Autodesk, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Three and six months ended July 31, 2019. All financial figures are in U.S. dollars; income-statement and cash-flow comparisons are year over year unless noted.
Business context and reporting period
Autodesk sells design, engineering, construction, manufacturing, and media software. Its business is transitioning from perpetual licenses and maintenance plans to subscriptions, cloud services, and enterprise business agreements. The company reported one operating segment. Fiscal 2020 ends January 31, 2020.
Financial and operating performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net revenue | $796.8 million | $611.7 million | $1,532.3 million | $1,171.6 million |
| Gross profit / margin | $717.3 million / 90% | $541.9 million / 89% | $1,370.1 million / 89% | $1,035.0 million / 88% |
| Operating income (loss) / margin | $73.8 million / 9% | ($24.7) million / (4%) | $98.6 million / 6% | ($80.0) million / (7%) |
| Net income (loss) | $40.2 million | ($39.4) million | $16.0 million | ($121.8) million |
| Diluted EPS | $0.18 | ($0.18) | $0.07 | ($0.56) |
- Q2 subscription revenue rose 58% to $663.7 million; maintenance revenue fell 38% to $103.5 million, primarily reflecting the maintenance-to-subscription migration program. Other revenue was $29.6 million, up 20%.
- Q2 revenue grew 30%; six-month revenue grew 31%. All major product families grew in Q2: AEC 37%, AutoCAD/AutoCAD LT 31%, Manufacturing 20%, and Media and Entertainment 22%.
- Recurring revenue was 96% of net revenue in Q2. Total ARR was $3.07 billion, up 31% year over year; subscription-plan ARR was $2.65 billion, up 58%. Maintenance-plan ARR was $414.0 million, down 25% from January 31, 2019.
- Remaining performance obligations were $2.81 billion at July 31, up 5% from January 31; the company expected to recognize $2.01 billion, or 72%, within 12 months. Deferred revenue was $2.25 billion.
- For the six months, operating cash flow was $440.5 million versus $26.4 million; investing cash outflow was $32.5 million and financing cash outflow was $366.1 million. Operating cash flow benefited from non-cash expenses and working-capital movements, including lower receivables and higher deferred revenue. Capital expenditures were $29.5 million.
- At July 31, cash and cash equivalents were $923.9 million and marketable securities were $67.4 million, totaling $991.3 million. Current assets were $1.52 billion and current liabilities $2.71 billion; current liabilities included $1.77 billion of deferred revenue and $449.2 million of current debt.
- Debt carrying value was approximately $1.84 billion: $449.2 million current and $1.39 billion long-term. The $650 million revolving facility was undrawn, and the company reported covenant compliance. Stockholders’ deficit was $194.3 million.
Material changes versus the prior comparable period
- Revenue growth was driven by subscription adoption, renewals, new subscriptions, cloud offerings, and enterprise agreements; maintenance revenue continued to decline as customers migrated to subscriptions.
- GAAP profitability improved substantially, with Q2 operating income of $73.8 million versus an operating loss of $24.7 million a year earlier. Q2 non-GAAP operating margin was 23%, compared with 9%; non-GAAP diluted EPS was $0.65 versus $0.19. Non-GAAP measures exclude items including stock compensation, acquisition costs, and acquired-intangible amortization.
- Operating expenses increased 14% in both Q2 and the six-month period, with higher headcount, stock-based compensation, and acquisition-related amortization among the stated drivers. Restructuring costs fell sharply as the fiscal 2018 plan was substantially completed.
- Six-month interest and other expense worsened to $23.5 million from $7.2 million, primarily due to interest on the term loan and lower gains on privately held investments.
- Cash from operations increased sharply year over year. Financing outflows included $250 million of debt repayment and $134.6 million of share repurchases during the six months.
Outlook, risks, and unusual items
- The filing provides no specific full-year revenue or EPS guidance. Management stated that existing liquidity, expected operating cash flows, and the available credit facility should meet working-capital and operating needs for at least the next 12 months.
- For Q3 FY2020 versus Q3 FY2019, management expected cost of revenue and marketing and sales expense to increase in dollars; R&D to increase while remaining flat as a share of revenue; G&A to decrease in dollars and as a share of revenue; and purchased-intangible amortization to increase in dollars while remaining flat as a share of revenue.
- Key risks include execution of the subscription and cloud transition, renewals and customer retention, acquisition integration, competition, international economic and political exposure, foreign-exchange volatility, cybersecurity and privacy, and reliance on distribution channels. Tech Data represented 35% of revenue and 28% of trade receivables; Ingram Micro represented 10% of revenue.
- Approximately 66% of six-month revenue came from outside the United States. The company hedges some currency exposure but does not fully mitigate it. It reported $214.4 million of gross unrecognized tax benefits, maintained valuation allowances on deferred tax attributes in the U.S. and certain foreign jurisdictions, and said the possible near-term change in uncertain tax benefits could not be estimated.
- Pending legal matters were not expected by management to have a material adverse effect, though an unfavorable resolution could materially affect a particular period and potential loss amounts were not estimable or considered immaterial based on available information.
- Autodesk adopted lease accounting in February 2019, recognizing operating-lease right-of-use assets of $298.8 million and lease liabilities totaling about $317.0 million at July 31. Adoption’s opening accumulated-deficit effect was $0.7 million and was not material to operating results or operating cash flow.
Important facts for investors to verify
- Whether subscription ARR growth and renewals continue to offset the planned decline in maintenance revenue, and how ARR compares with recognized revenue and billings.
- Whether margins and operating cash flow remain strong as acquisition-related costs, stock-based compensation, cloud costs, and headcount expand.
- Debt maturities and covenant headroom, especially the $449.2 million current debt balance and the $250 million term loan due in December 2020.
- Exposure to the Tech Data distribution channel, foreign exchange, international markets, and changes in customer renewal behavior.
- Potential effects of tax examinations, unrecognized tax benefits, legal proceedings, privacy regulation, and cybersecurity incidents.