FOB shipping point or electronic distribution), (3) the fee is fixed or determinable, and (4) collection is probable. We exercise judgment and use estimates in connection with determining the amounts of software license and services revenues to be recognized in each accounting period. Our primary judgments involve the following:


•	determining whether collection is probable;


•	assessing whether the fee is fixed or determinable;


•	determining whether service arrangements, including modifications and customization of the underlying software, are not essential to the functionality of the licensed software and thus would result in the revenue for license and service elements of an agreement being recorded separately; and


•	determining the fair value of services and support elements included in multiple-element arrangements, which is the basis for allocating and deferring revenue for such services and support.

Our software is distributed primarily through our direct sales force. In addition, we have an indirect distribution channel through alliances with resellers. Revenue arrangements with resellers are recognized on a sell-through basis; that is, when we deliver the product to the end-user customer. We record consideration given to a reseller as a reduction of revenue to the extent we have recorded revenue from the reseller. We do not offer contractual rights of return, stock balancing, or price protection to our resellers, and actual product returns from them have been insignificant to date. As a result, we do not maintain reserves for reseller product returns.

At the time of each sale transaction, we must make an assessment of the collectability of the amount due from the customer. Revenue is only recognized at that time if management deems that collection is probable. In making this assessment, we consider customer credit-worthiness and historical payment experience. At that same time, we assess whether fees are fixed or determinable and free of contingencies or significant uncertainties. In assessing whether the fee is fixed or determinable, we consider the payment terms of the transaction, including transactions with payment terms that extend beyond our customary payment terms, and our collection experience in similar transactions without making concessions, among other factors. We have periodically provided financing to credit-worthy customers with payment terms up to 24 months. If the fee is determined not to be fixed or determinable, revenue is recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. Our software license arrangements generally do not include customer acceptance provisions. However, if an arrangement includes an acceptance provision, we record revenue only upon the earlier of (1) receipt of written acceptance from the customer or (2) expiration of the acceptance period.

Generally, our contracts are accounted for individually. However, when contracts are closely interrelated and dependent on each other, it may be necessary to account for two or more contracts as one to reflect the substance of the group of contracts.

License and Subscription Solutions

License and subscription solutions revenue includes revenue from three primary sources: (1) sales of perpetual licenses, (2) subscription-based licenses, and (3) cloud services.

Under perpetual license arrangements, we generally recognize license revenue up front upon shipment to the customer. We use the residual method to recognize revenue from perpetual license software arrangements that include one or more elements to be delivered at a future date when evidence of the fair value of all undelivered elements exists, and the elements of the arrangement qualify for separate accounting as described below. Under the residual method, the fair value of the undelivered elements (i.e., support and services) based on our vendor-specific objective evidence (“VSOE”) of fair value is deferred and the remaining portion of the total arrangement fee is allocated to the delivered elements (i.e., perpetual software license). If evidence of the fair value of one or more of the undelivered elements does not exist, all revenues are deferred and recognized when delivery of all of those elements has occurred or when fair values can be established. We determine VSOE of the fair value of services and support revenue based upon our recent pricing for those elements when sold separately. For certain transactions, VSOE is determined based on a substantive renewal clause within a customer contract. Our current pricing practices are influenced primarily by product type, purchase volume, sales channel and customer location. We review services and support sold separately on a periodic basis and update, when appropriate, our VSOE of fair value for such elements to ensure that it reflects our recent pricing experience.

Subscription-based licenses include the right for a customer to use our licenses and receive related support for a specified term and revenue is recognized ratably over the term of the arrangement. When sold in arrangements with other elements, VSOE of fair value is established for the subscription-based licenses through the use of a substantive renewal clause within the customer contract for a combined annual fee that includes the term-based license and related support.

Cloud services reflect recurring revenues that include fees for hosting and application management of customers’ perpetual or subscription-based licenses. Generally, customers have the right to terminate the cloud services contract and take possession of the licenses without a significant penalty. When cloud services are sold as part of a multi-element transaction, revenue is allocated to cloud services based on VSOE, and recognized ratably over the contractual term beginning on the commencement dates of each contract, which is the date the services are made available to the customer. VSOE is established for cloud services either through a substantive stated renewal option or stated contractual overage rates, as these rates represent the value the customer is willing to pay on a standalone basis. In addition, cloud services include set-up fees, which are recognized ratably over the contract term or the expected customer life, whichever is longer.

Support

Support contracts generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates and bug fixes. Support revenue is recognized ratably over the term of the support contract on a straight-line basis.

Professional Services

Our software arrangements often include implementation, consulting and training services that are sold under consulting engagement contracts or as part of the software license arrangement. When we determine that such services are not essential to

the functionality of the licensed software, we record revenue separately for the license and service elements of these arrangements, provided that appropriate evidence of fair value exists for the undelivered services (i.e. VSOE of fair value). We consider various factors in assessing whether a service is not essential to the functionality of the software, including if the services may be provided by independent third parties experienced in providing such services (i.e. consulting and implementation) in coordination with dedicated customer personnel, and whether the services result in significant modification or customization of the software’s functionality. When professional services qualify for separate accounting, professional services revenues under time and materials billing arrangements are recognized as the services are performed. Professional services revenues under fixed-priced contracts are generally recognized as the services are performed using a proportionate performance model with hours or costs as the input method of attribution.

When we provide professional services that are considered essential to the functionality of the software, the arrangement does not qualify for separate accounting of the license and service elements, and the license revenue is recognized together with the consulting services using the percentage-of-completion method of contract accounting. Under such arrangements, consideration is recognized as the services are performed as measured by an observable input. In these circumstances, we separate license revenue from service revenue for income statement presentation by allocating VSOE of fair value of the consulting services as service revenue, and the residual portion as license revenue. Under the percentage-of-completion method, we estimate the stage of completion of contracts with fixed or “not to exceed” fees based on hours or costs incurred to date as compared with estimated total project hours or costs at completion. Adjustments to estimates to complete are made in the periods in which facts resulting in a change become known. When total cost estimates exceed revenues, we accrue for the estimated losses when identified. The use of the proportionate performance and percentage-of-completion methods of accounting require significant judgment relative to estimating total contract costs or hours (hours being a proxy for costs), including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed and anticipated changes in salaries and other costs.

Reimbursements of out-of-pocket expenditures incurred in connection with providing consulting services are included in service revenue, with the offsetting expense recorded in cost of service revenue.

Training services include on-site and classroom training. Training revenues are recognized as the related training services are provided.

Recent Accounting Pronouncements

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09), to supersede nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for us in our first quarter of fiscal 2018 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. In April 2015, the FASB proposed a one-year delay in the effective date of the new standard to 2019 for us. Under this proposal, early adoption will be allowed, but not earlier than the original effective date. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements.

Debt Issuance Costs

In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30), to simplify the required presentation of debt issuance costs. The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the related debt liability rather than as an asset. It is effective for financial statements issued for fiscal years beginning after December 15, 2015, our fiscal 2017, with early adoption permitted. The new guidance will be applied retrospectively to each prior period presented. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

2. Deferred Revenue and Financing Receivables

Deferred Revenue

Deferred revenue primarily relates to software support agreements billed to customers for which the services have not yet been provided. The liability associated with performing these services is included in deferred revenue and, if not yet paid, the

related customer receivable is included in prepaid expenses and other current assets. Billed but uncollected support and subscription-related amounts included in prepaid expenses and other current assets at April 4, 2015 and September 30, 2014 were $141.1 million and $116.2 million, respectively.

Financing Receivables

We periodically provide extended payment terms to credit-worthy customers for software purchases with payment terms up to 24 months. The determination of whether to offer such payment terms is based on the size, nature and credit-worthiness of the customer, and the history of collecting amounts due, without concession, from the customer and customers generally. This determination is based on an internal credit assessment. In making this assessment, we use the Standard & Poor's (S&P) credit rating as our primary credit quality indicator, if available. If a customer, whether commercial or the U.S. Federal government, has a S&P bond rating of BBB- or above, we designate the customer as Tier 1. If a customer does not have a S&P bond rating, or has a S&P bond rating below BBB-, we base our assessment on an internal credit assessment which considers selected balance sheet, operating and liquidity measures, historical payment experience, and current business conditions within the industry or region. We designate these customers as Tier 2 or Tier 3, with Tier 3 being lower credit quality than Tier 2.

As of April 4, 2015 and September 30, 2014, amounts due from customers for contracts with original payment terms greater than twelve months (financing receivables) totaled $32.5 million and $58.1 million, respectively. Accounts receivable and prepaid expenses and other current assets in the accompanying consolidated balance sheets included current receivables from such contracts totaling $28.0 million and $44.6 million at April 4, 2015 and September 30, 2014, respectively, and other assets in the accompanying consolidated balance sheets included long-term receivables from such contracts totaling $4.5 million and $13.5 million at April 4, 2015 and September 30, 2014, respectively. As of April 4, 2015, $0.4 million of these receivables were past due. None of these receivables were past due as of September 30, 2014. Our credit risk assessment for financing receivables was as follows:



	April 4, 2015		September 30, 2014
	(in thousands)
S&P bond rating BBB-1 and above-Tier 1	$	20,485	$	41,152
Internal Credit Assessment-Tier 2	11,994		16,989
Internal Credit Assessment-Tier 3	—		—
Total financing receivables	$	32,479	$	58,141

We evaluate the need for an allowance for doubtful accounts for estimated losses resulting from the inability of these customers to make required payments. As of April 4, 2015 and September 30, 2014, we concluded that all financing receivables were collectible and no reserve for credit losses was recorded. We did not provide a reserve for credit losses or write off any uncollectible financing receivables in the six months ended April 4, 2015 or March 29, 2014. We write off uncollectible trade and financing receivables when we have exhausted all collection avenues.

