Autodesk, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended July 31, 2018; filed August 30, 2018. The company makes design and engineering software and is shifting from perpetual licenses and maintenance plans toward subscriptions, cloud services, and enterprise agreements. Comparisons with 2017 are affected by the company’s adoption of ASC 606 and ASC 340-40; prior-period figures were not restated.
Financial performance and position
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Revenue | $611.7 million, up 22% from $501.8 million | $1,171.6 million, up 19% from $987.5 million |
| Subscription revenue | $420.6 million, up 114% | $771.0 million, up 109% |
| Maintenance revenue | $166.4 million, down 36% | $347.6 million, down 34% |
| Gross profit and margin | $541.9 million; 89%, versus $427.2 million and 85% | $1,035.0 million; 88%, versus $834.7 million and 85% |
| Operating loss and margin | $24.7 million loss; (4)%, versus $107.6 million loss and (21)% | $80.0 million loss; (7)%, versus $227.2 million loss and (23)% |
| Net loss and diluted loss per share | $39.4 million; $0.18 loss per share, versus $144.0 million and $0.66 | $121.8 million; $0.56 loss per share, versus $273.6 million and $1.25 |
Non-GAAP results were materially stronger than GAAP: Q2 non-GAAP operating income was $55.6 million (9% margin) and non-GAAP net income was $43.2 million ($0.19 per diluted share). For the six months, non-GAAP operating income was $84.6 million (7% margin) and non-GAAP net income was $57.6 million ($0.26 per diluted share). These measures exclude specified items, including stock compensation and restructuring costs.
- Cash flow: Operating activities provided $26.4 million in the first half, versus $27.3 million used in the prior-year period. Investing activities used $40.3 million and financing activities used $157.3 million. Cash and cash equivalents declined $182.6 million to $895.4 million.
- Liquidity and debt: Cash, cash equivalents, and marketable securities totaled approximately $1.3 billion. Long-term notes payable were $1.587 billion; the $400 million revolving credit facility had no borrowings outstanding. Autodesk amended the facility’s financial covenants after forecasting it might not meet the former minimum interest-coverage covenant in Q2 FY2019; it reported compliance at July 31.
- Balance sheet: Total assets were $3.833 billion, compared with $4.114 billion at January 31, 2018. Stockholders’ deficit was $241.6 million. Current deferred revenue was $1.492 billion; total billed and unbilled deferred revenue was $2.205 billion, with 74% expected to be recognized within 12 months.
- Recurring business indicators: ARR was $2.347 billion, up 28% year over year; core business ARR was $2.27 billion, up 29%. Total subscriptions were approximately 3.9 million. Subscription-plan ARR grew while maintenance-plan ARR declined as customers converted under the maintenance-to-subscription program.
Material changes and unusual items
- Revenue growth reflected subscription expansion, including maintenance customers moving to subscriptions. Other revenue fell 44% in Q2, primarily reflecting the transition away from perpetual-license sales. Revenue grew across product families and regions.
- ASC 606 and ASC 340-40 adoption changed revenue timing for some offerings and required capitalization of eligible contract-acquisition costs. The adoption reduced opening accumulated deficit by a cumulative $179.4 million. For Q2, reported net loss was $39.4 million; on the filing’s ASC 605 comparison basis it would have been $27.1 million. The company reported no adoption impact on cash flows.
- Restructuring charges were $13.8 million in Q2 and $36.3 million in the first half. The worldwide plan targets an approximately 13% workforce reduction, or about 1,150 employees, and facility consolidation, substantially complete by fiscal year-end.
- Autodesk acquired construction software provider Assemble Systems on July 3 for stated consideration of $93.6 million, including cash, stock, and remeasurement of its existing investment. The preliminary allocation included $71.9 million of goodwill; purchase accounting remained subject to finalization.
- Tax expense was $16.0 million in Q2 and $34.6 million in the first half despite pretax losses. Autodesk maintained a valuation allowance against U.S. deferred tax assets and had $343.1 million of gross unrecognized tax benefits. Its accounting for the Tax Act remained provisional.
- Tech Data accounted for 35% of Q2 and first-half revenue and 32% of trade receivables at July 31. Approximately 84% of cash and marketable securities were held outside the United States.
Outlook, commentary, and risks
Management emphasized ARR, billings, and subscriptions as indicators of momentum during the business-model transition. It expects maintenance revenue and subscriptions to continue declining as customers migrate, with the pace dependent on renewal rates and conversion activity. No specific revenue or earnings guidance is stated in the provided filing text. For Q3 FY2019 versus Q3 FY2018, management expected cost of revenue and research and development expense to decrease; marketing and sales and general and administrative expense to increase in dollars but decrease as a percentage of revenue.
Management said current liquidity, anticipated operating cash flows, and available credit were expected to cover working-capital and operating needs for at least 12 months. Key disclosed risks include subscription adoption and renewal rates, execution of the restructuring and cloud strategy, competition and product acceptance, foreign-exchange and international-market exposure, distributor concentration, cybersecurity and privacy obligations, tax uncertainty, and compliance with amended credit covenants. The company reported that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether ARR growth and subscription additions translate into durable revenue, cash generation, and improved GAAP profitability as maintenance revenue contracts.
- The effects of ASC 606 and commission-cost capitalization on period comparisons; 2017 figures were not restated, and the filing presents separate ASC 605 comparisons for certain metrics.
- The company’s ability to meet amended credit-facility covenants, particularly the minimum interest-coverage requirement scheduled to apply after October 31, 2018.
- The execution costs and expected benefits of the workforce reduction and facility consolidation, as well as integration and final purchase accounting for Assemble.
- Exposure to Tech Data, international cash availability and foreign exchange, and unresolved tax matters, including the IRS examination and provisional Tax Act accounting.