Autodesk, Inc. — Q2 FY2016 Form 10-Q
Reporting period: Three and six months ended July 31, 2015. Amounts are in U.S. dollars; financial statements are unaudited. Autodesk develops design and engineering software and was shifting from upfront perpetual licenses toward subscriptions, cloud services, and more flexible licensing.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Revenue | $609.5M | $637.1M | $1,256.0M | $1,229.6M |
| Gross profit / margin | $516.5M / 85% | $549.2M / 86% | $1,071.2M / 85% | $1,063.0M / 86% |
| Operating income / margin | $4.3M / 1% | $49.9M / 8% | $25.8M / 2% | $92.1M / 7% |
| Net income (loss) | $(235.5)M | $31.3M | $(216.4)M | $59.6M |
| GAAP diluted EPS | $(1.04) | $0.13 | $(0.95) | $0.26 |
| Operating cash flow | Not separately stated | Not separately stated | $163.7M | $314.9M |
- Quarterly revenue fell 4%; six-month revenue rose 2%. License and other revenue declined 17% in Q2 and 7% for six months, while subscription revenue increased 11% and 13%, respectively.
- GAAP operating income fell 91% in Q2 and 72% for six months. Higher employee-related and cloud costs, increased operating expenses, and lower quarterly revenue weighed on results.
- The GAAP net loss primarily reflected a $213.6M valuation allowance against U.S. federal and remaining state deferred tax assets; $205.3M was recorded as discrete tax expense. Autodesk cited cumulative U.S. losses associated with its business-model transition as significant negative evidence.
- Non-GAAP diluted EPS was $0.19 for Q2 and $0.49 for the six-month period. These measures exclude specified costs and tax items; they are not substitutes for GAAP results.
Revenue trends and business transition
- Subscriptions totaled 2.39M at July 31, versus 2.01M a year earlier. Recurring revenue represented 55% of Q2 revenue and 53% of six-month revenue, compared with 44% and 45% in the prior-year periods.
- Q2 segment revenue: Architecture, Engineering and Construction (AEC) $233.4M, up 7%; Manufacturing $171.2M, up 2%; Platform Solutions and Emerging Business (PSEB) $164.1M, down 21%; Media and Entertainment $40.8M, down 6%. For six months, AEC rose 14%, Manufacturing 13%, PSEB fell 17%, and Media and Entertainment fell 1%.
- Management attributed strength to subscription growth, AEC, and certain manufacturing products; weakness included AutoCAD LT/PSEB and Asia Pacific, particularly Japan. Foreign exchange reduced reported revenue; on a constant-currency basis, revenue was flat in Q2 and up 6% for six months.
- Autodesk had discontinued upgrades effective March 6, 2015, planned to make new commercial seats of most standalone products subscription-only from February 1, 2016, and planned to stop selling new perpetual suite licenses during fiscal 2017. Management expected transition effects to pressure upfront revenue, margins, earnings, deferred revenue, and operating cash flow before benefits from subscriptions develop.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $1.473B; marketable securities totaled $1.479B. Together, cash and securities were approximately $2.952B at July 31, 2015, versus $2.299B at January 31, 2015.
- Current assets were $2.900B and current liabilities $1.314B. Deferred revenue was $1.236B, including $1.004B of deferred subscription revenue, generally recognized over contract terms.
- Long-term notes payable, net, were $1.486B. In June, Autodesk issued $450M of 3.125% notes due 2020 and $300M of 4.375% notes due 2025. It also had $400M of available revolving credit and no borrowings under that facility; it reported compliance with its covenants.
- Six-month operating cash flow was $163.7M, down from $314.9M; capital expenditures were $29.8M. Cash flow included substantial noncash deferred-tax and stock-compensation adjustments.
- Autodesk repurchased 3.7M shares for $207.7M during the six months. Approximately 68% of cash, cash equivalents, and marketable securities were held offshore; repatriation of some foreign earnings could incur U.S. tax.
Outlook, risks, and unusual items
- Q3 FY2016 guidance: Revenue of $580M–$600M; GAAP diluted EPS of $(0.23)–$(0.18); non-GAAP diluted EPS of $0.05–$0.10.
- FY2016 guidance: Billings growth of 2%–4% (9%–11% constant currency); revenue of $2.465B–$2.505B (3%–5% constant-currency growth); GAAP operating margin of (2)%–(1)%; non-GAAP operating margin of 9%–10%; GAAP diluted EPS of $(1.39)–$(1.27); non-GAAP diluted EPS of $0.60–$0.72; net subscription additions of 375,000–425,000.
- Full-year GAAP EPS guidance included approximately $0.94 per share from the noncash deferred-tax valuation allowance. Management cautioned that traditional perpetual-license revenue could decline without a corresponding near-term decrease in expenses.
- Key exposures include execution and customer acceptance of the subscription/cloud transition, competition and technology changes, foreign-exchange movements, weak economic conditions in Asia and emerging markets, and dependence on indirect sales channels. Tech Data accounted for 23% of Q2 and 25% of six-month revenue, and 25% of receivables at quarter-end.
- Autodesk reported $251.1M of gross unrecognized tax benefits. It said pending legal matters were not expected to materially affect consolidated results, cash flows, or financial position, but noted that an unfavorable outcome could materially affect a particular period; potential losses were not estimable where applicable.
- The company recorded $5.7M of additional operating expenses for prior-period liability errors, which it concluded were not material to prior periods and were not expected to be material for FY2016. No restructuring charges were recorded in the first six months of FY2016.
- Management stated disclosure controls were effective at a reasonable assurance level and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscription additions, renewals, billings, and deferred subscription revenue support management’s transition assumptions as perpetual-license sales contract.
- Whether operating expenses and cloud-related costs moderate sufficiently to improve GAAP operating margins and operating cash flow.
- The future realizability of deferred tax assets, any further valuation-allowance changes, and developments in unrecognized tax benefits.
- Actual results against Q3 and FY2016 guidance, including the stated constant-currency assumptions and non-GAAP adjustments.
- Changes in Tech Data concentration, international demand and currency effects, offshore cash accessibility, and the company’s ability to service or refinance its $1.5B of notes.