We periodically transfer future payments under certain of these contracts to third-party financial institutions on a non-recourse basis. We record such transfers as sales of the related accounts receivable when we surrender control of such receivables. We sold $1.1 million of financing receivables to third-party financial institutions in the six months ended April 4, 2015. We sold $12.0 million of financing receivables to third-party financial institutions in the six months ended March 29, 2014.

3. Restructuring Charges

On April 4, 2015, we committed to a plan to restructure our workforce and consolidate select facilities to realign our global workforce to increase investment in our Internet of Things business and to reduce our cost structure through organizational efficiencies in the face of significant foreign currency depreciation relative to the U.S. Dollar and a more cautious outlook on global macroeconomic conditions. The restructuring actions are expected to result in restructuring charges of up to $45 million, primarily attributable to termination benefits. In the second quarter of 2015, we recorded a charge of $38.5 million attributable to termination benefits associated with 415 employees.

In September 2014, in support of integrating businesses acquired in 2014 and the continued evolution of our business model, we committed to a plan to restructure our workforce. As a result, we recorded a restructuring charge of $26.8 million in the fourth quarter of 2014 associated with severance and related costs associated with 283 employees.

The following table summarizes restructuring accrual activity for the six months ended April 4, 2015:



	Employee Severance and Related Benefits			Facility Closures and Related Costs			Total
	(in thousands)
October 1, 2014	$	25,835		$	535		$	26,370
Charge to operations	38,232			—			38,232
Cash disbursements	(22,532		)	(135		)	(22,667		)
Foreign exchange impact	(1,173		)	(5		)	(1,178		)
Accrual, April 4, 2015	$	40,362		$	395		$	40,757

The accrual for facility closures and related costs is included in accrued expenses and other liabilities in the consolidated balance sheet, and the accrual for employee severance and related benefits is included in accrued compensation and benefits in the consolidated balance sheet.

4. Stock-based Compensation

We measure the cost of employee services received in exchange for restricted stock unit (RSU) awards based on the fair value of RSU awards on the date of grant. That cost is recognized over the period during which an employee is required to provide service in exchange for the award.

Our equity incentive plan provides for grants of nonqualified and incentive stock options, common stock, restricted stock, RSUs and stock appreciation rights to employees, directors, officers and consultants. We award RSUs as the principal equity incentive awards, including certain performance-based awards that are earned based on achievement of performance criteria established by the Compensation Committee of our Board of Directors. Each RSU represents the contingent right to receive one share of our common stock.

Our equity incentive plans are described more fully in Note K to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014.



Restricted stock unit activity for the six months ended April 4, 2015	Shares		Weighted Average Grant Date Fair Value (Per Share)
	(in thousands)
Balance of outstanding restricted stock units October 1, 2014	4,379		$	26.87
Granted	1,342		$	37.78
Vested	(1,606	)	$	24.13
Forfeited or not earned	(197	)	$	29.21
Balance of outstanding restricted stock units April 4, 2015	3,918		$	31.62



	Restricted Stock Units
Grant Period	Performance-based (1)	Service-based (2)

	(Number of Units in thousands)
First six months of 2015	313	1,029

_________________


(1)	The performance-based RSUs were granted to employees pursuant to the terms described below.


(2)	The service-based RSUs were issued to employees, including our executive officers and our directors. Of these RSUs, approximately 110,000 will vest one year from the date of grant. Substantially all other service-based RSUs will vest in three substantially equal annual installments on or about the anniversary of the date of grant.

In the first six months of 2015, we granted the target performance-based restricted stock units ("target RSUs") shown in the table above to senior level employees, including our executive officers. These RSUs are eligible to vest based upon our total shareholder return relative to a peer group (the “TSR units”), measured annually over a three-year period. The number of TSR units to vest over the three year period will be determined based on the performance of PTC stock relative to the stock performance of an index of PTC peer companies established as of the grant date, as determined at the end of three measurement periods ending on September 30, 2015, 2016 and 2017, respectively. The shares earned for each period will vest on November

15 following each measurement period, up to a maximum of two times or one and one half times, as applicable, the number of target RSUs (up to a maximum of 590,000 shares). No vesting will occur in a period unless an annual threshold requirement is achieved. The employee must remain employed by PTC through the applicable vest date for any RSUs to vest. If the return to PTC shareholders is negative but still meets or exceeds the peer group indexed return, a maximum of 100% of the target RSUs shall vest for the measurement period. TSR units not earned in the first two year measurement periods are eligible to be earned in the third measurement period.

The weighted average fair value of the TSR units was $41.32 per target RSU on the grant date. The fair value of the TSR units was determined using a Monte Carlo simulation model, a generally accepted statistical technique used to simulate a range of possible future stock prices for PTC and the peer group. The method uses a risk-neutral framework to model future stock price movements based upon the risk-free rate of return, the volatility of each entity, and the pairwise correlations of each entity being modeled. The fair value for each simulation is the product of the payout percentage determined by PTC’s TSR rank against the peer group, the projected price of PTC stock, and a discount factor based on the risk-free rate.

The significant assumptions used in the Monte Carlo simulation model were as follows:



Average volatility of peer group	29.8	%
Risk free interest rate	0.85	%
Dividend yield	—	%

Compensation expense recorded for our stock-based awards was classified in our consolidated statements of operations as follows:



	Three months ended				Six months ended
	April 4, 2015		March 29, 2014		April 4, 2015		March 29, 2014
	(in thousands)
Cost of license and subscription solutions revenue	$	118	$	82	$	260	$	147
Cost of support revenue	989		889		1,765		1,813
Cost of professional services revenue	1,504		1,349		3,193		2,886
Sales and marketing	3,081		3,019		5,953		5,518
Research and development	3,001		2,147		6,087		4,836
General and administrative	4,129		5,080		6,806		10,130
Total stock-based compensation expense	$	12,822	$	12,566	$	24,064	$	25,330

5. Earnings per Share (EPS) and Common Stock

EPS

Basic EPS is calculated by dividing net income by the weighted average number of shares outstanding during the period. Unvested restricted stock, although legally issued and outstanding, is not considered outstanding for purposes of calculating basic EPS. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding plus the dilutive effect, if any, of outstanding stock options, restricted shares and RSUs using the treasury stock method. The calculation of the dilutive effect of outstanding equity awards under the treasury stock method includes consideration of proceeds from the assumed exercise of stock options, unrecognized compensation expense and any tax benefits as additional proceeds.



	Three months ended				Six months ended
Calculation of Basic and Diluted EPS	April 4, 2015		March 29, 2014		April 4, 2015		March 29, 2014
	(in thousands, except per share data)
Net income	$	5,392	$	43,756	$	35,676	$	83,413
Weighted average shares outstanding—Basic	114,944		118,978		115,147		118,973
Dilutive effect of employee stock options, restricted shares and restricted stock units	978		1,720		1,332		1,943
Weighted average shares outstanding—Diluted	115,922		120,698		116,479		120,916
Earnings per share—Basic	$	0.05	$	0.37	$	0.31	$	0.70
Earnings per share—Diluted	$	0.05	$	0.36	$	0.31	$	0.69

RSUs of 0.2 million were outstanding during the first six months of 2014 but were not included in the calculation of diluted EPS because the share impact of the assumed proceeds related to the weighted unamortized compensation expense exceeded the weighted average RSUs outstanding. These RSUs were excluded from the computation of diluted EPS as the effect would have been anti-dilutive.

Common Stock Repurchases

Our Articles of Organization authorize us to issue up to 500 million shares of our common stock. Our Board of Directors authorized us to repurchase up to $100 million worth of shares with cash from operations in the period October 1, 2013 through September 30, 2014. In the second quarter and first six months of 2014, we repurchased 1.1 million shares at a cost of $40.0 million. On August 4, 2014, our Board of Directors authorized us to repurchase up to an additional $600 million of our common stock from August 4, 2014 through September 30, 2017. All shares of our common stock repurchased are automatically restored to the status of authorized and unissued.

On August 14, 2014, we entered into an accelerated share repurchase (“ASR”) agreement with a major financial institution (“Bank”). The ASR allowed us to buy a large number of shares immediately at a purchase price determined by an average market price over a period of time. Under the ASR, we agreed to purchase $125 million of our common stock, in total, with an initial delivery to us in August 2014 of 2.3 million shares. We settled the ASR in December 2014 and the Bank delivered to us 1.1 million shares.

6. Acquisitions

Acquisition-related costs were $1.3 million and $4.8 million for the second quarter and first six months of 2015 and $3.9 million and $5.2 million for the second quarter and first six months of 2014, respectively. Acquisition-related costs include direct costs of potential and completed acquisitions (e.g., investment banker fees, professional fees, including legal and valuation services) and expenses related to acquisition integration activities (e.g., professional fees, severance, and retention bonuses). In addition, subsequent adjustments to our initial estimated amount of contingent consideration associated with specific acquisitions are included within acquisition-related charges. These costs have been classified in general and administrative expenses in the accompanying consolidated statements of operations.

