Autodesk, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended April 30, 2015; comparisons are with the three months ended April 30, 2014. Amounts are in U.S. dollars, millions except per-share data and where noted.
Business context
Autodesk sells design and engineering software across architecture, engineering and construction (AEC), platform solutions and emerging business (PSEB), manufacturing (MFG), and media and entertainment (M&E). The company is shifting toward cloud services and term-based subscriptions, which recognize more revenue over time and can pressure near-term revenue, margins, earnings, and operating cash flow.
Key financial results
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net revenue | $646.5 | $592.5 | +9% |
| Subscription revenue | $319.8 | $276.3 | +16% |
| License and other revenue | $326.7 | $316.2 | +3% |
| Gross profit / margin | $554.7 / 86% | $513.8 / 87% | Margin down 1 point |
| Operating income / margin | $21.5 / 3% | $42.2 / 7% | Income down 49% |
| Net income | $19.1 | $28.3 | Down 33% |
| Diluted EPS | $0.08 | $0.12 | Down $0.04 |
| Operating cash flow | $86.5 | $218.7 | Down 60% |
GAAP results included $50.2 million of stock-based compensation expense. Non-GAAP operating income was $94.1 million, non-GAAP operating margin 15%, and non-GAAP diluted EPS $0.30, versus $102.0 million, 17%, and $0.32, respectively, a year earlier.
Balance sheet, liquidity, and debt
- Cash, cash equivalents, and marketable securities totaled $2,271.2 million at April 30, down from $2,299.4 million at January 31, 2015. Cash and cash equivalents alone were $1,182.7 million.
- Current assets were $2,341.0 million and current liabilities $1,270.3 million. Deferred revenue totaled $1,153.7 million, including $930.1 million of deferred subscription revenue.
- Long-term notes payable were $747.4 million net carrying value; $750 million principal was outstanding. The company had no borrowings under its $400 million revolving credit facility and reported covenant compliance.
- Investing cash outflow was $252.9 million, including $34.5 million for acquisitions net of cash acquired. Financing cash outflow was $61.3 million, including $95.4 million used for share repurchases, partly offset by stock issuance proceeds.
- Approximately 86% of cash, cash equivalents, and marketable securities were held offshore. Management said available liquidity, expected operating cash flows, and the credit facility should meet requirements for at least 12 months.
Material changes and management commentary
- Subscription revenue growth outpaced license and other revenue; subscriptions increased to 2.33 million from 1.94 million. Subscription billings grew 3%, materially slower than subscription revenue growth of 16%.
- Operating expenses rose 13% to $533.2 million, chiefly from employee-related costs, increased headcount supporting the business-model transition, and a full quarter of Delcam results. Cost of revenue rose 17%.
- Segment revenue increased 21% in AEC, 25% in MFG, and 6% in M&E; PSEB declined 13%, primarily due to lower AutoCAD LT revenue. By geography, Americas grew 19%, EMEA 9%, and Asia Pacific declined 3% as reported, including a 25% decline in Japan.
- Foreign exchange weighed on reported revenue: management said revenue would have grown 13% on a constant-currency basis, excluding hedge effects, versus reported growth of 9%.
- Autodesk recorded $5.7 million of additional operating expense for prior-period errors, primarily employee-benefit and unclaimed-property liabilities. Management concluded the errors were not material to prior periods and did not expect them to be material to FY2016.
- Cash flow from operations fell substantially year over year. The filing attributes cash generation in part to lower receivables; accounts receivable declined to $316.0 million from $458.9 million at January 31.
Outlook, risks, and contingencies
- Q2 FY2016 guidance: Revenue of $600–$620 million; GAAP diluted EPS loss of $0.10–$0.05; non-GAAP diluted EPS of $0.14–$0.19.
- FY2016 guidance: Billings and revenue growth of approximately 2%–4%; GAAP diluted EPS of break-even to $0.15; non-GAAP diluted EPS of $0.95–$1.10; GAAP operating margin of approximately 1%–3% and non-GAAP margin of 12%–14%. The company expected 375,000–425,000 net new subscriptions.
- Management expects traditional perpetual-license revenue to decline without a corresponding near-term reduction in expenses. Most new commercial seats of standalone products are to be subscription-only beginning February 1, 2016; new perpetual suite licenses are planned to be discontinued during FY2017.
- Key risks include execution and customer acceptance of the business-model transition, foreign exchange and international economic conditions, reliance on indirect distribution, competition, cybersecurity and privacy, acquisition integration, and maintenance renewal trends. Tech Data accounted for 26% of revenue and 21% of trade receivables at quarter end.
- Legal claims and proceedings were described as ordinary-course matters; management did not expect pending matters to materially affect consolidated results, cash flows, or financial position, but said an unfavorable resolution could have a material effect in a particular period. Potential loss amounts were not estimable or were considered immaterial.
- The filing reports effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No significant off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether subscription growth and billings can sustain the transition as perpetual-license sales are curtailed, and how that affects revenue recognition and cash flow.
- Whether operating expense growth moderates and the company achieves its FY2016 revenue, billings, margin, EPS, and subscription guidance.
- Reported versus constant-currency performance, especially in Japan and other international markets, and the effectiveness and costs of currency hedges.
- Customer and receivable concentration involving Tech Data, plus the 86% offshore concentration of cash and securities and potential repatriation tax costs.
- The $5.7 million prior-period adjustment, the $248.4 million of gross unrecognized tax benefits, and developments in legal proceedings or other contingencies.