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ADSK > SEC Filings for ADSK > Form 10-Q on 5-Jun-2013All Recent SEC Filings

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Form 10-Q for AUTODESK INC


5-Jun-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The discussion in our MD&A and elsewhere in this Form 10-Q contains trend analyses and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are any statements that look to future events and consist of, among other things, our business strategies, including those discussed in "Strategy" below, anticipated future net revenue, future operating margin and other future financial results (by product type and geography) and operating expenses, the effectiveness of our internal reorganization and restructuring efforts, the effectiveness of efforts to reduce our operating expenses, expected market trends, including the growth of cloud, mobile and social computing, the effect of unemployment and availability of credit, the effects of weak global economic conditions, our backlog, expected trends in certain financial metrics, the impact of acquisitions and investment activities, the effects of fluctuations in exchange rates and our hedging activities on our financial results, our abilities to successfully expand adoption of our products, our ability to gain market acceptance of new businesses and sales initiatives, our ability to successfully increase sales of product suites as part of our overall sales strategy, and the impact of economic volatility and geopolitical activities in certain countries, particularly emerging economy countries, and the resulting effect on our financial results. In addition, forward-looking statements also consist of statements involving expectations regarding product acceptance, continuation of our stock repurchase program, statements regarding our liquidity and short-term and long-term cash requirements, as well as, statements involving trend analyses and statements including such words as "may," "believe," "could," "anticipate," "would," "might," "plan," "expect," and similar expressions or the negative of these terms or other comparable terminology. These forward-looking statements speak only as of the date of this Form 10-Q and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below in Part II, Item 1A, "Risk Factors," and in our other reports filed with the U.S. Securities and Exchange Commission. We assume no obligation to update the forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made, except as required by law.

Note: A glossary of terms used in this Form 10-Q appears at the end of this Item 2.

Strategy

Autodesk's vision is to help people imagine, design and create a better world. We do this by developing software for the world's designers, architects, engineers, and digital artists, professionals and non-professionals alike-the people who create the world's products, buildings, infrastructure, films, and games. Autodesk serves customers in three primary markets: architecture, engineering and construction; manufacturing; and digital media and entertainment.

Our goal is to provide our customers with the world's most innovative, and engaging design software and services. Our product and services portfolio allows our customers to digitally visualize, simulate, and analyze their projects, helping them to better understand the consequences of their design decisions; save time, money, and resources; and become more innovative.

Today, complex challenges such as globalization, urbanization, and sustainable design are driving our customers to new levels of performance and competitiveness, and we are committed to helping them address those challenges and take advantage of new opportunities. To achieve these goals, we are capitalizing on two of our strongest competitive advantages: our ability to bring advanced technology to mainstream markets, and the breadth and depth of our product portfolio.

By innovating within existing technology categories, we bring powerful new design capabilities to volume markets. Our products are designed to be easy-to-learn and use, and to provide customers with a low cost of deployment, a low total cost of ownership, and a rapid return on investment. In addition, our software architecture allows for extensibility and integration with other products. The breadth of our technology and product line gives us a unique competitive advantage, because it allows our customers to address a wide variety of problems in ways that transcend industry and disciplinary boundaries. This is particularly important in helping our customers address the complex challenges mentioned above. We also believe that our technological leadership and global brand recognition have positioned us well for long-term growth and industry leadership.

In addition to the competitive advantages afforded by our technology, our large global network of distributors, resellers, third-party developers, customers, educational institutions, faculty and students is a key competitive advantage. This network of relationships provides us with a broad and deep reach into volume markets around the world. Our distributor and reseller network is extensive and provides our customers with the resources to purchase, deploy, learn, and support our products quickly and easily. We have a significant number of registered third-party developers who create products that work well with our products and extend them for a variety of specialized applications.


We offer extensive educational programs supporting our software and services that include providing educational licenses for our software to all students and teachers for little or no fees. For example, during the three months ended April 30, 2013, we initiated a new program offering minimal cost software licenses to educational institutions in emerging economies. Through our partners, we also offer curricula and faculty development opportunities to educational institutions worldwide. Through these programs we intend to further Science, Technology, Engineering and Math (STEM) education initiatives. With an extensive global community of students who are experienced with our software and poised to become the next generation of professional users - our goal is to reduce the cost of training and education of new talent for our customers.