ThingWorx

In the second quarter of 2014, we acquired ThingWorx, Inc. for $111.5 million (net of cash acquired of $0.1 million). The former shareholders of ThingWorx are eligible to receive additional consideration of up to $18.0 million, which is contingent on the achievement of certain profitability and bookings targets (as defined in the Merger Agreement) within the period from December 30, 2013 to January 1, 2016. If such targets are achieved, the consideration is payable in cash in two installments, up to half of which will become payable in fiscal 2015, after the first year measurement period, and the remainder of which, including any such amounts not earned in the first measurement period that are subsequently earned, will become payable in fiscal 2016 after the second year measurement period. In connection with accounting for the business combination, we recorded a liability representing the fair value of the contingent consideration. The liability was valued using a discounted cash flow method and a probability weighted estimate of achievement of the financial targets. The estimated undiscounted range of outcomes for the contingent consideration is $16.5 million to $18.0 million. We assess the probability that the targets will be met and at what level each reporting period. Any subsequent changes in the estimated fair value of the liability are reflected in earnings until the liability is fully settled (an increase of $1.1 million in the first six months of 2015, see Note 8).

7. Goodwill and Intangible Assets

We have two operating segments: (1) Software Products and (2) Services. We assess goodwill for impairment at the reporting unit level. Our reporting units are determined based on the components of our operating segments that constitute a business for which discrete financial information is available and for which operating results are regularly reviewed by segment management. Our reporting units are the same as our operating segments. As of April 4, 2015 and September 30, 2014, goodwill and acquired intangible assets in the aggregate attributable to our software products segment were $1,222.5 million and $1,283.0 million, respectively, and attributable to our services segment were $63.9 million and $66.4 million, respectively. Acquired intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. We evaluate goodwill for impairment in the third quarter of our fiscal year, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of a reporting segment below its carrying value. Factors we consider important, on an overall company basis and segment basis, when applicable, that could trigger an impairment review include significant under-performance relative to historical or projected future operating results, significant changes in our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period and a reduction of our market capitalization relative to net book value. We completed our annual goodwill impairment review as of June 28, 2014 and concluded that no impairment charge was required as of that date.

To conduct these tests of goodwill, the fair value of the reporting unit is compared to its carrying value. If the reporting unit’s carrying value exceeds its fair value, we record an impairment loss equal to the difference between the carrying value of goodwill and its implied fair value. We estimate the fair values of our reporting units using discounted cash flow valuation models. Those models require estimates of future revenues, profits, capital expenditures, working capital, terminal values based on revenue multiples, and discount rates for each reporting unit. We estimate these amounts by evaluating historical trends, current budgets, operating plans and industry data. The estimated fair value of each reporting unit was more than double its carrying value as of June 28, 2014. Through April 4, 2015 there have not been any events or changes in circumstances that indicate that the carrying values of goodwill or acquired intangible assets may not be recoverable.

Goodwill and acquired intangible assets consisted of the following:



	April 4, 2015						September 30, 2014
	Gross Carrying Amount		Accumulated Amortization		Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
	(in thousands)
Goodwill (not amortized)					$	984,953					$	1,012,527
Intangible assets with finite lives (amortized) (1):
Purchased software	$	269,825	$	164,236	$	105,589	$	278,012	$	162,259	$	115,753
Capitalized software	22,877		22,877		—		22,877		22,877		—
Customer lists and relationships	346,506		157,454		189,052		360,530		147,469		213,061
Trademarks and trade names	18,010		11,597		6,413		18,479		10,964		7,515
Other	3,900		3,511		389		4,117		3,573		544
	$	661,118	$	359,675	$	301,443	$	684,015	$	347,142	$	336,873
Total goodwill and acquired intangible assets					$	1,286,396					$	1,349,400

(1) The weighted average useful lives of purchased software, customer lists and relationships, trademarks and trade names and other intangible assets with a remaining net book value are 9 years, 10 years, 9 years, and 3 years, respectively.

Goodwill

Changes in goodwill presented by reportable segment were as follows:



	Software Products Segment			Services Segment			Total
	(in thousands)
Balance, October 1, 2014	$	959,768		$	52,759		$	1,012,527
Acquisition of Axeda	(180		)	—			(180		)
Foreign currency translation adjustments	(27,163		)	(231		)	(27,394		)
Balance, April 4, 2015	$	932,425		$	52,528		$	984,953

Amortization of Intangible Assets

The aggregate amortization expense for intangible assets with finite lives was classified in our consolidated statements of operations as follows:



	Three months ended				Six months ended
	April 4, 2015		March 29, 2014		April 4, 2015		March 29, 2014
	(in thousands)
Amortization of acquired intangible assets	$	9,173	$	7,985	$	18,586	$	15,774
Cost of license and subscriptions solutions revenue	4,714		4,407		9,481		8,904
Total amortization expense	$	13,887	$	12,392	$	28,067	$	24,678

8. Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. Generally accepted accounting principles prescribe a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Three levels of inputs that may be used to measure fair value:


•	Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

•

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or


•	Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Our significant financial assets and liabilities measured at fair value on a recurring basis as of April 4, 2015 and September 30, 2014 were as follows:



	April 4, 2015
	Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets:
Cash equivalents (1)	$	61,037	$	—	$	—	$	61,037
Forward contracts	—		39		—		39
	$	61,037	$	39	$	—	$	61,076
Financial liabilities:
Contingent consideration related to ThingWorx acquisition	$	—	$	—	$	16,272	$	16,272
Forward contracts	—		255		—		255
	$	—	$	255	$	16,272	$	16,527



	September 30, 2014
	Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets:
Cash equivalents (1)	$	101,113	$	—	$	—	$	101,113
Forward contracts	—		339		—		339
	$	101,113	$	339	$	—	$	101,452
Financial liabilities:
Contingent consideration related to ThingWorx acquisition	$	—	$	—	$	15,191	$	15,191
Forward contracts	—		911		—		911
	$	—	$	911	$	15,191	$	16,102

______________

(1) Money market funds and time deposits.

Changes in the fair value of Level 3 contingent consideration liability associated with our acquisition of ThingWorx were as follows:



	Contingent Consideration
	(in thousands)
Balance, October 1, 2014	$	15,191
Change in present value of contingent consideration	1,081
Balance, April 4, 2015	$	16,272

In connection with accounting for the ThingWorx business combination, we recorded a liability representing the fair value of contingent consideration payable upon achievement of certain financial targets over the next two years. The liability that we recorded was valued using a discounted cash flow method and a probability weighted estimate of achievement of the financial targets based on inputs that are not observable in the market, which represents a level 3 measurement within the fair value hierarchy. Changes in the fair value of the contingent consideration liability will be reflected in acquisition-related charges in general and administrative expense until the liability is fully settled. The contingent consideration liability is included in accrued expenses and other current liabilities in the consolidated balance sheet as of April 4, 2015.

9. Derivative Financial Instruments

Our foreign currency risk management strategy is principally designed to mitigate the future potential financial impact of changes in the value of transactions and balances denominated in foreign currency resulting from changes in foreign currency exchange rates. We enter into derivative transactions, specifically foreign currency forward contracts with maturities of up to approximately three months, to manage our exposure to fluctuations in foreign exchange rates that arise primarily from our foreign currency-denominated receivables and payables.

Generally, we do not designate foreign currency forward contracts as hedges for accounting purposes, and changes in the fair value of these instruments are recognized immediately in earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in other income (expense), net.

As of April 4, 2015 and September 30, 2014, we had outstanding forward contracts with notional amounts equivalent to the following:



Currency Hedged	April 4, 2015		September 30, 2014
	(in thousands)
Canadian Dollar / U.S. Dollar	$	21,283	25,583
Euro / U.S. Dollar	35,007		61,751
British Pound / Euro	9,196		14,259
Israeli New Sheqel / U.S. Dollar	2,713		6,144
All other	12,424		9,251
Total	$	80,623	$	116,988

As of April 4, 2015 and September 30, 2014, the accompanying consolidated balance sheets include a net asset of $0.0 million and $0.3 million, respectively, in prepaid expenses and other current assets, and a net liability of $0.3 million and $0.9 million, respectively, in accrued expenses related to the fair value of our forward contracts.

Net gains and losses on foreign currency exposures are recorded in other income (expense), net and include realized and unrealized gains and losses on forward contracts. Net gains and losses on foreign currency exposures for the three and six months ended April 4, 2015 and March 29, 2014 were as follows:



	Three months ended					Six months ended
	April 4, 2015		March 29, 2014			April 4, 2015		March 29, 2014
	(in thousands)
Net foreign currency losses	$	675	$	1,129		$	912	$	1,993
Net realized and unrealized loss (gain) on forward contracts (excluding the underlying foreign currency exposure being hedged)	$	678	$	(69	)	$	381	$	(1,697	)

10. Segment Information

We operate within a single industry segment—computer software and related services. Operating segments as defined under GAAP are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our President and Chief Executive Officer. We have two operating and reportable segments: (1) Software Products, which includes license and related support revenue (including updates and technical support) for all our products except training-related products; and (2) Services, which includes consulting, implementation, training, cloud services, computer-based training products, including support on these products, and other services revenue. We do not allocate sales and marketing or administrative expenses to our operating segments as these activities are managed on a consolidated basis.

