Autodesk, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2017, ended October 31, 2016. Comparisons are with the corresponding periods in fiscal 2016 unless stated otherwise. Amounts are in U.S. dollars.
Business context and reporting period
Autodesk is shifting from upfront perpetual-license sales toward term-based subscriptions and cloud services. It ended sales of new perpetual licenses for most individual products in February 2016 and for suites in August 2016, replacing suites with industry collections. Management cautions that this transition depresses reported revenue and cash flow as revenue is recognized over contract terms and new offerings generally have lower initial prices. In Q3, Autodesk changed its internal management reporting and now reports as one operating and reporting segment, while continuing to disclose revenue by product family.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Revenue | $489.6 million | $599.8 million | $1,552.2 million | $1,855.8 million |
| Gross profit / margin | $408.1 million / 83% | $508.8 million / 85% | $1,293.2 million / 83% | $1,580.0 million / 85% |
| Operating loss / margin | $(119.9) million / (24)% | $(14.8) million / (2)% | $(332.5) million / (21)% | $11.0 million / 1% |
| Net loss | $(142.8) million | $(43.8) million | $(408.7) million | $(293.3) million |
| Diluted loss per share | $(0.64) | $(0.19) | $(1.83) | $(1.29) |
Q3 subscription revenue was $319.5 million, essentially flat year over year; license and other revenue fell 39% to $170.1 million. For the first nine months, subscription revenue rose 1% to $967.5 million while license and other revenue declined 35% to $584.7 million. Recurring revenue, a company-defined measure, increased 11% in Q3 to $374.2 million and represented 76% of total revenue, versus 56% a year earlier.
For the first nine months, operating cash flow was $154.1 million, down from $244.1 million. Cash and cash equivalents were $1,436.5 million; marketable securities totaled $987.4 million, for combined cash and securities of approximately $2.4 billion. Long-term notes payable were $1,489.9 million; Autodesk had no borrowings under its $400 million credit facility and reported covenant compliance. Deferred revenue was approximately $1.53 billion.
Material changes versus the prior comparable period
- Total revenue declined 18% in Q3 and 16% for the first nine months, principally reflecting the move away from perpetual licenses. Autodesk reported a 66% Q3 decline in perpetual-license revenue and a 133% increase in license revenue from new-model subscriptions.
- New-model subscription revenue grew 40% in Q3 and 37% for the first nine months, but was not yet sufficient to offset lower perpetual-license and maintenance revenue.
- Q3 product-family revenue fell 44% for AutoCAD and AutoCAD LT, 16% for Manufacturing, 13% for Media and Entertainment, and 6% for Architecture, Engineering and Construction. Asia Pacific revenue declined 39% in Q3, with management citing the transition and continued weakness in Japan.
- Operating expenses were $528.0 million in Q3, up 1%; nine-month expenses rose 4% to $1,625.7 million, including $71.5 million of restructuring and facility-exit charges. Nine-month operating results moved from income of $11.0 million to a loss of $332.5 million.
- At October 31, total subscriptions were 2.95 million, up 15% from January 31. New-model subscriptions rose 101% to 860,700, while maintenance subscriptions declined 3% to 2.09 million. Total ARR increased 9% to $1,496.6 million; total ARPS declined 5% to $507.
Outlook, management commentary, risks and unusual items
- Management provided no clear numerical revenue or earnings guidance in the filing text. For Q4 FY2017, it expected cost of revenue to fall in dollars but rise as a percentage of revenue; marketing and sales expense to increase slightly; R&D expense to remain flat; and G&A and purchased-intangible amortization to decline in dollars. It expects transition effects on ARPS to begin stabilizing as the transition progresses.
- The fiscal 2017 restructuring plan targets approximately $65 million of employee termination costs and $7 million of lease and other exit costs. Management expected substantially all plan liabilities to be paid by fiscal year-end.
- Autodesk reported ineffective disclosure controls as of October 31, 2016, due to an unremediated material weakness in technical review of deferred-tax reconciliations and the effective tax rate. Management described remediation efforts but said they had not operated long enough to conclude they were effective.
- The company recorded a $13.5 million Q3 tax provision despite a pre-tax loss. U.S. deferred tax assets remain subject to a valuation allowance. Gross unrecognized tax benefits were $264.3 million. A $9.9 million China transfer-pricing audit settlement was paid in November; liabilities for other years remained under discussion.
- Tech Data accounted for 31% of Q3 revenue and 30% of nine-month revenue, and 25% of accounts receivable at October 31. Autodesk states it believes other distributors could reduce disruption if that relationship ended.
- Approximately 91% of cash, cash equivalents and marketable securities were offshore. Management said current balances, expected operating cash flows and available credit should meet requirements for at least 12 months, while noting repatriation could have tax consequences.
- Key risks include successful adoption and renewal of new subscriptions, continued declines in maintenance, foreign-exchange exposure, international economic and political conditions, channel and distributor concentration, competition, cybersecurity and privacy, tax uncertainty, and the unresolved controls weakness. Autodesk reported routine legal matters and said it could not estimate potential losses for some proceedings; it did not expect pending matters to have a material adverse impact based on information then available.
Important facts for investors to verify
- Whether new-model subscription growth and renewals can replace declining perpetual-license and maintenance revenue, and how ARR compares with recognized revenue and cash collections.
- Whether operating cash flow and margins improve as the transition proceeds, including the effect of restructuring and stock-based compensation.
- Progress and independent confirmation of remediation of the material weakness in tax controls.
- Exposure to Tech Data, international markets and offshore cash, including the implications of currency movements and potential repatriation taxes.
- The filing reports nine-month common-stock repurchases of $397.6 million in the cash-flow statement, while MD&A cites $409.6 million of repurchases; verify the scope and reconciliation of those figures.