Autodesk, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended January 31, 2017. The filing also reports fourth-quarter FY2017 results; this is not a calendar-year 2016 quarterly filing. Amounts are in U.S. dollars.
Business context and reporting period
Autodesk provides design software and services for architecture, engineering and construction; manufacturing; and media and entertainment. During FY2017, it accelerated its shift from perpetual software licenses toward subscriptions, cloud services and industry collections. It discontinued new perpetual licenses for most individual products effective February 1, 2016, and for suites effective August 1, 2016. Beginning in the third quarter, management assessed the business as one operating segment.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net revenue | $2,031.0 million | $2,504.1 million |
| Subscription revenue | $1,290.0 million | $1,277.2 million |
| Gross profit / margin | $1,689.1 million / 83% | $2,133.4 million / 85% |
| Operating income (loss) / margin | $(499.6) million / (25)% | $1.3 million / approximately 0% |
| Net income (loss) | $(582.1) million | $(330.5) million |
| Diluted loss per share | $(2.61) | $(1.46) |
| Cash flow from operations | $169.7 million | $414.0 million |
- Fourth-quarter FY2017 revenue was $478.8 million; operating loss was $167.1 million, net loss was $173.4 million, and diluted loss per share was $0.78.
- License and other revenue fell 40% to $741.0 million, while subscription revenue increased 1%. New-model subscription revenue grew 39%; maintenance revenue declined 3%.
- Recurring revenue was $1,500.4 million, or 74% of total revenue, versus $1,347.1 million, or 54%, in FY2016. Total ARR increased 16% to $1,599.9 million; total subscriptions rose 21% to 3.108 million. New-model ARR grew 107%, while maintenance ARR declined 4%.
- GAAP operating expenses were $2,188.7 million, including $80.5 million of restructuring and facility-exit charges. R&D was $766.1 million, or 38% of revenue. Management’s non-GAAP measures showed an operating loss of $125.5 million and net loss of $111.0 million; these exclude specified items, including stock compensation and restructuring.
- Cash, cash equivalents and marketable securities totaled approximately $2.2 billion at year-end, down from $2.8 billion. Deferred revenue was $1.8 billion. Operating cash flow fell 59% year over year.
- Outstanding senior notes had $1.5 billion aggregate principal. The $400 million revolving facility had no borrowings at year-end. Net cash and marketable securities after senior notes was approximately $0.7 billion. The company obtained a waiver of its leverage-ratio covenant for Q4 and was discussing amendments with lenders.
- Autodesk repurchased 9.7 million shares for $631.6 million during FY2017. No dividends were declared.
Material changes versus the prior comparable period
- Revenue declined 19% year over year, or 16% on a constant-currency basis. Management attributed the decline primarily to ending most perpetual-license sales and recognizing more subscription revenue ratably over contract terms.
- Product-family revenue fell 7% in AEC, 14% in Manufacturing, 45% in AutoCAD/AutoCAD LT, and 13% in Media and Entertainment. APAC revenue declined 40% as reported, reflecting the transition and continued weakness in Japan.
- Operating results shifted from approximately break-even to a $499.6 million GAAP operating loss. The filing cites lower revenue and higher operating expenses, including restructuring charges. FY2016 net loss included a $230.8 million U.S. deferred-tax valuation allowance.
- Cash flow from operations decreased from $414.0 million to $169.7 million; year-end stockholders’ equity declined from $1,619.6 million to $733.6 million.
Outlook, management commentary, risks and unusual items
- Management said ARR and subscription growth better reflected business momentum during the transition than reported revenue. It expected maintenance subscriptions to decline gradually and noted that new-model adoption, renewal rates and ARPS could vary. The filing does not provide a full-year FY2018 revenue or earnings outlook.
- For FY2018, management expected cost of revenue to decrease in dollars and as a percentage of revenue; marketing and sales and R&D expenses to increase in dollars and as a percentage of revenue; G&A to remain relatively flat; and amortization of purchased intangibles to decline in dollars.
- The FY2017 restructuring targeted approximately 840 positions and consolidation of 18 leased facilities; authorized actions were substantially complete by year-end. The plan recorded $70.9 million of costs, with an additional $9.6 million of facility-exit costs outside the plan.
- CEO Carl Bass resigned effective February 8, 2017. The board began a CEO search and established an Interim Office of the Chief Executive; Andrew Anagnost and Amar Hanspal were co-CEOs as of the filing.
- A material weakness in internal controls over income-tax expense remained unremediated at January 31, 2017. Management deemed disclosure controls ineffective, and the auditor issued an adverse opinion on internal control over financial reporting, while giving an unqualified opinion on the financial statements.
- Autodesk maintained a full valuation allowance against U.S. deferred tax assets. FY2017 tax expense was $58.3 million despite a pretax loss of $523.8 million, primarily reflecting foreign taxes, withholding taxes and tax amortization.
- Key risks include successful execution of the subscription/cloud transition, customer and maintenance renewals, competition and pricing pressure, foreign exchange and international exposure, reliance on indirect sales channels (72% of FY2017 revenue), and Tech Data’s concentration (30% of revenue). Legal proceedings were not expected by management to have a material adverse effect, though the filing notes outcomes remain uncertain.
Important facts for investors to verify
- Track new-model ARR, subscription additions, renewal rates and ARPS against the decline in maintenance subscriptions and license revenue.
- Monitor operating cash generation, deferred-revenue trends, share repurchases and cash balances, particularly given the business transition and debt maturities.
- Check whether Autodesk and lenders amend the revolving-credit covenants, and confirm the company’s ability to meet the covenant terms.
- Review remediation of the income-tax control weakness and any subsequent auditor assessment or financial-statement adjustments.
- Assess the impact of the CEO transition, restructuring execution, foreign-exchange movements and customer/channel concentration on operating performance.