The revenue and operating income attributable to our operating segments are summarized as follows:



	Three months ended						Six months ended
	April 4, 2015			March 29, 2014			April 4, 2015			March 29, 2014
	(in thousands)
Revenue:
Total Software Products segment revenue	$	240,951		$	245,423		$	487,942		$	489,677
Total Services segment revenue	73,168			83,277			151,619			163,948
Total revenue	$	314,119		$	328,700		$	639,561		$	653,625
Operating income: (1)
Software Products segment	$	134,580		$	154,859		$	283,625		$	313,099
Services segment	3,178			16,427			16,378			29,048
Sales and marketing expenses	(94,942		)	(85,933		)	(182,549		)	(170,644		)
General and administrative expenses	(38,828		)	(34,140		)	(75,835		)	(65,419		)
Total operating income	3,988			51,213			41,619			106,084
Other income (expense), net	(3,601		)	(2,692		)	(6,825		)	(4,446		)
Income before income taxes	$	387		$	48,521		$	34,794		$	101,638

(1)

We recorded restructuring charges of $38.5 million in the second quarter of 2015. Software Products included $10.0 million; Services included $11.0 million; sales and marketing expenses included $12.9 million; and general and administrative expenses included $4.6 million of these restructuring charges. We recorded a credit to restructuring of $0.3 million in the first quarter of 2015 which is included in the Services segment. We recorded restructuring charges of $1.1 million in the first six months of 2014. Software Products included $0.1 million; Services included $0.2 million; sales and marketing expenses included $0.5 million; and general and administrative expenses included $0.3 million of these restructuring charges.

11. Income Taxes

In the second quarter and first six months of 2015, our effective tax rate was a benefit of 1,293% on pre-tax income of $0.4 million and a benefit of 3% on pre-tax income of $34.8 million, respectively, compared to a provision of 10% on pre-tax income of $48.5 million and 18% on pre-tax income of $101.6 million in the second quarter and first six months of 2014, respectively. In the second quarter and first six months of 2015 and 2014, our effective tax rate was lower than the 35% statutory federal income tax rate due to our corporate structure in which our foreign taxes are at a net effective tax rate lower than the U.S. rate. A significant amount of our foreign earnings is generated by our subsidiaries organized in Ireland. In 2015 and 2014, the foreign rate differential predominantly relates to these Irish earnings. Our foreign rate differential in 2015 includes a rate benefit from a business realignment completed on September 30, 2014 in which intellectual property was transferred between two wholly-owned foreign subsidiaries. The realignment allows us to more efficiently manage the distribution of our products to European customers. This realignment resulted in a tax benefit of approximately $4 million and $8 million in the second quarter and first six months of 2015, respectively. In addition, in the second quarter and first six months of 2015, we recorded a tax benefit of $3.1 million related to the reassessment of our reserve requirements, and a benefit of $1.4 million in conjunction with the reorganization of our Atego U.S. subsidiaries. Additionally, our provision reflects a $2.1 million tax benefit related to a retroactive extension of the U.S. research and development tax credit enacted in the first quarter of 2015. This benefit was offset by a corresponding provision to increase our U.S. valuation allowance.

Additionally, in the second quarter and first six months of 2014, our effective tax rate was lower than the 35% statutory federal income tax rate due to the reversal of a portion of our valuation allowance against net deferred tax assets. In the second quarter of 2014, our acquisition of ThingWorx was accounted for as a business combination and we recorded the fair value of assets and liabilities acquired, including finite-lived acquired intangible assets totaling $32.1 million and net deferred tax liabilities of $8.9 million, primarily related to the tax effect of the acquired intangible assets that are not deductible for income tax purposes. These net deferred tax liabilities reduced our net deferred tax asset balance and resulted in a tax benefit of $8.9 million recorded in the second quarter of 2014 to decrease our valuation allowance in the U.S. As the decrease in the valuation allowance was not part of the accounting for the business combination (the fair value of the assets acquired and liabilities assumed), it was recorded as an income tax benefit.

As of April 4, 2015 and September 30, 2014, we had unrecognized tax benefits of $11.1 million and $15.0 million, respectively. If all of our unrecognized tax benefits as of April 4, 2015 were to become recognizable in the future, we would record a benefit to the income tax provision of $9.7 million which would be partially offset by an increase in the U.S. valuation allowance of $3.1 million.

Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in favorable or unfavorable changes in our estimates. We believe it is reasonably possible that within the next 12 months the amount of unrecognized tax benefits related to the resolution of multi-jurisdictional tax positions could be reduced by up to $4 million as audits close and statutes of limitations expire.

We follow the with-and-without approach for the direct effects of windfall tax deductions to determine the timing of the recognition of benefits for windfall tax deductions. In the second quarter and first six months of 2014, we recorded windfall tax benefits of $1.3 million and $8.1 million, respectively, to additional paid-in capital.

12. Debt

Credit Agreement

In September 2014, we entered into a multi-currency credit facility with a syndicate of sixteen banks for which JPMorgan Chase Bank, N.A. acts as Administrative Agent. We expect to use the credit facility for general corporate purposes, including acquisitions of businesses, share repurchases and working capital requirements. As of April 4, 2015, the fair value of our credit facility approximates our book value.

The credit facility consists of a $500 million term loan and a $1 billion revolving loan commitment, and may be increased by an additional $250 million (in the form of revolving loans or term loans, or a combination thereof) if the existing or additional lenders are willing to make such increased commitments. The revolving loan commitment does not require amortization of principal. The term loan requires prepayment of principal at the end of each calendar quarter. The revolving loan and term loan may be repaid in whole or in part prior to the scheduled maturity dates at our option without penalty or premium. The credit facility matures on September 15, 2019, when remaining amounts outstanding will be due and payable in full. We are required to make principal payments under the term loan of $25 million, $50 million, $50 million, $75 million and $300 million in 2015, 2016, 2017, 2018 and 2019, respectively.

PTC is the sole borrower under the credit facility. The obligations under the credit facility are guaranteed by PTC’s material domestic subsidiaries and 65% of the voting equity interests of PTC’s material first-tier foreign subsidiaries are pledged as collateral for the obligations.

As of April 4, 2015, we had $530.6 million outstanding under the credit facility comprised of the $487.5 million term loan and a $43.1 million revolving loan. Loans under the credit facility bear interest at variable rates which reset every 30 to 180 days depending on the rate and period selected by PTC as described below. As of April 4, 2015, the annual rate on the term and revolving loan was 1.6875% (which will reset on June 17, 2015). Interest rates on borrowings outstanding under the credit facility range from 1.25% to 1.5% above an adjusted LIBO rate for Eurodollar-based borrowings or would range from 0.25% to 0.5% above the defined base rate (the greater of the Prime Rate, the Federal Funds Effective Rate plus 0.005%, or an adjusted LIBO rate plus 1%) for base rate borrowings, in each case based upon PTC’s leverage ratio. Additionally, PTC may borrow certain foreign currencies at rates set in the same range above the respective London interbank offered interest rates for those currencies, based on PTC’s leverage ratio. A quarterly commitment fee on the undrawn portion of the credit facility is required, ranging from 0.175% to 0.25% per annum, based upon PTC’s leverage ratio.

The credit facility limits PTC’s and its subsidiaries’ ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends (other than to PTC) and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except on an arms-length basis. Under the credit facility, PTC and its material domestic subsidiaries may not invest cash or property in, or loan to, PTC’s foreign subsidiaries in aggregate amounts exceeding $75 million for any purpose and an additional $150 million for acquisitions of businesses. In addition, under the credit facility, PTC and its subsidiaries must maintain the following financial ratios:


•	a leverage ratio, defined as consolidated funded indebtedness to consolidated trailing four quarters EBITDA, of no greater than 3.00 to 1.00 at any time; and


•	a fixed charge coverage ratio, defined as the ratio of consolidated trailing four quarters EBITDA less consolidated capital expenditures to consolidated fixed charges, of no less than 3.50 to 1.00 at any time.

As of April 4, 2015, our leverage ratio was 1.73 to 1.00, our fixed charge coverage ratio was 9.85 to 1.00 and we were in compliance with all financial and operating covenants of the credit facility. As of April 4, 2015, we had $405 million available to borrow under the revolving loan portion of our credit facility, the availability of which is limited based on financial covenants in the facility. As of May 8, 2015, following our acquisition of ColdLight (see Note 15), we had approximately $290 million available under the revolving loan portion of our credit facility.

Any failure to comply with the financial or operating covenants of the credit facility would prevent PTC from being able to borrow additional funds, and would constitute a default, permitting the lenders to, among other things, accelerate the

amounts outstanding, including all accrued interest and unpaid fees, under the credit facility and to terminate the credit facility. A change in control of PTC, as defined in the agreement, also constitutes an event of default, permitting the lenders to accelerate the indebtedness and terminate the credit facility.

13. Commitments and Contingencies

Legal and Regulatory Matters

China Investigation

We have, since making a voluntary disclosure to the U.S. Securities and Exchange Commission (SEC) and the Department of Justice, been cooperating to provide information to those agencies concerning expenditures by our business partners and our China business, including for travel and entertainment, that apparently benefited employees of customers regarded as state owned enterprises in China. This matter involves issues regarding compliance with laws, including the U.S. Foreign Corrupt Practices Act. Negotiations with the SEC to reach a resolution of its investigation have begun but have not been concluded. We expect to begin negotiations with the Department of Justice to resolve its investigation in the near future. Resolution of this matter is likely to include fines and penalties. Given the uncertainty regarding whether settlements can be reached and, if reached, on what terms, we are not able to estimate a range of reasonably possible loss with regard to any such settlements and have not recorded any liability in connection with this matter. If settlements are reached, we believe that the associated financial liability could be material to our results of operations for the fiscal period in which the liability is recorded. Further, any settlement or other resolution of this matter could have collateral effects on our business in China, the United States and elsewhere.

