Autodesk, Inc. — Q3 FY2015 Form 10-Q
Reporting period: Three and nine months ended October 31, 2014; comparisons are with the corresponding 2013 periods unless noted. Dollar amounts are in millions except per-share data. The interim statements are unaudited.
Business context
Autodesk develops design and engineering software and services across Platform Solutions and Emerging Business (PSEB), Architecture, Engineering and Construction (AEC), Manufacturing (MFG), and Media and Entertainment (M&E). The company is shifting toward cloud services and more flexible, subscription-based licenses. It said it would discontinue upgrades after FY2015 and planned to stop offering new perpetual licenses over the following 12–24 months.
Financial performance
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Revenue | $618.0 | $555.2 | $1,847.6 | $1,687.3 |
| Gross profit / margin | $532.0 / 86% | $488.1 / 88% | $1,595.0 / 86% | $1,484.9 / 88% |
| Operating income / margin | $14.6 / 2% | $68.1 / 12% | $106.7 / 6% | $233.1 / 14% |
| Net income | $10.7 | $57.6 | $70.3 | $174.9 |
| Diluted EPS | $0.05 | $0.25 | $0.30 | $0.77 |
- Q3 revenue grew 11%: subscription revenue rose 15% to $297.5, and license and other revenue rose 8% to $320.5. Nine-month revenue grew 10%, led by subscription revenue growth of 14%.
- Q3 billings increased 25% and nine-month billings increased 20%; management attributed the gap between billings and revenue growth primarily to subscription billings and higher deferred revenue. Total subscriptions were 2.13 million at quarter-end, versus 1.85 million at January 31, 2014.
- Q3 segment revenue growth was strongest in MFG (+20%) and AEC (+17%); PSEB grew 3%, while M&E declined 3%. For the nine months, AEC grew 18%, MFG 14%, PSEB 2%, and M&E declined 7%.
- Operating expenses increased 23% in Q3 and 19% year to date. Management cited spending on the business-model transition and cloud investment, Delcam-related dilution and headcount, and higher volume-related commissions and incentives. GAAP operating margin fell sharply despite revenue growth.
- Non-GAAP diluted EPS was $0.25 for Q3 and $0.92 for the nine months, versus $0.41 and $1.28, respectively. These measures exclude items including stock compensation, acquired-intangible amortization, restructuring, and strategic-investment losses; they are supplemental, not substitutes for GAAP results.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $450.9, up from $380.0. Investing cash use was $777.7, including $603.8 for acquisitions; financing cash use was $179.7, including $307.6 of share repurchases. Cash and cash equivalents declined $508.0 to $1,345.0.
- Cash, cash equivalents and marketable securities totaled $2,156.9 at October 31, 2014, down from $2,544.4 at January 31, 2014. Current assets were $2,458.7 and current liabilities $1,193.3. Deferred revenue totaled $1,006.2, including $775.1 current; management said much of it relates to subscriptions recognized ratably.
- Senior notes had $750.0 principal outstanding, with $747.0 reported net of discount; the notes carry 1.95% and 3.6% coupons and mature in 2017 and 2022. The $400.0 revolving credit facility had no borrowings and expires in May 2018.
- Approximately 83% of cash, cash equivalents and marketable securities were held offshore. Autodesk said existing liquidity, expected operating cash flows and the credit facility should meet working-capital and operating needs for at least 12 months.
Outlook, risks and notable items
- FY2015 guidance: Revenue growth of approximately 9%–10%; billings growth of 15%–17%; GAAP operating margin of approximately 4.5%–5%; GAAP diluted EPS of $0.30–$0.33; and 325,000–375,000 net subscription additions. Non-GAAP operating margin guidance was 15%–15.5%, and non-GAAP diluted EPS guidance was $1.15–$1.18.
- Q4 FY2015 guidance: Revenue of $640–$655 and GAAP diluted EPS from a loss of $0.03 to break-even; non-GAAP diluted EPS of $0.22–$0.25.
- Management expects the transition to increase ratable revenue and subscriptions over time, but warned that traditional perpetual-license revenue may decline without a matching near-term reduction in expenses. Execution, customer and channel acceptance, cloud investment costs, and the pace of subscription growth remain important uncertainties.
- Acquisitions included Delcam ($284.6), Within Technologies ($88.0), Shotgun ($54.5), and 16 other acquisitions for approximately $207.2. Acquisition cash spending and goodwill increased materially; some purchase-price allocations remained preliminary. Management noted integration costs and margin dilution risks.
- Tech Data accounted for 26% of revenue in both the quarter and nine-month period, and 22% of trade receivables at October 31. Autodesk cited foreign-exchange exposure, global economic and political uncertainty, competition, cybersecurity and privacy risks, and dependence on indirect sales channels. Its currency hedges do not fully offset exchange-rate effects.
- Gross unrecognized tax benefits were $236.7; the company could not estimate the possible change over the next 12 months. Routine legal matters were not expected to have a material adverse effect, but an unfavorable outcome could materially affect a particular period and any potential loss could not be estimated.
- Autodesk recorded $3.4 of impairment on privately held equity investments during the nine months. The nine-month period included $3.1 of restructuring charges; none were recorded in Q3. The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether subscription and billings growth converts into recognized revenue and sustained subscription additions as perpetual offerings are phased out.
- Monitor operating expenses, GAAP margins, and the gap between GAAP and non-GAAP results, particularly stock compensation and acquisition-related amortization.
- Assess acquisition integration, purchase-accounting adjustments, goodwill growth, and whether acquired businesses deliver expected growth without continued margin dilution.
- Review liquidity and cash deployment, including offshore cash availability, acquisition spending, repurchases, and the timing of senior-note maturities.
- Evaluate customer and distribution concentration, especially Tech Data, and the potential effects of currency movements, international conditions, and channel disruption.
- Follow tax uncertainty, investment impairments, and the status and potential outcomes of legal proceedings.