We continually strive to increase the business value of our design tools to our customers in a number of ways. First, we seek to address an increasing portion of our customers' workflow with products that extend the value of our customers' digital design information into visualization, analysis and simulation. Second, we seek to improve our product interoperability and usability, thus improving our customers' productivity and effectiveness. Third, we continue to develop new ways to deliver capability and value to our customers, such as product suites, cloud and social-based services, and delivery of our solutions on mobile devices and new hardware platforms. Fourth, we extend our customers' workflow with products for adjacent users and for the "customers of our customers," thus increasing the value of the design information our customers produce. Finally, we continue to develop new lines of consumer products and services that are delivered and experienced through the Web, tablets, and other mobile devices providing our advanced visualization technologies to consumers-a whole new category of Autodesk customer.

Autodesk was founded during the platform transition from mainframes and engineering workstations to personal computers. We developed and sustained a compelling value proposition based upon desktop software for the personal computer. Just as the transition from mainframes to personal computers transformed the industry thirty years ago, we believe our industry is undergoing a similar transition from the personal computer to cloud, social, and mobile computing. To address this shift, our major business initiatives include our desire to accelerate the business' move to the cloud, transform our customers' experience, increase industry focus to meet customer demands, and develop more effective marketing.

Our growth strategy is predicated upon leading the transition in the industries we serve into the cloud in three ways:

Grow. We believe opportunity remains in our PC-based software business, and we intend to continue to grow this business. In particular we are offering product suites with improved interoperability and usability to enhance our customers' productivity. We are continuing to drive maintenance and new licensing models to better match the business needs of our customers. We will continue to emphasize developing direct relationships with large, global customers and pursuing opportunities in emerging economies.

Transform. At the same time we grow our desktop software business, we are migrating many of our products to the cloud. This entails development of new cloud computing infrastructure and redesigning our applications to leverage the cloud. We are also developing new capabilities that are enabled by the cloud such as collaborative Product Lifecycle Management ("PLM") and online simulation. Our goal is to lead our industry in transitioning to the cloud.

Expand. We believe that the combination of cloud, social and mobile computing affords us the opportunity to expand our business into new markets. For example, we have added new customers through our consumer products. We intend to continue to develop our business to both add new customers and find new capabilities to incorporate in our core business.

We believe that expanding our customers' portfolios to include our suites presents a meaningful growth opportunity and is an important part of our overall strategy. As our customers in all industries adopt our design suites, we believe they will experience an increase in their productivity and the value of their design data. For the three months ended April 30, 2013, revenue from suites increased 8% as compared to the same period in the prior fiscal year. As a percentage of revenue, suites consisted of 31% of our net revenue in the three months ended April 30, 2013 as compared to 28% of our net revenue in the three months ended April 30, 2012.

Expanding our geographic coverage is another key element of our growth strategy. Much of the growth in the world's construction and manufacturing is happening in emerging economies. Further, emerging economies face many of the challenges that our design technology can help address, for example infrastructure build-out. Although revenue from emerging economies decreased 8% during the three months ended April 30, 2013 as compared to the same period of the prior fiscal year, we believe that emerging economies continue to present long-term growth opportunities for us. Revenue from emerging countries represented 13% of net revenue for the three months ended April 30, 2013, as compared to 14% of net revenue for the three months ended April 30, 2012. While we believe there are long-term growth opportunities in emerging economies, conducting business in these countries presents significant challenges, including economic volatility, geopolitical risk, local


competition, intellectual property protection, poorly developed business infrastructure, scarcity of talent, software piracy and different purchase patterns as compared to the developed world.

Our strategy includes improving our product functionality and expanding our product offerings through internal development as well as through the acquisition of products, technology and businesses. Acquisitions often increase the speed at which we can deliver product functionality to our customers; however, they entail cost and integration challenges and may, in certain instances, negatively impact our operating margins. We continually review these trade-offs in making decisions regarding acquisitions. We currently anticipate that we will continue to acquire products, technology and businesses as compelling opportunities become available.