Legal Proceedings

We are subject to various legal proceedings and claims that arise in the ordinary course of business. We do not believe that resolving the legal proceedings and claims that we are currently subject to will have a material adverse impact on our financial condition, results of operations or cash flows. However, the results of legal proceedings cannot be predicted with certainty. Should any of these legal proceedings and claims be resolved against us, the operating results for a particular reporting period could be adversely affected.

Accruals

With respect to legal proceedings and claims, we record an accrual for a contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. For legal proceedings and claims for which the likelihood that a liability has been incurred is more than remote but less than probable, we estimate the range of possible outcomes. As of April 4, 2015, we had a legal proceedings and claims accrual of $2.0 million.

Guarantees and Indemnification Obligations

We enter into standard indemnification agreements in the ordinary course of our business. Pursuant to such agreements with our business partners or customers, we indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to our products, as well as claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and we accordingly believe the estimated fair value of liabilities under these agreements is immaterial.

We warrant that our software products will perform in all material respects in accordance with our standard published specifications in effect at the time of delivery of the licensed products for a specified period of time. Additionally, we generally warrant that our consulting services will be performed consistent with generally accepted industry standards. In most cases, liability for these warranties is capped. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history; however, we have not incurred significant cost under our product or services warranties. As a result, we believe the estimated fair value of these liabilities is immaterial.

14. Pension Plans

Our pension plans are described in more detail in Note M to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014. In the first six months of 2015, we contributed $15 million to a non-U.S. pension plan.

Termination of U.S. Pension Plan

We maintain a U.S. defined benefit pension plan (the Plan) that covers certain persons who were employees of Computervision Corporation (acquired by us in 1998). Benefits under the Plan were frozen in 1990. In the second quarter of 2014, we began the process of terminating the Plan, which will include settling Plan liabilities by offering lump sum distributions to certain plan participants and purchasing annuity contracts to cover vested benefits. As part of the planned termination, in 2014 we re-balanced assets to a target asset allocation of 100% fixed income investments (up from 40%), which will provide a better matching of Plan assets to the characteristics of the liabilities. In the third quarter of 2014, we provided notice to plan participants of our intent to terminate the plan effective August 1, 2014 and in the second quarter of 2015 we provided a notice of plan benefits to participants. In March 2015, we received a favorable determination letter from the Internal Revenue Service with respect to the termination, and we expect to complete the termination process by September 30, 2015. We will take further actions to minimize the volatility of the value of our pension assets relative to pension liabilities and to settle remaining Plan liabilities, including making such contributions to the Plan as may be necessary to make the Plan sufficient to settle all Plan liabilities.

As of September 30, 2014, we valued the projected benefit obligations of the Plan based on the present value of estimated costs to settle the liabilities through a combination of lump sum payments to participants and purchasing annuities from an insurance company. This reflects an estimate of how many participants we expect will accept a lump sum offering, and an estimate of lump sum payouts for those participants based on the current lump sum rates approved by the IRS. Liabilities expected to be settled through annuity contracts have been estimated based on future benefit payments, discounted based on current interest rates that correspond to the liability payouts, adjusted to reflect a premium that would be assessed by the insurer.

We expect to settle the liabilities by the end of fiscal 2015. As the liabilities are settled, unamortized losses in accumulated other comprehensive income will be recognized based on the projected benefit obligations and assets measured as of the dates the settlements occur. The amount of unamortized losses was $68 million at September 30, 2014, $49 million net of tax. Prior to settling the liabilities, we will contribute such additional amounts (currently estimated to be approximately $25 million) as may be necessary to fully fund the Plan. Such contributions are expected to be made concurrently with settling the liabilities but may be made earlier at our discretion.

15. Subsequent Events

On May 7, 2015, we acquired ColdLight Solutions, LLC pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) for approximately $100 million in cash. An additional $5 million is payable to the former owners contingent upon the achievement of certain milestones as set forth in the Merger Agreement.

On May 6, 2015, we borrowed $100 million under our Credit Facility.


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not historic facts, including statements about our future financial and growth expectations, the development of our products and markets and adoption of our solutions and future purchases by customers, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. These risks include the possibility that the macroeconomic and/or global manufacturing climates may not improve or may deteriorate, the possibility that customers may not purchase our solutions when or at the rates we expect, the possibility that our businesses, including our Internet of Things (IoT) and SLM businesses, may not expand and/or generate the revenue we expect, the possibility that market size and growth estimates may be incorrect and that we may be unable to grow our business at or in excess of market growth rates, the possibility that our pipeline of opportunities may not convert or generate the revenue we expect, the possibility that new products released and planned products, including IoT enabled core products, may not generate the revenue we expect or be released as we expect, the possibility that foreign currency exchange rates may vary from our expectations and thereby affect our reported revenue and expense, the possibility that we may not achieve the license and subscription solutions (L&SS), support or professional services revenue that we expect, which could result in a different mix of revenue between L&SS, support and professional services and could impact our EPS results, the possibility that our customers may purchase more of our solutions as subscriptions than we expect, which would adversely affect near-term revenue, operating margins and EPS, the possibility that sales of our solutions as subscriptions may not have the longer-term positive effect on revenue that we expect, the possibility that we may be unable to leverage our products and customer relationships to increase sales, the possibility that sales personnel productivity may not increase as we expect, the possibility that we may be unable to expand our services partner ecosystem or improve services margins as we expect, the possibility that our workforce realignment may not improve operating margins as we expect and may adversely affect our operations, the possibility that we may be unable to generate sufficient operating cash flow to return 40% of free cash flow to shareholders or that other uses of cash could preclude share repurchases, and the possibility that substantial fines and penalties may be assessed against PTC in connection with our previously announced investigation in China and that any such resolution may have collateral effects on our business in China, the U.S. or elsewhere; as well as other risks and uncertainties described below throughout or referenced in Part II, Item 1A. Risk Factors of this report.

Business Overview

PTC Inc. develops and delivers technology solutions, comprised of software and services, that transform the way our customers create, operate and service their products for a smart, connected world.

Our solutions and software products address the challenges our customers face in the following areas:

Computer-Aided Design (CAD)

Effective and collaborative product design across the globe.

Product Lifecycle Management (PLM)

Efficient and consistent management of product development from concept to retirement across functional processes and distributed teams.

Application Lifecycle Management (ALM)

Management of global software development from concept to delivery.

Service Lifecycle Management (SLM)

Planning and delivery of service, and analysis of product intelligence at the point of service.

Internet of Things (IoT)

Enabling connectivity and development of software applications for smart, connected products.

Executive Overview

Our overall revenue results were down year over year due to several important changes within our business as well as external factors, namely an increasing mix of subscription sales, a shift of services to our partners in accordance with our margin strategy, and an increase in the strength of the U.S. Dollar relative to international currencies, most notably the Euro and the Yen. In the second quarter of 2015, total revenue was down 4% (up 3% on a constant currency basis), software revenue (support and license and subscription solutions revenue) was flat (up 8% on a constant currency basis) and professional services revenue declined 20% (12% on a constant currency basis). Our software revenue performance was driven by support

revenue, which was up 1% (9% on a constant currency basis). Growth in support was offset by a 3% decline in L&SS revenue due to unfavorable currency movements (L&SS revenue was up 6% on a constant currency basis), a higher mix of subscription-based revenue, and fewer large deals in the quarter than in the prior year. If we view our revenue by adjusting for currency exchange rate changes and for subscription mix, as described in "License Mix-Adjusted Metrics" below, we believe that our year-over-year software revenue would have grown 10% and total revenue would have increased 5%.

Subscription solutions bookings in the quarter increased to 14% of our license and subscription solutions (L&SS) bookings from 4% in the second quarter of 2014. While we believe subscription-based pricing will be favorable over the longer term, we believe our higher mix of subscription-based bookings in the first half of 2015 compared to the first half of 2014 has negatively impacted reported revenue and EPS. Approximately 59% of our revenue in the second quarter of 2015 came from recurring revenue streams (subscription solutions and support), up from approximately 52% in the year-ago period.

From a geographic perspective, when excluding the effect of changes in currency exchange rates, we delivered very strong performance in Japan, including a mega deal (a L&SS booking greater than $5 million from a customer in a quarter), low to mid-single digit software revenue growth in the Americas and Europe, and marginal growth in Asia-Pacific. Software revenue results benefited from strong support revenue growth in all regions on a constant currency basis, tempered by a year-over-year decline in L&SS revenue in the Americas and Europe, compared to the second quarter of 2014, which included 3 mega deals (one in Europe and two in the Americas). In addition, we believe cautious buying behavior later in the quarter impacted large deal close rates and timing. We had 13 large deals (which we define as a L&SS booking greater than $1 million from an individual customer in a quarter) in the second quarter of 2015, compared to 17 in the second quarter of 2014. Many of our largest customers are multi-nationals that rely heavily on exports, so the strengthening of the U.S. Dollar could be negatively impacting their businesses.

