Autodesk, Inc. — Q2 FY2018 Form 10-Q Summary
Business context and reporting period
Quarter ended July 31, 2017; fiscal year ends January 31. Autodesk is shifting from perpetual software licenses toward term subscriptions, cloud services, and flexible enterprise agreements. The company says this transition shifts revenue recognition from upfront to ratable and can weigh on reported revenue, margins, earnings, and operating cash flow. Prior-year revenue and cost classifications were re-presented; the change did not affect total revenue or gross margin.
Financial results and key metrics
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $501.8 million | $550.7 million | $987.5 million | $1,062.6 million |
| Gross margin | 85% | 85% | 85% | 83% |
| Operating loss | $107.6 million | $62.9 million | $227.2 million | $212.6 million |
| Net loss | $144.0 million | $98.2 million | $273.6 million | $265.9 million |
| Basic and diluted loss per share | $0.66 | $0.44 | $1.25 | $1.19 |
| Cash from operating activities | Not separately presented for the quarter | $(27.3) million | $146.4 million |
Q2 revenue fell 9% year over year; six-month revenue fell 7%. Subscription revenue rose 93% in Q2 and 97% year to date, while maintenance revenue declined 6% in both periods and license and other revenue fell 74% and 70%, respectively. Gross profit was $427.2 million in Q2. Q2 operating expenses rose 1% to $534.8 million; six-month operating expenses declined 3% to $1.062 billion.
Recurring revenue was $457.4 million in Q2, up 21% year over year and equal to 91% of reported revenue. At July 31, total ARR was $1.830 billion, up 12% from January 31; subscription-plan ARR rose 37% to $783.7 million, while maintenance-plan ARR declined 2% to $1.046 billion. Total subscriptions were 3.443 million, up 11% from January 31. Deferred revenue was $1.776 billion, with an additional $62.6 million of unbilled deferred revenue.
Operating cash flow was a $27.3 million use of cash for the six months, versus $146.4 million provided a year earlier. Investing activities provided $200.7 million, mainly from marketable-security maturities and sales; financing activities used $218.0 million, including debt repayment and share repurchases. Cash and cash equivalents were $1.174 billion at July 31.
Cash, cash equivalents, and marketable securities totaled $1.94 billion. Autodesk reported $1.60 billion principal amount of notes outstanding and $358.8 million of cash and securities net of senior notes. It issued $500 million of 3.5% notes due 2027 and used proceeds in part to redeem $400 million of 1.95% notes due 2017. No credit-facility borrowings were outstanding at July 31; the $400 million facility matures in May 2020. The company reported compliance with its credit covenants.
Material changes versus the prior comparable period
- The transition to subscriptions drove sharply lower license revenue, partly offset by subscription growth. Autodesk attributed subscription growth primarily to product subscriptions.
- Q2 operating loss widened to $107.6 million from $62.9 million, and net loss widened to $144.0 million from $98.2 million. For the six months, operating and net losses also increased.
- Six-month operating cash flow swung from $146.4 million provided to $27.3 million used.
- Q2 product-family revenue declined 18% in Architecture, Engineering and Construction and 17% in Manufacturing, while AutoCAD and AutoCAD LT grew 32% and Media and Entertainment grew 10%.
- Marketing and sales expense rose 6% year over year in both the quarter and six-month period. Restructuring costs were substantially lower than in the prior year.
Outlook, management commentary, risks, and unusual items
Management expects maintenance revenue and maintenance subscriptions to decline over time as new maintenance sales have largely ceased; the pace depends on renewals and customer conversion to subscriptions. A maintenance-to-subscription incentive program began June 15, 2017. Management said subscription-plan growth was led by product subscriptions and expected ARR and ARPS to fluctuate with term length, geography, product mix, and pricing. The filing gives no clear revenue, earnings, or full-year financial guidance. For Q3 FY2018 versus Q3 FY2017, management anticipated lower cost of revenue, higher marketing and sales expense but flat as a percentage of revenue, a slight increase in R&D as a percentage of revenue, flat G&A, and a slight decline in purchased-intangible amortization.
- Transition and demand risk: Results depend on customer adoption, subscription renewal and conversion rates, channel acceptance, pricing, and successful scaling of cloud offerings. New subscriptions generally have lower initial prices and ratable revenue recognition.
- Customer and channel concentration: Tech Data represented 31% of Q2 revenue and 30% of six-month revenue; it held 30% of accounts receivable at July 31. Indirect channels generated approximately 70% of six-month revenue.
- Liquidity and geographic exposure: Approximately 82% of cash, cash equivalents, and marketable securities were held outside the U.S. Management expects available liquidity, operating cash flows, and credit access to cover needs for at least 12 months, while noting possible restrictions or tax costs on foreign cash.
- Tax matters: Autodesk maintained a full valuation allowance against U.S. deferred tax assets and reported $267.5 million of gross unrecognized tax benefits. The IRS began examining fiscal 2014 and 2015 federal returns.
- Legal and regulatory matters: The company disclosed routine legal proceedings, with no estimated loss amount provided for potentially material adverse outcomes. It also reported a December 2016 voluntary disclosure to OFAC concerning licenses totaling less than $700,000; OFAC’s review was pending, and penalties or other sanctions were possible.
- Unusual expenses: Q2 interest and other expense included $13.5 million of losses on strategic investments and dispositions. Autodesk recorded $3.6 million of impairment on privately held investments in Q2 and $4.1 million year to date. CEO-transition costs were $10.6 million in Q2 and $21.6 million year to date, including accelerated stock compensation.
Important facts for investors to verify
- Whether subscription growth and maintenance-to-subscription conversions can offset falling maintenance and perpetual-license revenue, and how renewal rates develop.
- Whether ARR, recurring revenue, and deferred revenue trends translate into improved GAAP revenue, profitability, and operating cash flow.
- The size and timing of CEO-transition, investment-impairment, and other excluded non-GAAP items; compare non-GAAP results with GAAP losses.
- Debt maturities, credit-facility covenant compliance, and the availability of foreign-held cash for U.S. needs.
- Developments in the IRS examination, OFAC review, legal proceedings, and the adoption of the new revenue-recognition standard, which management said could materially affect the adoption-date balance sheet.