Our strategy depends upon a number of assumptions, including that we will be able to continue making our technology available to mainstream markets; leverage our large global network of distributors, resellers, third-party developers, customers, educational institutions, and students; improve the performance and functionality of our products; and adequately protect our intellectual property. If the outcome of any of these assumptions differs from our expectations, we may not be able to implement our strategy, which could potentially adversely affect our business. For further discussion regarding these and related risks see Part II, Item 1A, "Risk Factors."

Critical Accounting Policies and Estimates

Our Condensed Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles. In preparing our Condensed Consolidated Financial Statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our Condensed Consolidated Financial Statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments and estimates. Our significant accounting policies are described in Note 1, "Business and Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements in our Form 10-K for the fiscal year ended January 31, 2013. In addition, we highlighted those policies that involve a higher degree of judgment and complexity with further discussion in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in such Form 10-K. We believe these policies are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. Updates on the relevant periodic financial disclosures related to these policies are provided below.

Income Taxes. We currently have $190.3 million of net deferred tax assets, primarily a result of tax credits, net operating losses, capital losses, and timing differences for reserves, accrued liabilities, stock options and restricted stock units, fixed assets, deferred revenue, purchased technologies and capitalized intangibles, partially offset by the establishment of U.S. deferred tax liabilities on unremitted earnings from certain foreign subsidiaries, deferred tax liabilities associated with tax method change on advanced payments and valuation allowances against U.S. and Canadian deferred tax assets. We perform a quarterly assessment of the recoverability of these net deferred tax assets and believe that we will generate sufficient future taxable income in appropriate tax jurisdictions to realize the net deferred tax assets. Our judgments regarding future profitability may change due to future market conditions and other factors. Any change in future profitability may require material adjustments to these net deferred tax assets, resulting in a reduction in net income in the period when such determination is made. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business. It is possible that these positions may be challenged by jurisdictional tax authorities and that such challenges may have a significant impact on our effective tax rate.

Overview of the Three Months Ended April 30, 2013

                             Three Months Ended      As a % of Net      Three Months Ended     As a % of Net
(in millions)                  April 30, 2013           Revenue           April 30, 2012          Revenue
Net Revenue                 $            570.4              100 %      $            588.6             100 %
Cost of revenue                           67.5               12 %                    58.8              10 %
Gross Profit                             502.9               88 %                   529.8              90 %
Operating expenses                       421.5               74 %                   435.8              74 %
Income from Operations      $             81.4               14 %      $             94.0              16 %

Our results in the three months ended April 30, 2013, as compared to the same period in the prior fiscal year, reflect the current uneven global economic environment, which has impacted our business on almost every front. During the three months


ended April 30, 2013, as compared to same period in the prior fiscal year, net revenue decreased 3%, gross profit decreased 5% and income from operations decreased 13%. Contributing to the year over year decreases in revenue during the three months ended April 30, 2013 were decreases in license and other revenue partially offset by increases in subscription revenue. We experienced decreases in revenue for many of our major products, reportable segments and geographic areas during the three months ended April 30, 2013 as compared to the same period in the prior fiscal year. The reasons for these decreases are discussed below under the heading "Results from Operations."

Revenue from flagship products was 55% of total net revenue during the three months ended April 30, 2013, a decrease of 9% as compared to the same period in the prior fiscal year. Revenue from suites was 31% of total net revenue for the three months ended April 30, 2013, an increase of 8% as compared to the same period in the prior fiscal year. Revenue from new and adjacent products was flat as compared to the same period in the prior fiscal year at 14% of total net revenue during the three months ended April 30, 2013. We anticipate that, as our new and existing customers migrate from our stand-alone products, our revenue from suites will increase as a percentage of revenue and that our revenue from our flagship and new and adjacent products will decline as a percentage of revenue.

While net revenue decreased $18.2 million or 3% for the three months ended April 30, 2013, as compared to the same period in the prior fiscal year, our operating expenses also decreased by $14.3 million or 3% for the three months ended April 30, 2013. The decrease in operating expenses was primarily related to lower employee related costs and marketing related costs during the three months ended April 30, 2013. Similarly, income from operations decreased 13% in the three months ended April 30, 2013, as compared to the same period in the prior fiscal year, and our total operating margin decreased from 16% for the three months ended April 30, 2012 to 14% for the three months ended April 30, 2013 due primarily to lower revenue related to foreign currency exchange headwinds and increased costs of goods sold during the three months ended April 30, 2013.