When excluding the effect of changes in currency exchange rates, from a product solutions view, our results were somewhat mixed. CAD and SLM delivered solid results, in line with our targets, while extended PLM was at the lower-end of our target range, which we believe was primarily due to a few large deals slipping out of the quarter. Our results in the second quarter of 2015 suggest we are seeing good customer traction for our Internet of Things (IoT) solutions, although IoT solutions are currently a small percentage of our overall business.

GAAP operating margin was 1.3% (3.8% on a constant currency basis) for the second quarter of 2015, down from 15.6% in the second quarter of 2014. Non-GAAP operating margin of 23.4% (25.7% on a constant currency basis) was down 100 basis points compared to the second quarter of 2014. We delivered GAAP EPS of $0.05 for the second quarter of 2015, down 87% (66% on a constant currency basis) from $0.36 for the second quarter of 2014, and non-GAAP EPS of $0.53, up 11% (33% on a constant currency basis) from $0.48 for the second quarter of 2014. GAAP and non-GAAP EPS benefited from higher support revenue and a lower tax rate, offset by lower professional services revenue, lower revenue due to a higher mix of subscription solutions bookings in the quarter and higher operating expenses due to investments in our Internet of Things business. Additionally, our GAAP EPS includes a restructuring charge of $38 million in the second quarter of 2015 associated with our business realignment described below. Currency movements reduced GAAP EPS by approximately $0.08.

We generated $92 million of cash from operations in the second quarter of 2015. We repaid $75 million under our credit facility and we ended the quarter with $268 million of cash. At April 4, 2015, the balance outstanding under our credit facility was $531 million and we had $405 million available to borrow under the revolving loan portion of our credit facility. At May 8, 2015, the balance outstanding under our credit facility was $631 million and we had approximately $290 million available to borrow under the revolving loan portion of our credit facility. Our ability to borrow is limited based on financial covenants in the facility.

Non-GAAP measures are reconciled to GAAP results under Results of Operations - Non-GAAP Measures below.

Realignment of Our Workforce

On April 4, 2015, we committed to a plan to restructure our global workforce and consolidate select facilities to increase investment in our Internet of Things business and to reduce our cost structure through organizational efficiencies in the face of significant foreign currency depreciation relative to the U.S. Dollar and a more cautious outlook on global macroeconomic conditions. The restructuring actions are expected to result in charges of up to $45 million, primarily attributable to termination benefits. In the second quarter of 2015, we recorded a charge of $38.5 million attributable to termination benefits associated with 415 employees. We expect the majority of the restructuring costs will be paid in 2015 and that the reorganization will result in net annualized expense reductions of approximately $30 million.

Subscription Solutions

With recent acquisitions and the introduction of subscription-based pricing for most of our products, we had a higher mix of subscription-based bookings in the current period relative to the year-ago period. Revenue is generally recognized differently for the sale of a perpetual license and the sale of a subscription solution. Under a perpetual software license, revenue is recognized at the time of sale, while for a subscription solution, revenue is deferred and recognized ratably over the

subscription term. Given this difference in revenue recognition, we are using the subscription solutions bookings, L&SS bookings and license mix-adjusted metrics described below to gauge the health of our business for internal planning and forecasting purposes.

Subscription Solutions Bookings

We use Subscription Solutions bookings to provide a view of Subscription Solutions sales as adjusted to approximate the revenue amount we estimate would have been recorded if the customer had purchased a perpetual license For this metric, we multiply the annualized contract value (ACV) of a new subscription solutions booking (or purchase) by 2. The ACV of a new subscription solutions booking is calculated by dividing the total value of a new subscription solutions booking by the term of the contract (in days) and multiplying that result by 365, unless the term is less than one year, in which case the contract value equals the ACV. Because Subscription Solutions bookings is a metric we use to approximate the value of subscription solution sales if sold as perpetual licenses, this metric does not represent the actual revenue amount that will be recognized with respect to subscription solution sales or that would have been recognized if the sale had been of a perpetual license.

L&SS Bookings

L&SS bookings are new Subscriptions Solutions bookings (calculated as described above) plus our perpetual license sales recognized in the period.

License Mix-Adjusted Metrics

These metrics assume that all new subscription and cloud services bookings since the start of 2014 were perpetual license sales that included support in subsequent periods. The license mix-adjusted amount is calculated by taking L&SS bookings for the period (as calculated as described above), calculating assumed support revenue at 20% of the annual value of the converted amount and then adding that amount to support revenue in future periods, beginning in the quarter after the converted booking is assumed to be recognized. The assumed support revenue is recognized ratably over a 12 month period and is assumed to renew in subsequent years. The total assumed revenue (perpetual license equivalent plus assumed support) is then converted into U.S. Dollars based on the corresponding prior year’s foreign currency exchange rates.

Future Expectations, Strategies and Risks

Uncertainty about the economic environment, volatility in foreign currency exchange rates and our transition to subscription-based sales are headwinds for revenue growth in fiscal 2015. While we saw indications of improvement in global manufacturing economic conditions in 2014, current economic indicators raise concerns about the economic climate, particularly in Europe, China and Japan. Due to this level of uncertainty, and current unfavorable Euro and Yen to U.S. Dollar exchange rates relative to 2014, at the outset of 2015 we expected only modest revenue growth in 2015. Due to further deterioration in currency exchange rates and uncertainty regarding macroeconomic conditions, we expect 2015 revenue below our previous guidance, although we expect our 2015 non-GAAP earnings to be consistent with the guidance that we provided in the second quarter of 2015.

If economic conditions deteriorate further, or if foreign currency exchange rates relative to the U.S. Dollar differ significantly from our current assumed rates, our results could differ materially from our targets. Additionally, if a greater percentage of our customers purchase our solutions as subscriptions than we expect, it may have an adverse impact on revenue, operating margin, cash flow and EPS growth relative to our targets and historical results.

Our 2015 targets exclude settlement losses related to the termination of our U.S. pension plan. While we expect to complete the termination process by September 30, 2015, the amount of the losses will vary based on the timing of the settlement payments and the projected benefit obligations and assets in the plan measured as of the dates the settlements occur. We currently estimate the pre-tax settlement losses to be approximately $65 million.

Our results have been impacted, and we expect will continue to be impacted, by our ability to close large transactions. The amount of revenue, particularly L&SS revenue, attributable to large transactions, and the number of such transactions, may vary significantly from quarter to quarter based on customer purchasing decisions and macroeconomic conditions. Our growth rates have become increasingly dependent on adoption of our solutions by large direct customers. Such transactions tend to be larger in size and may have long lead times as they often follow a lengthy product selection and evaluation process. This may cause volatility in our results.

Impact of an Investigation in China

Resolution of this matter is likely to include fines and penalties. Given the uncertainty regarding whether settlements can be reached and, if reached, on what terms, we are not able to estimate a range of reasonably possible loss with regard to any such settlements and have not recorded any liability in connection with this matter. If settlements are reached, we believe that the associated financial liability could be material to our results of operations for the fiscal period in which the liability is recorded. Further, any settlement or other resolution of this matter could have collateral effects on our business in China, the United States and elsewhere.

Revenue, Operating Margin, Earnings per Share and Cash Flow from Operations

The following table shows the financial measures that we consider the most significant indicators of the performance of our business. In addition to operating income, operating margin, and diluted earnings per share as calculated under generally accepted accounting principles (“GAAP”), the table also includes non-GAAP operating income, operating margin, and diluted earnings per share for the reported periods. We discuss the non-GAAP measures in detail, including items excluded from the measures, and provide a reconciliation to the comparable GAAP measures under Results of Operations - Non-GAAP Measures below.



	Three months ended						Percent Change 2014 to 2015				Six months ended							Percent Change 2014 to 2015
	April 4, 2015			March 29, 2014			Actual		Constant Currency		April 4, 2015			March 29, 2014				Actual		Constant Currency
	(Dollar amounts in millions, except per share data)
License and subscriptions solutions	$	86.0		$	88.5		(3	)%	6	%	$	164.9		$	171.4			(4	)%	2	%
Support	168.7			166.2			1	%	9	%	350.4			336.4				4	%	10	%
Total software revenue	254.7			254.8			—	%	8	%	515.3			507.8			—	1	%	7	%
Professional services	59.4			73.9			(20	)%	(12	)%	124.3			145.8				(15	)%	(9	)%
Total revenue	314.1			328.7			(4	)%	3	%	639.6			653.6				(2	)%	4	%
Total cost of revenue	86.1			93.8			(8	)%			179.0			186.8				(4	)%
Gross margin	228.1			234.9			(3	)%			460.6			466.9				(1	)%
Operating expenses	224.1			183.7			22	%			418.9			360.8				16	%
Total costs and expenses (1)	310.1			277.5			12	%	18	%	597.9			547.5				9	%	13	%
Operating income (1)	$	4.0		$	51.2		(92	)%	(75	)%	$	41.6		$	106.1			(61	)%	(46	)%
Non-GAAP operating income (1)	$	73.8		$	80.1		(8	)%	9	%	$	143.6		$	162.4			(12	)%	1	%
Operating margin (1)	1.3		%	15.6		%					6.5		%	16.2		%
Non-GAAP operating margin (1)	23.4		%	24.4		%					22.4		%	24.8		%
Diluted earnings per share (2)	$	0.05		$	0.36						$	0.31		$	0.69
Non-GAAP diluted earnings per share (2)	$	0.53		$	0.48						$	1.03		$	0.98
Cash flow from operations	$	92.0		$	110.7						$	105.6		$	147.0

