Autodesk, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, three months ended April 30, 2017. Comparative period: three months ended April 30, 2016. Unaudited consolidated results. Autodesk is transitioning from perpetual software licenses to subscription offerings, which shifts revenue recognition toward ratable recognition and can affect revenue, margins, earnings and operating cash flow.
Key financial results
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Revenue | $485.7 million | $511.9 million | Down 5% |
| Gross profit / margin | $407.5 million / 84% | $419.5 million / 82% | Profit down 3%; margin up 2 points |
| Operating loss / margin | $(119.6) million / (25)% | $(149.7) million / (29)% | Loss narrowed |
| Net loss / diluted loss per share | $(129.6) million / $(0.59) | $(167.7) million / $(0.75) | Loss narrowed |
| Operating cash flow | $45.2 million | $164.4 million | Down 73% |
- Revenue mix: Maintenance revenue was $263.6 million, down 7%; subscription revenue was $173.4 million, up 103%; license and other revenue was $48.7 million, down 66%. Subscription growth was led by product subscriptions; the license decline reflected the discontinuation of most new perpetual license sales.
- Costs and non-GAAP results: Operating expenses fell 7% to $527.1 million, primarily because the prior-year quarter included substantial restructuring charges. GAAP gross margin improved, but non-GAAP operating loss increased to $39.5 million from $27.0 million, and non-GAAP net loss increased to $34.8 million from $23.0 million. Non-GAAP measures exclude items including stock compensation, amortization and CEO transition costs.
- Recurring business metrics: Recurring revenue was $435.9 million, up 18% year over year and 90% of reported revenue. Total subscriptions increased 6% from January 31, 2017, to 3.29 million; subscription-plan subscriptions rose 21% to 1.32 million, while maintenance-plan subscriptions declined 2% to 1.97 million. Total ARR was $1.744 billion, up 6%; total ARPS was $530.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled approximately $2.1 billion at April 30. Net accounts receivable was $231.5 million. Notes payable had a carrying value of approximately $1.49 billion; aggregate principal outstanding was approximately $1.5 billion. The $400 million revolving credit facility was undrawn, and Autodesk reported covenant compliance. Approximately 80% of cash and marketable securities were held outside the U.S.
- Cash uses: Financing activities used $178.8 million, including $195.9 million of share repurchases in the cash flow statement. Autodesk repurchased 2.2 million shares at an average $85.48 per share; 24.4 million shares remained authorized for repurchase.
Changes, outlook and material matters
- Revenue and cost-of-revenue categories were recast in Q1 FY2018 to show maintenance, subscription, and license and other revenue separately; the reclassification did not change total revenue, cost of revenue or gross margin.
- Management attributed the lower reported revenue primarily to the license transition, partly offset by subscription growth. Revenue decreased across AEC and manufacturing, while AutoCAD/AutoCAD LT and Media and Entertainment increased. Foreign exchange also weighed on revenue.
- Autodesk planned to begin a maintenance-to-subscription incentive program on June 1, 2017, offering discounts to customers who convert and increasing maintenance pricing over time for customers who remain. Management expects maintenance revenue to decline gradually, with the rate affected by renewals and conversions.
- No full-year revenue or earnings guidance is provided in the supplied filing text. For Q2 FY2018 versus Q2 FY2017, management expected cost of revenue to decrease in dollars and remain flat as a percentage of revenue; marketing and sales, research and development, and general and administrative expenses were expected to increase as a percentage of revenue.
- Management stated existing liquidity, expected operating cash flow and available credit should meet working-capital and operating needs for at least 12 months. It also noted that transition-related ratable revenue recognition and lower initial subscription prices are expected to continue affecting cash flow and reported results.
- Credit and tax matters: Autodesk amended its credit-facility covenants in April 2017 after forecasting difficulty meeting the prior minimum interest-coverage covenant. A $400 million note matures in December 2017. The company maintained a full valuation allowance against U.S. deferred tax assets and reported $263.9 million of gross unrecognized tax benefits; the IRS began examining fiscal 2014 and 2015 federal returns.
- Unusual items and controls: The quarter included $11.0 million of CEO transition costs used in the non-GAAP reconciliation. A prior material weakness in controls over deferred-tax-account reviews was reported as remediated; disclosure controls were assessed as effective. Autodesk recorded $0.5 million of impairment on privately held investments.
- Risks and contingencies: Tech Data accounted for 30% of quarterly revenue and 29% of trade receivables. The filing highlights business-model execution and subscription renewal risks, global economic and foreign-exchange exposure, channel dependence, cybersecurity and privacy risks, competition, and debt covenant and refinancing risks. Pending legal matters were not expected to have a material adverse impact, but an unfavorable outcome could materially affect a future period; a potential loss estimate was not provided. Autodesk also disclosed an OFAC voluntary self-disclosure concerning certain licenses totaling less than $700,000; the review was pending.
Investor verification priorities
- Track subscription-plan ARR and subscription growth against declining maintenance-plan ARR and renewals, especially after the June 2017 conversion program.
- Assess whether subscription growth and renewals can offset the loss of perpetual-license revenue and support improving GAAP and non-GAAP operating performance.
- Reconcile operating cash flow and deferred revenue trends with reported revenue, including the $30.0 million of unbilled deferred revenue and the filing’s noted adjustment to that figure.
- Monitor the December 2017 $400 million note maturity, amended credit covenants, and the amount and location of cash available to meet obligations.
- Evaluate concentration and exposure: Tech Data’s revenue and receivables share, foreign-currency sensitivity, overseas cash availability, tax examinations and valuation allowance, and the unresolved OFAC review.