Autodesk, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended April 30, 2016. Comparisons are with the three months ended April 30, 2015, unless otherwise noted. Amounts are in U.S. dollars.
Business context
Autodesk is transitioning from upfront perpetual-license sales to subscriptions and cloud-based offerings. It stopped selling new perpetual licenses for most individual products on February 1, 2016, and planned to stop selling new perpetual suite licenses on August 1, 2016. Management cautioned that ratable revenue recognition and lower initial subscription prices affect revenue, margins, earnings, deferred revenue, billings, and operating cash flow during the transition.
Financial performance
| Metric | Q1 FY2017 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $511.9 million | $646.5 million | Down 21% |
| Subscription revenue | $326.0 million | $319.8 million | Up 2%; new-model subscription revenue increased 34% |
| License and other revenue | $185.9 million | $326.7 million | Down 43%, primarily reflecting the shift away from perpetual licenses |
| Gross profit / margin | $419.4 million / 82% | $554.7 million / 86% | Gross profit down 24% |
| Operating expenses | $574.4 million | $533.2 million | Up 8%, including $52.3 million of restructuring and facility-exit charges |
| Operating income (loss) / margin | ($155.0) million / (30%) | $21.5 million / 3% | Lower revenue and higher expenses |
| Net income (loss) / diluted EPS | ($173.0) million / ($0.77) | $19.1 million / $0.08 | GAAP loss; non-GAAP net loss was $23.0 million and non-GAAP diluted EPS was ($0.10) |
| Operating cash flow | $164.4 million | $86.5 million | Higher year over year, primarily supported by lower accounts receivable |
Recurring revenue was $358.9 million, up 9%, and represented 70% of total revenue versus 51% a year earlier. At April 30, total subscriptions were 2.71 million, up 5% from January 31; total ARR was $1.436 billion, up 4%. New-model subscriptions increased 33% and new-model ARR increased 21%; total ARPS declined 1% to $530.
Revenue declined in every reportable segment: Architecture, Engineering and Construction (AEC) 8%; Manufacturing 14%; Platform Solutions and Emerging Business (PSEB) 46%; and Media and Entertainment 12%. PSEB’s decline primarily reflected lower AutoCAD and AutoCAD LT revenue. International revenue was 64% of total revenue, versus 69% a year earlier. Revenue declined 17% in EMEA and 42% in Asia Pacific on an as-reported basis.
Financial position, cash flow, and debt
- Cash and cash equivalents were $1.223 billion; marketable securities totaled approximately $1.583 billion. Combined cash and marketable securities were approximately $2.8 billion at April 30, 2016.
- Deferred revenue was approximately $1.524 billion, including $1.092 billion current and $432 million long term. The company stated it would be recognized over contract terms, typically one to three years.
- Accounts receivable was $256.4 million, down from $653.6 million at January 31; days sales outstanding declined from 92 to 46, primarily due to seasonal maintenance billings and improved billing linearity.
- Long-term notes payable, net, was $1.488 billion. The company reported $1.5 billion aggregate principal outstanding and no borrowings on its $400 million revolving credit facility; it was in covenant compliance.
- Operating cash flow was $164.4 million; investing cash outflow was $230.2 million, including $59.6 million for acquisitions and $22.3 million of capital expenditures. Financing cash outflow was $67.2 million, including $100.1 million of share repurchases. Cash and cash equivalents decreased $129.6 million during the quarter.
Outlook and management commentary
Management expected the subscription transition to expand the customer base and, over time, support long-term revenue growth through higher subscriptions, ARR, and customer value. It also expected maintenance subscriptions to peak as perpetual sales end and then decline gradually. Management said it remained focused on spending discipline while making investments to drive growth.
| Guidance | Company outlook |
|---|---|
| Q2 FY2017 revenue | $500–$520 million |
| Q2 FY2017 GAAP diluted EPS | ($0.73) to ($0.63) |
| Q2 FY2017 non-GAAP diluted EPS | ($0.18) to ($0.11) |
| FY2017 revenue | $1.95–$2.05 billion; $1.995–$2.095 billion excluding foreign-exchange effects and hedge gains/losses |
| FY2017 spend growth | GAAP: 3%–4%; non-GAAP: (1%) to flat |
| FY2017 GAAP / non-GAAP diluted EPS | GAAP: ($3.25) to ($2.87); non-GAAP: ($0.95) to ($0.70) |
| FY2017 net subscription additions | 475,000–525,000 |
In February 2016, Autodesk approved a worldwide restructuring to reduce headcount by approximately 10% and consolidate facilities. The plan was estimated to cost about $88 million ($76 million in employee termination benefits and $12 million in facility and other exit costs); $52.3 million was recorded in the quarter. The company expected to pay substantially all related employee and facility liabilities by fiscal year-end.
Risks, contingencies, and unusual items
- Business-model execution: The transition could reduce near-term revenue and cash flow, and depends on customer adoption, renewals, channel acceptance, pricing, and successful development and scaling of cloud services.
- Tax matters: Autodesk recorded a full valuation allowance against U.S. federal and state deferred tax assets. A China transfer-pricing audit covering 2004–2013 could result in a material tax charge, but the company could not estimate the amount. Gross unrecognized tax benefits were $254.6 million.
- Internal controls: Management concluded 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 to be deemed effective.
- Revenue concentration: Tech Data accounted for 29% of quarterly revenue and 29% of trade receivables, increasing from 26% and 22%, respectively, at the comparable prior-year period and January 31 balance-sheet date.
- Geographic and currency exposure: Approximately 79% of cash, cash equivalents, and marketable securities was held offshore. Autodesk hedged a portion, but not all, of its foreign-exchange exposure; currency movements affected reported revenue.
- Legal matters: The company said pending matters were not expected to materially affect results or financial position, while noting that an unfavorable outcome could materially affect a future period and that a potential loss estimate was unavailable or immaterial.
- Other risks: Management highlighted global economic and political conditions, competition, subscription renewals, cybersecurity and privacy, acquisitions and integration, and potential impairment of goodwill or other assets.
Investor verification priorities
- Track subscription additions, ARR, renewal rates, and maintenance declines against management’s transition assumptions and FY2017 subscription-addition target.
- Compare subsequent reported results with the Q2 and FY2017 revenue, EPS, and spend guidance, noting the stated non-GAAP exclusions.
- Assess whether restructuring savings materialize, and distinguish recurring operating costs from restructuring charges.
- Monitor remediation of the tax-related material weakness and any developments in the China tax audit or U.S. deferred-tax valuation allowance.
- Review cash generation, deferred-revenue trends, offshore liquidity, debt maturities, and the pace of share repurchases.
- Monitor Tech Data concentration and the effects of foreign exchange and regional demand, particularly in Asia Pacific and emerging economies.