(1) Costs and expenses for the three and six months ended April 4, 2015 included restructuring charges of $38.5 million and $38.2 million, respectively, compared to $1.1 million in the first six months of 2014 (none in the second quarter). Costs and expenses for the three and six months ended April 4, 2015 included acquisition-related and pension plan termination costs of $3.6 million and $9.3 million, respectively, compared to $3.9 million and $5.2 million in the second quarter and first six months of 2014, respectively. These restructuring charges and acquisition-related and pension plan termination costs have been excluded from non-GAAP operating income.
(2) Income taxes for non-GAAP diluted earnings per share reflect the tax effects of non-GAAP adjustments which are calculated by applying the applicable tax rate by jurisdiction to the non-GAAP adjustments described in Non-GAAP Measures. In the fourth quarter of 2012, a valuation allowance was established against our U.S. net deferred tax assets. Similarly, in the fourth quarter of 2014, valuation allowances were established against our foreign net deferred tax assets in two foreign jurisdictions. As the U.S. and the two foreign jurisdictions are profitable on a non-GAAP basis, the 2015 and 2014 non-GAAP tax provision is being calculated assuming there is no valuation allowance in these jurisdictions. Our non-GAAP tax provision in the first quarter of 2015 includes a $2.1 million tax benefit related to a retroactive extension of the research and development tax credit enacted in that quarter. Our non-GAAP tax provision excludes a non-cash tax benefit of $8.9 million in the second quarter of 2014 related to the release of a portion of the valuation allowance as a result of deferred tax liabilities established for the acquisition of ThingWorx. This benefit has been excluded from non-GAAP diluted earnings per share.

Results of Operations

Impact of Foreign Currency Exchange on Results of Operations

Approximately two-thirds of our revenue and half of our expenses are transacted in currencies other than the U.S. Dollar. Because we report our results of operations in U.S. Dollars, currency translation, particularly changes in the Euro and Yen

relative to the U.S. Dollar, affects our reported results. If actual results for the second quarter and first six months of 2015 had been converted into U.S. Dollars based on the foreign currency exchange rates in effect for the second quarter and first six months of 2014, revenue would have been higher by $25.6 million and $37.9 million, respectively, costs and expenses would have been higher by $16.7 million and $22.8 million, respectively, and operating income would have been higher by $8.9 million and $15.1 million, respectively. Our constant currency disclosures are calculated by multiplying the actual results for the first six months of 2015 by the exchange rates in effect for the first six months of 2014.

Revenue from Acquired Businesses

In 2014, we completed the acquisitions of Axeda (on August 11, 2014), Atego (on June 30, 2014) and ThingWorx (on December 30, 2013). The results of operations of these acquired businesses have been included in our consolidated financial statements beginning on their respective acquisition dates. Axeda and Atego collectively added 3% and 4%, respectively, to our revenue in the second quarter and first six months of 2015.

Reclassifications

Through 2014, we classified revenue in three categories: 1) license; 2) service; and 3) support. Because we introduced subscription-based licenses in 2015, we have revised our revenue reporting. Effective with the beginning of the first quarter of 2015, we are reporting revenue as follows: 1) license and subscription solutions (L&SS); 2) support; and 3) professional services. License and subscription solutions revenue includes perpetual license revenue, subscription revenue and cloud services revenue. Cloud service offerings were previously reflected in service revenue and cost of service revenue. Consulting and training service revenue and consulting and training cost of service revenue are now referred to as professional services revenue and cost of professional services revenue. The discussion that follows reflects our revised reporting structure.

Revenue

We report our revenue by line of business (license and subscriptions solutions (L&SS), support and professional services), by solution area (CAD, EPLM, SLM and IoT) and by geographic region (Americas, Europe, Pacific Rim and Japan). Results include combined revenue from direct sales and our channel.

CAD revenue includes PTC Creo^® and PTC Mathcad^®.

Extended PLM (EPLM) revenue includes our PLM solutions (primarily PTC Windchill^®) and our ALM solutions (primarily PTC Integrity^™) and Atego^®.

SLM revenue includes PTC Arbortext^®and PTC Servigistics^®products.

IoT revenue includes ThingWorx^® and Axeda^® products.



Revenue by Line of Business	% of Total Revenue
	Three months ended				Six months ended
	April 4, 2015		March 29, 2014		April 4, 2015		March 29, 2014
L&SS	27	%	27	%	26	%	26	%
Support	54	%	51	%	55	%	51	%
Professional services	19	%	22	%	19	%	22	%



Revenue by Solution	Three months ended								Six months ended
					Percent Change								Percent Change
	April 4, 2015		March 29, 2014		Actual		Constant Currency		April 4, 2015		March 29, 2014		Actual		Constant Currency
	(Dollar amounts in millions)
CAD
L&SS	$	35.0	$	37.9	(7	)%	2	%	$	64.8	$	72.0	(10	)%	(3	)%
Support	91.1		93.9		(3	)%	6	%	189.7		189.9		—	%	6	%
Total software revenue	126.2		131.7		(4	)%	5	%	254.4		261.9		(3	)%	4	%
Professional services	4.9		6.4		(24	)%	(16	)%	10.2		12.4		(18	)%	(12	)%
Total revenue	$	131.1	$	138.2	(5	)%	4	%	$	264.6	$	274.3	(4	)%	3	%
EPLM
L&SS	$	32.7	$	40.3	(19	)%	(11	)%	$	63.8	$	76.0	(16	)%	(10	)%
Support	59.2		55.4		7	%	14	%	122.6		112.1		9	%	14	%
Total software revenue	91.9		95.7		(4	)%	4	%	186.4		188.1		(1	)%	5	%
Professional services	40.1		51.1		(21	)%	(13	)%	85.1		101.8		(16	)%	(10	)%
Total revenue	$	132.0	$	146.8	(10	)%	(2	)%	$	271.5	$	289.9	(6	)%	(1	)%
SLM
L&SS	$	10.7	$	10.0	8	%	11	%	$	20.7	$	23.0	(10	)%	(7	)%
Support	17.2		17.0		1	%	6	%	36.0		34.4		4	%	8	%
Total software revenue	27.9		26.9		4	%	8	%	56.7		57.4		(1	)%	2	%
Professional services	13.7		16.3		(16	)%	(12	)%	27.8		31.5		(12	)%	(8	)%
Total revenue	$	41.6	$	43.2	(4	)%	—	%	$	84.5	$	88.9	(5	)%	(2	)%
IoT
L&SS	$	7.5	$	0.4					$	15.6	$	0.4
Support	1.2		—						2.1		—
Total software revenue	8.7		0.4						17.8		0.4
Professional services	0.7		0.1						1.2		0.1
Total revenue	$	9.4	$	0.5					$	19.0	$	0.5

License and Subscription Solutions Revenue

The decrease in L&SS revenue in the second quarter of 2015 and first six months of 2015 was due primarily to changes in currency exchange rates, lower large deal revenue and a higher mix of subscription solutions revenue, partially offset by revenue from acquisitions. In the second quarter of 2015, compared to the year-ago period, L&SS revenue was down 3% (up 6% on a constant currency basis) and organic L&SS revenue (excluding revenue from Axeda and Atego) was down 11% (down 2% on a constant currency basis). In the first six months of 2015, compared to the year-ago period, L&SS revenue was down 4% (up 2% on a constant currency basis) and organic L&SS revenue was down 13% (down 6% on a constant currency basis). The amount of L&SS revenue and bookings attributable to large transactions, and the number of such transactions, may vary significantly from period to period and by geographic region. There was one L&SS booking from an individual customer greater than $5 million in the second quarter and first six months of 2015. There were three L&SS bookings from individual customers greater than $5 million in the second quarter and first six months of 2014. Subscription solutions bookings in the first quarter of 2015 were 14% of our license and subscription solutions (L&SS) bookings compared to 4% in the second quarter of 2014. Subscription solutions bookings in the first six months of 2015 were 16% of our license and subscription solutions (L&SS) bookings compared to 3% in the first six months of 2014.

Support Revenue

Support revenue is composed of contracts to maintain new and/or previously purchased perpetual licenses. Subscription-based licenses include the right for a customer to use our software and receive related support for a specified term, for which revenue is recognized ratably over the term of the arrangement. Subscription-based revenue (including support) is included in L&SS revenue. We saw steady growth in support revenue in 2013 and 2014, continuing in 2015. CAD support seats increased 1% as of the end of the second quarter of 2015 compared to the end of the second quarter of 2014 and EPLM support seats

increased 2% over the same period. Support revenue increased in all regions and business areas on a constant currency basis in the second quarter and first six months of 2015 compared to the second quarter and first six months of 2014, in part due to 5% constant currency perpetual license revenue growth in 2014, compared to 2013, and due in part to year-over year increases in support pricing.

Foreign currency exchange rate movements reduced support revenue by $12.7 million and $19.0 million in the second quarter and first six months of 2015, respectively, compared to the second quarter and first six months of 2014.

