Autodesk, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2017, ended July 31, 2016. Financial statements are unaudited; amounts are in millions except per-share data.
Business context and reporting period
Autodesk develops design, engineering, construction, manufacturing, and media software. It is transitioning from perpetual-license sales to subscriptions and cloud services. New perpetual licenses for most individual products ended February 1, 2016; sales of most new perpetual suite licenses ended August 1, 2016. This shifts revenue recognition toward ratable recognition and affects reported revenue, margins, earnings, and operating cash flow.
Key financial results
| Metric | Three months ended July 31, 2016 | Prior year | Six months ended July 31, 2016 | Prior year |
|---|---|---|---|---|
| Revenue | $550.7 | $609.5 | $1,062.6 | $1,256.0 |
| Subscription revenue | $322.0 | $319.0 | $648.0 | $638.8 |
| License and other revenue | $228.7 | $290.5 | $414.6 | $617.2 |
| Gross profit / margin | $465.6 / 85% | $516.5 / 85% | $885.1 / 83% | $1,071.2 / 85% |
| Operating loss / margin | $(62.9) / (11)% | $4.3 / 1% | $(212.6) / (20)% | $25.8 / 2% |
| Net loss | $(98.2) | $(268.6) | $(265.9) | $(249.5) |
| GAAP diluted loss per share | $(0.44) | $(1.18) | $(1.19) | $(1.10) |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $146.4 | $163.7 |
Second-quarter non-GAAP net income was $11.9 million, or $0.05 per diluted share, versus $44.0 million, or $0.19, a year earlier. First-half non-GAAP net loss was $11.1 million, or $0.05 per share, versus non-GAAP net income of $113.1 million, or $0.49. These company-defined measures exclude items including stock compensation, acquired-intangible amortization, restructuring costs, and specified tax items.
At July 31, cash and cash equivalents were $1,467.3 million and marketable securities totaled $1,103.2 million, approximately $2.57 billion combined. Deferred revenue was approximately $1.52 billion. Long-term notes payable, net, were $1,489.2 million; the $400 million revolving credit facility had no borrowings and Autodesk reported covenant compliance. Total assets were $5,047.4 million and current liabilities were $1,559.6 million.
Material changes versus prior comparable periods
- Revenue declined 10% in the quarter and 15% year to date, principally because license and other revenue fell 21% and 33%, respectively, amid the shift away from perpetual licenses. Subscription revenue grew 1% in both periods; new-model subscription revenue increased 38% in the quarter and 36% year to date, while maintenance revenue declined.
- Recurring revenue was $367.3 million for the quarter, up 10%, and $726.2 million for the half, up 9%. At quarter-end, total subscriptions were 2.82 million, up 9% from fiscal year-end; new-model subscriptions were up 62% to 692,700. ARR was $1.469 billion, up 7% from fiscal year-end, with new-model ARR up 46% to $371.3 million.
- Segment results were mixed: quarterly AEC revenue rose 8% and Manufacturing rose 3%, while Platform Solutions and Emerging Business fell 47% and Media and Entertainment fell 16%. Year-to-date AEC was flat, Manufacturing declined 6%, PSEB declined 47%, and M&E declined 14%.
- Asia Pacific revenue declined 32% in the quarter and 37% year to date, reflecting the transition and continued weakness in Japan and emerging economies. Foreign exchange also reduced reported results; management cited constant-currency revenue declines of 6% for the quarter and 12% for the half.
- Operating expenses included $16.0 million of restructuring and facility-exit charges in the quarter and $68.3 million year to date. Cash from operations declined 11% year over year for the first half.
Outlook, risks, and unusual items
- Q3 FY17 guidance: Revenue of $470–$485 million; GAAP diluted loss per share of $0.81–$0.74 and non-GAAP diluted loss per share of $0.27–$0.22.
- FY17 guidance: Revenue of $2.00–$2.05 billion; GAAP spend growth of approximately 2%, non-GAAP spend growth of approximately negative 2%, GAAP diluted loss per share of $2.97–$2.74, non-GAAP diluted loss per share of $0.70–$0.55, and 475,000–525,000 net subscription additions. Revenue guidance excluding foreign-exchange effects and hedge gains or losses was $2.045–$2.095 billion.
- The fiscal 2017 restructuring plan targets an approximately 10% workforce reduction and facility consolidation. Expected costs were approximately $69 million for employee termination benefits and $10 million for facility exits and related costs; substantially all plan liabilities were expected to be paid by fiscal year-end.
- Management said existing balances, anticipated operating cash flows, and available credit should meet working-capital and operating needs for at least 12 months. Approximately 86% of cash, cash equivalents, and marketable securities were held offshore; repatriation may involve U.S. tax consequences.
- Tech Data accounted for 31% of quarterly and 30% of first-half revenue, and 31% of receivables at July 31. This represents significant distributor concentration.
- Autodesk disclosed that its disclosure controls were not effective at quarter-end because of a previously identified material weakness in technical review of deferred-tax reconciliations and the effective tax rate. Remediation was underway but had not operated long enough for management to conclude it was effective.
- The company recorded a proposed China transfer-pricing audit settlement liability of approximately $11.4 million, including interest, subject to review by Chinese tax authorities. The IRS also planned to examine fiscal 2014 and 2015 federal returns. Gross unrecognized tax benefits were $261.6 million.
- Prior-year comparative results were revised for a $33.1 million understatement of income tax expense related primarily to the valuation allowance; Autodesk said the error was not material to those statements. The filing also describes general litigation and indemnification exposures; management did not expect pending matters to materially affect results, but stated outcomes are uncertain.
Important facts for investors to verify
- Whether new-model subscriptions, ARR, and renewals continue to grow enough to offset declining maintenance revenue and lost upfront perpetual-license sales.
- Whether revenue, operating margins, and operating cash flow track the transition-related guidance, including the stated GAAP and non-GAAP assumptions.
- Progress and final costs of the restructuring, and whether expected expense reductions are realized.
- Remediation of the material weakness in tax controls, subsequent tax-audit developments, and the effect of the U.S. deferred-tax valuation allowance.
- Exposure to Tech Data and other channel partners, foreign-exchange movements, and the concentration of liquidity offshore.