Autodesk, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Three and six months ended July 31, 2011. Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2010 periods unless otherwise stated.
Business context and operating performance
Autodesk sells design and creation software through four reportable segments: Platform Solutions and Emerging Business (PSEB), Architecture, Engineering and Construction (AEC), Manufacturing, and Media and Entertainment (M&E). Revenue growth was broad across segments and geographies. Management cited higher new-seat, upgrade and maintenance revenue.
Key financial metrics
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Net revenue | $546.3 (+16%) | $472.8 | $1,074.6 (+13%) | $947.4 |
| Gross profit / margin | $488.9 / 89% | $424.4 / 90% | $962.6 / 90% | $847.7 / 89% |
| Operating income / margin | $95.0 / 17% | $79.8 / 17% | $173.6 / 16% | $130.6 / 14% |
| Net income | $71.2 | $59.9 | $140.5 | $96.8 |
| Diluted EPS | $0.30 | $0.25 | $0.59 | $0.41 |
| Operating cash flow | Not separately provided | Not separately provided | $260.6 | $250.6 |
- Q2 license and other revenue was $333.0, up 19%; maintenance revenue was $213.3, up 11%. Six-month increases were 17% and 8%, respectively.
- Q2 operating expenses were $393.9, up 14%; six-month expenses were $789.0, up 10%. Six-month operating margin improved to 16% from 14%.
- At July 31, cash and cash equivalents were $1,131.5; marketable securities were $421.0, for total cash and securities of $1,552.5. Current assets were $1,778.8 and current liabilities $827.1.
- Six-month investing cash outflow was $174.8, including $81.2 for business combinations and $53.0 in capital expenditures. Financing cash outflow was $26.3, including $169.4 of share repurchases and $129.6 of stock issuance proceeds. Cash increased $56.4 to $1,131.5.
- No borrowings were outstanding under the $400.0 million unsecured revolving credit facility, which expires in May 2016. The filing reports no outstanding line-of-credit borrowings; a separate total-debt figure is not clearly provided.
- Deferred revenue was $642.4 within aggregate backlog of $667.5. Maintenance-contract revenue is recognized over contract terms, predominantly one year.
Material changes versus the prior comparable period
- Revenue increased 16% in Q2 and 13% for the half year; net income increased about 19% and 45%, respectively.
- All segments grew in Q2: PSEB 12%, AEC 19%, Manufacturing 20%, and M&E 9%. Manufacturing had the highest segment growth; AEC benefited from Revit-family sales.
- Suites revenue grew 45% in Q2 and 31% for the half year, reaching 29% and 26% of total revenue, respectively. Emerging-country revenue grew 23% and 18% for those periods.
- Q2 GAAP gross margin declined one percentage point to 89%, while operating margin was unchanged at 17%. Cost of maintenance revenue rose 48% in Q2, partly due to support headcount and suite fulfillment costs.
- Acquisitions and capital spending increased: business-combination cash outflow was $81.2 versus $8.5 in the prior-year half, and capital expenditures were $53.0 versus $11.1.
Outlook, risks and unusual items
- Management’s stated goals for the remainder of FY2012 were revenue growth and improved operating-margin percentage; the filing provides no numerical full-year revenue or earnings guidance. For Q3, it expected cost of revenue and each major operating expense category to rise in dollars but remain relatively consistent as a share of revenue.
- Management said current cash, expected operating cash flows and the available facility should meet working-capital and operating needs for the next 12 months. This outlook is subject to global economic conditions, customer spending, unemployment, credit availability, foreign exchange and other risks.
- International markets accounted for 72% of Q2 and 73% of six-month revenue. Tech Data accounted for 17% of revenue in both periods and 18% of receivables at July 31.
- Q2 included a favorable $1.3 restructuring adjustment. The company acquired Scaleform for $36.2 and Blue Ridge Numerics for $41.2 during the half; purchase-price allocations remained preliminary. After quarter-end, Autodesk acquired Instructables for about $32.0 and agreed to buy certain TurboSquid technology assets for $26.0.
- Investments included a $4.2 auction-rate security that had failed to settle at auction since 2007; recovery timing and proceeds were uncertain. Level 3 assets also included $14.5 of privately held convertible debt securities.
- Gross unrecognized tax benefits were $195.3, including $181.8 that could affect the effective tax rate if recognized. Legal proceedings were not expected by management to have a material adverse impact, but potential losses could not be estimated clearly.
- Other disclosed risks include acquisition integration, reliance on distributors, maintenance renewals, currency movements, economic and geopolitical uncertainty, competition, software piracy, intellectual-property claims, cybersecurity and technology changes.
Investor verification priorities
- Check whether suites growth, new-seat sales and maintenance billings continue, and how these trends convert into recognized revenue and deferred revenue.
- Monitor gross-margin pressure, operating-expense growth and management’s progress toward its margin-improvement goal.
- Review cash generation against acquisition spending, capital expenditures and share repurchases; confirm the use and availability of the revolving facility.
- Assess exposure to Tech Data, international markets, foreign exchange and the continued illiquidity and valuation of Level 3 investments.
- Track acquisition integration and final purchase-price allocations, tax uncertainties, and developments in legal proceedings and other disclosed risks.