Professional Services Revenue

Consulting and training services engagements typically result from sales of new licenses and subscription solutions, particularly of our EPLM and SLM solutions. The decline in professional services revenue in the second quarter and first six months of 2015 was due in part to strong growth in service partner bookings, which is in line with our strategy for professional services revenue to trend flat-to-down over time as we expand our service partner program under which service engagements are referred to third party service providers. Additionally, over time, we anticipate implementing solutions that require less services. As a result, we do not expect that the amount of professional services we deliver will increase proportionately if L&SS revenue increases. Consulting revenue typically represents approximately 85% of total professional services revenue and training revenue typically represents approximately 15%. Our consulting service revenue in the second quarter and first six months of 2015 was down 21% and 17%, respectively. Year over year, training revenue decreased 10% and 1% in the second quarter and first six months of 2015, respectively, compared to the second quarter and first six months of 2014.

CAD Revenue

In the second quarter and first six months of 2015, L&SS revenue from new Creo^® seats, modules, and upgrades, which accounts for over 80% of CAD L&SS revenue, declined 4% and 5%, respectively, but was up modestly on a constant currency basis, compared to the second quarter and first six months of 2014. Fiscal 2014 benefited from a Creo product cycle. Looking forward, with the maturing of this product cycle, we expect CAD license revenue in 2015 will be lower than 2014.

CAD channel revenue which represents approximately 40% of total CAD revenue, was down 5% in the second quarter of 2015 compared to the year-ago period (up 5% on a constant currency basis) with L&SS revenue down 7% year over year (up 2% on a constant currency basis). In the first six months of 2015, CAD channel revenue was flat (up 8% on a constant currency basis).

Extended PLM Revenue

The decrease in EPLM L&SS revenue in the second quarter of 2015 reflects a 23% decline in PLM revenue, partially offset by a 10% increase in ALM revenue. PLM results in the second quarter of 2015 reflect lower large deal revenue, which we believe was due in part to a few large deals slipping out of the quarter. The decrease in EPLM L&SS revenue in the first six months of 2015 reflects a 15% decline in PLM revenue and a 23% decline in ALM revenue.

SLM Revenue

We remain encouraged by our SLM pipeline. While we have seen variability in the revenue contribution from SLM, we believe that leveraging customer relationships in our installed base where penetration of our SLM solutions is still in the early stages and the introduction of new connected SLM applications will drive future SLM solutions revenue growth.

IoT Revenue

IoT revenue is attributable to our acquisitions of Axeda and ThingWorx in the fourth quarter and second quarter, respectively, of fiscal 2014. We believe our leadership position within the application enablement platforms space, combined with an ability to sell IoT solutions to new and existing PTC customers, will enable us to achieve significant growth rates in this business going forward. Our IoT products contributed almost 10% of our current quarter reported L&SS revenue.

Bookings from Individual Customers

We believe the amount of large deals is an important measure of the strength of our business. We are now defining large deals as greater than $1 million of L&SS bookings (as defined in Executive Overview Subscription Solutions) from a customer during the quarter, which we believe more accurately reflects incremental new software business in a given quarter. Previously we defined large deals as more than $1 million of license and service revenue recognized from a customer during a quarter. We also track mega deals, which we now define as transactions resulting in L&SS bookings of over $5 million in a quarter. There was one mega deal in the second quarter of 2015 and three mega deals in the second quarter of 2014. There were no mega deals in the first quarters of 2015 and 2014.

For the second quarters of 2015 and 2014, there were 13 customers and 17 customers with L&SS bookings greater than $1 million, respectively, with average bookings per customer of $2.2 million in both periods. We continue to have a strong pipeline of large deals that we are working on worldwide, though the timing of closing and the size of large deals may be affected by the overall health of the manufacturing economy, among other factors.



	Three months ended				Six months ended
	April 4, 2015		March 29, 2014		April 4, 2015		March 29, 2014
	(in millions)
L&SS bookings greater than $1 million from individual customers in a quarter (1)	$	29.2	$	37.5	$	55.1	$	65.3
(1) We define L&SS bookings as new subscription solutions ACV multiplied by two, plus perpetual license revenue, as described in "Executive Overview, Subscription Solutions".

Revenue by Geographic Region



	Three months ended				Percent Change				Six months ended				Percent Change
	April 4, 2015		March 29, 2014		Actual		Constant Currency		April 4, 2015		March 29, 2014		Actual		Constant Currency
	(Dollar amounts in millions)
Revenue by region:
Americas	$	131.8	$	134.4	(2	)%	(1	)%	$	267.9	$	273.3	(2	)%	(1	)%
Europe	$	110.3	$	128.0	(14	)%	—	%	$	238.6	$	255.1	(6	)%	4	%
Pacific Rim	$	32.9	$	36.7	(10	)%	(8	)%	$	68.8	$	70.6	(3	)%	(1	)%
Japan	$	39.1	$	29.6	32	%	52	%	$	64.3	$	54.8	17	%	34	%



	Three months ended				Six months ended
	April 4, 2015		March 29, 2014		April 4, 2015		March 29, 2014
Revenue by region as a % of total revenue:
Americas	42	%	41	%	42	%	42	%
Europe	35	%	39	%	37	%	39	%
Pacific Rim	10	%	11	%	11	%	11	%
Japan	12	%	9	%	10	%	8	%

Americas

The decrease in revenue in the Americas in the second quarter of 2015 compared to the second quarter of 2014 consisted of a decrease of 9% ($3.0 million) in L&SS revenue and a decrease of 16% ($5.1 million) in professional services revenue, partially offset by an increase of 8% ($5.6 million) in support revenue. The decrease in revenue in the Americas in the first six months of 2015 compared to the first six months of 2014 consisted of a decrease of 15% ($10.4 million) in L&SS revenue and a decrease of 14% ($8.8 million) in professional services revenue, partially offset by an increase of 10% ($13.9 million) in support revenue. On an organic basis, revenue in the Americas decreased 8% in both the second quarter and first six months of 2015, compared to the second quarter and first six months of 2014. We had two mega deals in the Americas in the second quarter and first six months of 2014. We did not have any mega deals in the Americas in the second quarter and first six months of 2015.

Europe

Revenue in Europe in the second quarter of 2015 compared to the second quarter of 2014 consisted of a decrease in L&SS revenue of 24% ($8.0 million), 11% on a constant currency basis, a decrease in support revenue of 6% ($3.7 million), an increase of 9% on a constant currency basis, and a decrease in professional services revenue of 21% ($6.0 million), 8% on a constant currency basis. Revenue in Europe in the first six months of 2015 compared to the first six months of 2014 consisted of a decrease in L&SS revenue of 10% ($6.2 million), an increase of 1% on a constant currency basis, a decrease in support revenue of 1% ($1.8 million), an increase of 9% on a constant currency basis, and a decrease in professional services revenue of 15% ($8.5 million), 5% on a constant currency basis. We had one mega deal in Europe in the second quarter and first six months of 2014. We did not have any mega deals in Europe in the second quarter and first six months of 2015.

Changes in foreign currency exchange rates, particularly the Euro, reduced revenue in Europe by $18.1 million and $26.8 million in the second quarter of and first six months 2015, respectively, as compared to the second quarter and first six months of 2014.

Pacific Rim

Revenue in the Pacific Rim in the second quarter of 2015 compared to the second quarter of 2014 included a decrease of 11% ($1.9 million) in L&SS revenue and a decrease of 44% ($3.6 million) in professional services revenue, partially offset by an increase in support revenue of 13% ($1.6 million). Revenue in the Pacific Rim in the first six months of 2015 compared to the first six months of 2014 included a decrease of 34% ($5.3 million) in professional services revenue partially offset by an increase in support revenue of 14% ($3.5 million). L&SS revenue in the first six months of 2015 was flat compared to the first six months of 2014.

Revenue from China, which has historically represented 5% to 7% of our total revenue, was 4% of revenue in both the second quarter and first six months of 2015, compared to 5% of revenue in both the second quarter and first six months of 2014 and decreased 26% and 15% in the second quarter and first six months of 2015, respectively, as compared to the second quarter and first six months of 2014.

Japan

Revenue in Japan in the second quarter of 2015 compared to the second quarter of 2014 reflects an increase of 140% ($10.2 million) in L&SS revenue and an increase of 4% ($0.2 million) in professional services revenue, offset by a decrease in support revenue of 6% ($1.0 million). Year over year, on a constant currency basis, in the second quarter of 2015, L&SS revenue was up 178%, support revenue was up 8% and professional services revenue was up 19%. Revenue in Japan in the first six months of 2015 compared to the first six months of 2014 reflects an increase of 88% ($10.2 million) in L&SS revenue and an increase of 10% ($0.9 million) in professional services revenue, offset by a decrease in support revenue of 5% ($1.6 million). Year over year, on a constant currency basis, in the first six months of 2015, L&SS revenue was up 117%, support revenue was up 7% and professional services revenue was up 25%. We had one transaction with greater than $5 million of L&SS revenue from a customer in the second quarter of 2015. We had no transactions in Japan greater than $5 million in the first six months of 2014.

Changes in the Yen to U.S. Dollar exchange rate reduced revenue in Japan by $6.0 million and $8.9 million in the second quarter and first six months of 2015, respectively, compared to the second quarter and first six months of 2014.



Gross Margin	Three months ended								Six months ended
	April 4, 2015			March 29, 2014			Percent Change		April 4, 2015		March 29, 2014		Percent Change
	(Dollar amounts in millions)
Gross margin	$	228.1		$	234.9		(3	)%	$	460.6	$	466.9	(1	)%
Non-GAAP gross margin	236.4			241.6			(2	)%	477.5		480.6		(1	)%
Gross margin as a % of revenue:
License and subscription solutions	84.7		%	87.7		%			83.9