ADSK

Business Context and Reporting Period

This Form 10-Q covers Autodesk, Inc. for the quarterly period ended October 31, 1999 (Fiscal Q3 2000) and the nine months ended October 31, 1999. The filing reflects the consolidation of Discreet Logic Inc. (acquired March 1999 via pooling of interests) and VISION* Solutions (acquired April 1999 via purchase method). The company operates two reportable segments: Design Solutions and Discreet.

Key Financial Metrics

Margins (Q3 1999 vs Q3 1998): Cost of revenues increased from 15% to 17% of net revenues. Marketing and sales expenses rose from 35% to 37%. Research and development remained flat at 20%.

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 1.2% in Q3 and 8.3% over nine months, primarily driven by a decline in AutoCAD and AutoCAD LT sales. While Asia Pacific revenues grew 43%, decreases in the Americas (12%) and Europe (6%) offset this growth.
• Profitability Impact: The company reported a net loss of $15.4 million for the nine months ended October 31, 1999, compared to net income of $73.9 million in the prior year. This was significantly impacted by $36.5 million in nonrecurring charges.
• Nonrecurring Charges: Charges included $15.5 million for corporate restructuring (elimination of ~350 positions), $17.7 million related to the Discreet acquisition, and $3.3 million for in-process R&D from the VISION acquisition.
• Segment Performance: The Design Solutions segment generated $73.9 million in operating income for Q3, while the Discreet segment generated $5.3 million. Unallocated costs totaled $83.6 million for the quarter.

Guidance, Outlook, and Risks

Management Commentary: Management attributes recent revenue slowdowns to customer deferrals related to the transition to AutoCAD 2000 and Year 2000 (Y2K) testing concerns. The company expects continued investment in marketing and R&D. A stock repurchase program for up to 8.0 million shares was announced in November 1999 to offset dilution from employee stock plans.

Risks and Contingencies:

• Product Concentration: Heavy reliance on AutoCAD sales; any decline in this product line materially impacts results.
• Integration Risks: Challenges in integrating Discreet Logic's operations, culture, and sales channels with Autodesk's existing model.
• Competition: Intense competition in design and multimedia software markets from companies like Bentley, Computervision, and Adobe.
• Legal: An FTC investigation into potential unfair competition methods is ongoing, though management does not expect a material impact. A class action lawsuit against Discreet was dismissed with prejudice in September 1999.
• Y2K Compliance: The company is in the testing phase of its Y2K remediation, with minimal expected impact on operations.

Investor Verification Checklist

• AutoCAD Sales Trends: Verify the extent of the decline in AutoCAD and AutoCAD LT sales and the timeline for recovery post-AutoCAD 2000 transition.
• Restructuring Savings: Confirm the realization of the projected $9.0 million quarterly savings from the recent restructuring and the timeline for settling the remaining $5.9 million in liabilities.
• Discreet Integration: Assess the progress of integrating Discreet's direct sales model with Autodesk's distributor network and the realization of anticipated synergies.
• Product Returns: Monitor product return rates, which rose to 7% of revenues in Q3 1999, as a leading indicator of channel inventory health.
• Stock Repurchase Execution: Track the execution of the newly announced 8.0 million share repurchase program and its impact on share count and EPS.