By EDGAR
Securities and Exchange Commission
Division of Corporation Finance
Office of Technology
100 F Street, N.E.
Washington, DC 20549
Attention: Brittany Ebbertt and Christine Dietz
Re: PTC Inc. (the Company)
Form 10-K for the Fiscal Year Ended September 30, 2022
Filed November 15, 2022
File No. 000-18059
Ladies and Gentlemen:
This letter is submitted by PTC Inc. (“PTC” or the “Company”) in response to comments of the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff”) raised in your letter dated March 14, 2023 (the “Comment Letter”) based on the Staff’s review of PTC’s Form 10-K for the Fiscal Year Ended September 30, 2022, filed on November 15, 2022. The comments from the Comment Letter are included below in bold. The Company’s response follows the comment.
Form 10-K for the Fiscal Year Ended September 30, 2022
Management's Discussion and Analysis of Financial Condition and Results of Operations Operating Measure - ARR, page 30
Response 1:
Annual Run Rate (“ARR”) represents the annualized value of our portfolio of active subscription software, cloud, SaaS, and support contracts as of the end of the reporting period. We calculate ARR as follows:
ARR is aligned with the amount that we invoice the customer annually. We invoice customers annually for the current year of the contract. A customer with a one-year contract will be invoiced for the total value of the contract at the beginning of the contractual term, while a customer with a multi-year contract will be invoiced for each annual period at the beginning of each year of the contract.
ARR is not annualized recurring revenue and is not calculated based on recognized or unearned revenue and there is no direct relationship between revenue recognized in accordance with ASC 606 and our ARR operating measure. Accordingly, up-front revenue recognized from term licenses does not impact ARR.
Please see the Appendix for details on the calculation of reported ARR for six different contract scenarios.
We believe ARR is a valuable operating measure to assess the health of a subscription business because it illustrates subscription billings to customers on an annual basis.
Response 2:
Typical subscription contract term lengths are 1, 2 or 3 years with an average length of approximately 2 years. Refer to Contract Scenarios 1, 2, 3 and 6 within the Appendix for examples of the reported ARR results for contracts with a duration of more than 1 year. ARR is calculated using only the annualized value of active contracts so only one year of multi-year contracts is included in ARR, and future contract renewals or non-renewals are not considered in the calculation.
For contracts with a duration of less than one year, we annualize the contract value and include this in our ARR calculation only for the active period(s). We note that less than 2% of our ARR value is comprised of contracts with a duration of less than one year, which contracts include add-ons to existing contracts with terms set to co-terminate with the original contract. Refer to Contract Scenario 5 within the Appendix for an example illustration of the reported ARR results for a contract with a duration of less than 1 year.
Response 3:
Refer to our above Response 1 for details regarding how we calculate ARR for contracts, including multi-year contracts. Additionally refer to Contract Scenarios 1, 2, 3 and 6 within the Appendix for examples.
The table below represents the approximate percentage of our recurring revenue that was recognized from multi-year contracts in each period presented. Our recurring revenue excludes revenue from the sale of professional services and perpetual licenses.
2020 | 2021 | 2022 |
~45% | ~50% | ~55% |
Typical terms for our multi-year contracts include that they are non-cancellable throughout the term, and we invoice the customer at subscription commencement and annually thereafter on the anniversary of the subscription start date. Our on-premises contracts provide customers with an annual right to exchange software within the original subscription with other products within the same product family. This exchange right does not provide the customer with any contractual right to reduce their contract value or receive any refund. (See Footnote 2 to our financial statements of our 2022 Form 10-K for discussion regarding the accounting treatment of this right under ASC 606.)
Response 4:
As discussed within Response 3, our typical terms for multi-year, non-cancellable, on-premises subscription contracts provide customers with an annual right to exchange software within the original subscription for other software. This exchange right does not change the total value of the customer contract, or the duration that they can use our software, so we do not make any adjustment to ARR. Under our standard software terms, Contract Scenarios 1, 2, and 6 within the Appendix would include an exchange right.
For additions to customer subscriptions and new customer subscriptions acquired, we report incremental ARR based on the contract value executed with the customer once the subscriptions become active. Contract Scenario 2 within the Appendix illustrates the impact on ARR of an addition to a current customer subscription. Contract Scenario 6 within the Appendix (the ramp contract) illustrates how incremental ARR is added to total ARR as each portion of the contract becomes active.
Response 5:
Our ARR calculation is independent from the calculation of recognized revenue. ARR includes only active contracts as of the end of a period and, therefore, if a contract has not renewed, it is excluded from our ARR calculation. Our calculation of ARR does not reflect anticipated renewals or non-renewals as it is a point in time calculation. A contract is included in reported ARR if it is active at the end of the period (the ARR calculation date) and is excluded if it is not active at the ARR calculation date. Please see Contract Scenarios 3, 4, and 5 within the Appendix for the ARR treatment after a contract expired.
Response 6:
For our future filings, we will modify our disclosed definition and explanation as follows:
“ARR (Annual Run Rate) represents the annualized value of our portfolio of active subscription software, cloud, SaaS, and support contracts as of the end of the reporting period. We calculate ARR as follows:
We believe ARR is a valuable operating measure to assess the health of a subscription business because it illustrates subscription billings to customers on an annual basis. As ARR is not annualized recurring revenue, it is not calculated based on recognized or unearned revenue and is not affected by variability in the timing of revenue under ASC 606, particularly for on-premises license subscriptions where a substantial portion of the total value of the contract is recognized at a point in time upon the later of when the software is made available, or the subscription term commences.
