Autodesk, Inc. — Q3 FY2016 Form 10-Q
Reporting period: Three and nine months ended October 31, 2015. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. The interim financial statements are unaudited.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $599.8 | $618.0 | $1,855.8 | $1,847.6 |
| Gross profit / margin | $508.8 / 85% | $532.0 / 86% | $1,580.0 / 85% | $1,595.0 / 86% |
| Operating income (loss) / margin | $(14.8) / (2)% | $14.6 / 2% | $11.0 / 1% | $106.7 / 6% |
| Net income (loss) | $(43.8) | $10.7 | $(293.3) | $70.3 |
| Diluted EPS | $(0.19) | $0.05 | $(1.29) | $0.30 |
| Operating cash flow | Not presented by quarter | $244.1 | $450.9 |
- Q3 revenue fell 3% year over year; nine-month revenue was essentially flat. License and other revenue declined 12% in Q3 and 9% for the nine-month period, while subscription revenue grew 7% and 11%, respectively.
- Q3 operating expenses were $523.6 million, up from $517.4 million; nine-month expenses were $1,569.0 million, up from $1,488.3 million. Management attributed increased spending mainly to employee-related and cloud-related costs supporting the business-model transition.
- Nine-month operating cash flow declined 46% to $244.1 million. Investing activities used $756.1 million, including $104.6 million for acquisitions; financing activities provided $441.3 million, including $748.3 million of debt proceeds and $357.7 million of share repurchases.
Balance sheet, debt and liquidity
- At October 31, cash and cash equivalents were $1,337.5 million and marketable securities totaled $1,486.9 million, or approximately $2.8 billion combined. Net accounts receivable was $362.3 million.
- Total deferred revenue was $1,212.3 million, including $963.4 million of deferred subscription revenue, generally recognized over contract terms.
- Long-term notes payable, net, was $1,486.9 million. Autodesk had issued $750 million principal amount of notes in June 2015, with coupons of 3.125% and 4.375% and maturities in 2020 and 2025. The company reported no borrowings on its $400 million revolving credit facility and compliance with its covenants.
- Management said existing liquidity, expected operating cash flows and the available credit facility should meet working-capital and operating needs for at least the next 12 months. Approximately 73% of cash, cash equivalents and marketable securities was offshore.
Material changes and business transition
- The transition from perpetual licenses toward subscriptions is shifting revenue recognition toward ratable recognition and lowering upfront prices. Autodesk said this transition is expected to affect revenue, margins, EPS, deferred revenue and operating cash flow, and expects traditional perpetual-license revenue to decline without a corresponding expense decrease over the next 12–24 months.
- Recurring revenue represented 56% of Q3 revenue, versus 48% a year earlier. Total subscriptions rose 16% year over year to 2.47 million; total subscription ARR increased 15% to $1.354 billion. New-model subscriptions grew 132%, while total ARPS declined 1% to $548.
- By segment, Q3 revenue increased 4% in Architecture, Engineering and Construction (AEC) and 3% in Manufacturing, but declined 15% in Platform Solutions and Emerging Business (PSEB) and 9% in Media and Entertainment. For the nine-month period, AEC and Manufacturing grew 10% and 9%; PSEB fell 16% and Media and Entertainment fell 3%.
- Foreign exchange weighed on reported results. Management estimated revenue growth at constant currency, excluding hedge gains and losses, of 2% for Q3 and 5% for the nine-month period.
Outlook, risks and unusual items
- Q4 FY2016 guidance: Revenue of $620–$640 million; GAAP diluted EPS loss of $0.31–$0.27 and non-GAAP diluted EPS of $0.08–$0.12.
- FY2016 guidance: Billings growth of 0.5%–1.5% (7%–8% at constant currency); revenue of $2.475–$2.495 billion (3%–4% growth at constant currency); GAAP operating margin approximately (1)% and non-GAAP margin approximately 10%; GAAP diluted EPS loss of $1.59–$1.55 and non-GAAP EPS of $0.72–$0.76; net subscription additions of 310,000–330,000.
- Nine-month tax expense was $293.5 million despite pretax income of only $0.2 million, primarily reflecting a $230.8 million valuation allowance against U.S. federal and remaining state deferred tax assets. The nine-month tax charge also included a $33.1 million correction to the previously reported valuation-allowance calculation; Autodesk revised its prior-quarter results and said the original error was not material to those periods.
- Management concluded disclosure controls and procedures were not effective as of October 31, 2015, due to a material weakness in technical review controls over deferred-tax reconciliations and the effective tax rate. Remediation efforts were underway, including enhanced reviews and outside technical assistance.
- Key risks include execution and customer adoption of the subscription transition, competitive and economic conditions, foreign-exchange exposure, reliance on distributors, and tax-asset recoverability. Tech Data accounted for 26% of Q3 revenue and 25% of trade receivables at quarter-end. Autodesk reported that pending legal matters were not expected to have a material adverse impact, while noting outcomes are uncertain.
- After quarter-end, Autodesk completed its acquisition of netfabb and an investment in FIT AG on November 12, 2015; the filing reported approximate cash amounts of $42.5 million and $27.4 million, respectively.
Investor verification priorities
- Track subscription adoption, ARR, ARPS, renewal trends and billings as perpetual-license sales are phased out; assess whether growth offsets lower upfront revenue and cash conversion.
- Review the material weakness remediation and subsequent filings for evidence that tax controls have been strengthened and the deferred-tax valuation allowance remains supportable.
- Reconcile GAAP results and cash flow with management’s non-GAAP measures and guidance, including the effects of stock compensation, acquired-intangible amortization and the valuation allowance.
- Monitor operating expense growth, margins and operating cash flow against management’s transition investment plans and FY2016 outlook.
- Assess debt service, offshore cash availability and repatriation tax exposure, along with concentration in Tech Data and foreign-currency risk.