Autodesk, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 31, 2017. Amounts are in U.S. dollars; financial statements are unaudited.
Business context
Autodesk is transitioning from perpetual software licenses toward term subscriptions, cloud services, and flexible enterprise agreements. It discontinued new perpetual licenses for most individual products in February 2016 and for suites in August 2016. Subscription revenue is generally recognized over the contract term, affecting the timing of reported revenue and cash flows. The company says ARR and subscription growth better reflect business momentum during this transition.
Key financial results
| Metric | Three months ended October 31, 2017 | Three months ended October 31, 2016 | Nine months ended October 31, 2017 | Nine months ended October 31, 2016 |
|---|---|---|---|---|
| Net revenue | $515.3 million | $489.6 million | $1,502.8 million | $1,552.2 million |
| Gross profit / margin | $437.8 million / 85% | $408.1 million / 83% | $1,272.5 million / 85% | $1,293.2 million / 83% |
| Operating loss / margin | $100.0 million / (19%) | $119.9 million / (24%) | $327.2 million / (22%) | $332.5 million / (21%) |
| Net loss | $119.8 million | $142.8 million | $393.4 million | $408.7 million |
| Diluted net loss per share | $0.55 | $0.64 | $1.79 | $1.83 |
Quarterly revenue rose 5%, primarily as subscription revenue increased 106% to $231.1 million; maintenance revenue fell 11% to $244.4 million and license and other revenue fell 62% to $39.8 million. For the nine months, revenue declined 3%: subscription revenue doubled to $600.6 million, while maintenance revenue fell 8% to $769.8 million and license and other revenue fell 68% to $132.4 million.
Recurring revenue was $475.5 million for the quarter, up 24%, and $1,368.8 million for the nine months, up 21%. At October 31, total ARR was $1.902 billion, up 16% from January 31; subscription-plan ARR was $924.0 million, up 62%, while maintenance-plan ARR was $977.8 million, down 8%. Total subscriptions increased 16% year over year to 3.589 million.
Cash flow, liquidity, and debt
- Operating cash flow was a use of $78.4 million in the nine months, compared with $154.1 million provided in the prior-year period. Investing activities provided $258.9 million and financing activities used $374.2 million.
- Cash and cash equivalents were $1.025 billion at October 31, 2017; marketable securities totaled $693.0 million. Management reported combined cash, cash equivalents, and marketable securities of $1.72 billion, and said liquidity should be sufficient for working capital and operating needs for at least the next 12 months.
- Current assets were $1.872 billion and current liabilities were $1.750 billion. Deferred revenue was $1.764 billion, with an additional $147.9 million of unbilled deferred revenue.
- Long-term notes payable, net, were $1.585 billion; the company reported $1.6 billion aggregate principal amount of notes outstanding after redeeming $400 million of notes in July. It issued $500 million of 3.5% notes due 2027 and had no borrowings under its $400 million revolving credit facility; it reported compliance with facility covenants.
- Stockholders’ equity was $107.3 million, down from $733.6 million at January 31, 2017. The company repurchased 4.4 million shares for $437.9 million in the nine months.
Material changes and management commentary
- The subscription transition drove higher subscription revenue and ARR, but management cautioned that ratable revenue recognition and lower initial subscription prices continue to affect revenue, margins, earnings, deferred revenue, and operating cash flow. Maintenance-plan subscriptions are expected to decline as customers migrate or do not renew.
- Management attributed quarterly operating-margin improvement to higher revenue, partly offset by higher spending. Nine-month operating margin worsened as lower revenue more than offset lower total spend. GAAP operating expenses were $537.8 million for the quarter, up 2%, and $1.600 billion for the nine months, down 2%.
- Management stated that non-GAAP spend was expected to remain flat in fiscal 2019. The filing does not provide a clear numerical revenue or earnings forecast for the next quarter or full year.
- In November 2017, after the reporting period, the board approved a restructuring expected to eliminate approximately 13% of the workforce, or about 1,150 positions, and consolidate facilities. Autodesk estimated pretax charges of $135–$149 million, substantially all cash, with most expected by the end of fiscal 2019. The company said the actions would reduce GAAP margins and increase GAAP net loss during the remainder of fiscal 2018 and fiscal 2019.
- Other notable items include $21.6 million of CEO-transition costs in the nine-month non-GAAP reconciliation and $8.0 million of impairment charges on privately held investments during the nine months. The company maintained a valuation allowance against U.S. deferred tax assets and reported $291.4 million of gross unrecognized tax benefits. An IRS examination of fiscal 2014 and 2015 federal returns was underway.
Risks, contingencies, and unusual items
- Execution, customer acceptance, renewal rates, pricing, and channel support for the subscription and cloud transition could affect future revenue, cash generation, and margins. The company noted that Tech Data accounted for 31% of nine-month revenue and 28% of trade receivables at October 31, 2017.
- Approximately 80% of cash, cash equivalents, and marketable securities were held outside the United States, subject to potential foreign-exchange, regulatory, and tax constraints. Foreign currency movements remain a risk despite hedging.
- Pending legal matters include intellectual-property, commercial, employment, and other claims. Autodesk said it did not expect current matters to have a material adverse impact, but stated that unfavorable outcomes could materially affect a particular period and that some potential losses could not be estimated.
- The company disclosed a December 2016 voluntary self-disclosure to OFAC regarding certain license sales totaling less than $700,000; OFAC’s review was pending, and penalties or other sanctions were possible.
- Autodesk reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no significant off-balance-sheet arrangements.
Important facts for investors to verify
- Whether subscription-plan growth and maintenance-to-subscription conversions offset continued declines in maintenance and perpetual-license revenue.
- Whether ARR, subscriptions, renewal rates, and ARPS sustain momentum, and how these non-GAAP operating metrics reconcile with reported revenue and cash flow.
- Operating cash flow, deferred revenue, and liquidity trends, including the availability of foreign-held cash and compliance with debt covenants.
- The restructuring’s actual workforce reductions, cash costs, timing, and impact on operating capacity and fiscal 2019 spending.
- Developments in the IRS examination, unrecognized tax benefits, OFAC review, and legal proceedings.
- The effects of adopting the new revenue-recognition standard in fiscal 2019; management anticipated possible material balance-sheet effects, including from capitalizing sales commissions, while continuing its evaluation.