ARR should be viewed independently of recognized and unearned revenue and is not intended to be combined with, or to replace, either of those items. Investors should consider our ARR operating measure only in conjunction with our GAAP financial results.”
Response 7:
Refer to Response 6 above for our proposed revised disclosure.
The Company acknowledges that it is responsible for the accuracy and adequacy of its disclosures, notwithstanding any review, comments, action or absence of action by the staff. Please do not hesitate to contact me at ktalvitie@ptc.com if there are any comments or questions concerning the foregoing or if we can be of any assistance in any way.
Sincerely,
/s/ Kristian Talvitie
Kristian Talvitie
Chief Financial Officer
PTC Inc.
121 Seaport Blvd
Boston, MA 02110
Appendix: Example Calculations of ARR and Revenue for the Applicable Period End
The examples below show how we would include the annualized value of a contract in, or exclude it from, our disclosed ARR as of the end of a reporting period. In all cases below, the execution date of the contract is not relevant to the calculation of ARR as we consider only the performance period of the contract.
Contract Scenarios | |||||||||||||||||||||
# | Scenario | Total Contract Value | Contract Signature Date | Contract Start | Contract End | Annual Run Rate | Annual Billing | Annual Billing Date | |||||||||||||
1 | 3 year on-premises subscription contract | 3,000 | 11/15/2021 | 1/1/2022 | 12/31/2024 | 1,000 | 1,000 | 1/1/202X | |||||||||||||
2 | 2.5 year on-premises subscription contract* | 2,500 | 6/15/2022 | 7/1/2022 | 12/31/2024 | 1,000 | 1,000* | 1/1/202X | |||||||||||||
3 | 2 year SaaS contract | 2,000 | 1/1/2022 | 1/1/2022 | 12/31/2023 | 1,000 | 1,000 | 1/1/202X | |||||||||||||
4 | 1 year support contract | 1,000 | 12/1/2021 | 1/1/2022 | 12/31/2022 | 1,000 | 1,000 | 1/1/202X | |||||||||||||
5 | 6 month on-premises subscription contract | 500 | 12/15/2021 | 1/1/2022 | 6/30/2022 | 1,000 | 500 | 1/1/202X | |||||||||||||
6 | 3 year on-premises subscription ramp contract: | 6,000 | 12/1/2021 | 1/1/2022 | 12/31/2024 |
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6.1 | Year 1 fee (see ramp note) | 1,000 | 12/1/2021 | 1/1/2022 | 12/31/2022 | 1,000 | 1,000 | 1/1/2022 | |||||||||||||
6.2 | Year 2 fee (see ramp note) | 2,000 | 12/1/2021 | 1/1/2023 | 12/31/2023 | 2,000 | 2,000 | 1/1/2023 | |||||||||||||
6.3 | Year 3 fee (see ramp note) | 3,000 | 12/1/2021 | 1/1/2024 | 12/31/2024 | 3,000 | 3,000 | 1/1/2024 | |||||||||||||
Ramp note: PTC occasionally sells subscriptions to customers which include an increasing volume of licenses at different scheduled times during the subscription term. The increase in license volume is accompanied by an increase in the annual customer fee. In the above example, PTC's customer contract includes an initial volume of licenses in year 1 for $1,000. In year 2, the customer's volume increases, resulting in an increased annual fee to $2,000. In year 3, the customer's volume increases again for a year 3 fee of $3,000. We count toward ARR the value of active licenses only, so the incremental licenses (and corresponding fee increase) in years 2 and 3 are excluded from ARR in year 1. The incremental licenses in year 3 are excluded from the year 2 ARR value. In year 3, all licenses are active, so the full $3,000 fee is included within reported ARR. | |||||||||||||||||||||
* Assume that contract #2 represents an incremental order from the contract #1 customer. In this example, the customer has elected to add licenses to their subscription so that all license expire on the same 12/31/24 contract end date. Since the period of contract #2 is 6 months, we would generally invoice the customer $500 for the initial 6 month period, then $1,000 for the 2023 and 2024 annual periods. | |||||||||||||||||||||
Reported Annual Run Rate as of: | |||||||||||||||||||||
# | 12/31/2021 | 3/31/2022 | 6/30/2022 | 9/30/2022 | 12/31/2022 | 3/31/2023 | 6/30/2023 | 9/30/2023 | 12/31/2023 | 3/31/2024 | 6/30/2024 | 9/30/2024 | 12/31/2024 | ||||||||
1 | - | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | ||||||||
2 | - | - | - | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | ||||||||
3 | - | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | - | - | - | - | ||||||||
4 | - | 1,000 | 1,000 | 1,000 | 1,000 | - | - | - | - | - | - | - | - | ||||||||
5 |
| 1,000 | 1,000 | - | - | - | - | - | - | - | - | - | - | ||||||||
6 | - | 1,000 | 1,000 | 1,000 | 1,000 | 2,000 | 2,000 | 2,000 | 2,000 | 3,000 | 3,000 | 3,000 | 3,000 | ||||||||
Total | - | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 | 5,000 |