We generate a significant amount of our revenue in the U.S., Japan, Germany, the United Kingdom and France. Our revenue was negatively impacted from foreign exchange rate changes during the three months ended April 30, 2013, as compared to the same period in the prior fiscal year. Had applicable exchange rates from the three months ended April 30, 2012 been in effect during the three months ended April 30, 2013 and had we excluded foreign exchange hedge gains and losses from the three months ended April 30, 2013, ("on a constant currency basis"), net revenue would have been flat compared to the prior fiscal year. During the three months ended April 30, 2013, total spend, defined as cost of revenue plus operating expenses, decreased 1% as reported and remained flat on a constant currency basis compared to the same periods in the prior fiscal year. Changes in the value of the U.S. dollar may have a significant effect on net revenue, total spend and income from operations in future periods. We use foreign currency contracts to reduce the exchange rate effect on a portion of the net revenue of certain anticipated transactions but do not attempt to completely mitigate the impact of fluctuation of such foreign currency against the U.S. dollar.

We rely significantly upon major distributors and resellers in both the U.S. and international regions, including Tech Data Corporation and its global affiliates (collectively, "Tech Data"). Tech Data accounted for 25% and 22% of our consolidated net revenue during the three months ended April 30, 2013 and 2012, respectively. We believe our business is not substantially dependent on Tech Data. Our customers through Tech Data are the resellers and end users who purchase our software licenses and services. Should any of the agreements between Tech Data and us be terminated for any reason, we believe the resellers and end users who currently purchase our products through Tech Data would be able to continue to do so under substantially the same terms from one of our many other distributors without substantial disruption to our revenue.

Our primary goals for the remainder of fiscal 2014 are to grow revenue from our current levels consistent with seasonal trends, manage our operating margin, and to invest in product functionality and new product lines, including suites offerings, while controlling our operating expenses. In addition, we will continue to look closely at our cost structure to find ways to improve our operating margin while allowing continued investment in growth and productivity initiatives. We believe net revenue for fiscal 2014 will increase by approximately 3% compared to fiscal 2013. We anticipate fiscal 2014 operating margin will increase by approximately 50 to 100 basis points compared to fiscal 2013. There can be no assurance that we will achieve our financial goals and improve our financial results. Additionally, we believe that unemployment rates and the availability of credit to major industries we serve are important indicators for our business. If we are unable to successfully achieve our major business initiatives or if global economic conditions deteriorate, we may not achieve our financial goals.


At April 30, 2013, we had $2,479.9 million in cash and marketable securities. We completed the three months ended April 30, 2013 with a higher deferred revenue balance and a lower accounts receivable balance as compared to the end of the fiscal year ended January 31, 2013. Our deferred revenue balance at April 30, 2013 included $754.9 million of customer maintenance contracts, which will be recognized as revenue ratably over the life of the contracts. The term of our maintenance contracts is typically between one and three years. We repurchased 3.2 million shares of our common stock for $129.2 million during the three months ended April 30, 2013. Comparatively, we repurchased 2.5 million shares of our common stock for $99.2 million during the three months ended April 30, 2012.

Results of Operations

Net Revenue

                                                 Three Months        Increase/(Decrease) compared to        Three Months
                                                    Ended                   prior fiscal year                  Ended
(in millions)                                   April 30, 2013            $                     %          April 30, 2012
Net Revenue:
License and other                               $      323.5     $           (31.7 )           (9 )%       $      355.2
Subscription                                           246.9                  13.5              6  %              233.4
                                                $      570.4     $           (18.2 )           (3 )%       $      588.6
Net Revenue by Geographic Area:
Americas                                        $      202.2     $            (5.4 )           (3 )%       $      207.6
Europe, Middle East and Africa                         216.2                  (8.2 )           (4 )%              224.4
Asia Pacific                                           152.0                  (4.6 )           (3 )%              156.6
                                                $      570.4     $           (18.2 )           (3 )%       $      588.6
Net Revenue by Operating Segment:
Platform Solutions and Emerging Business        $      212.7     $           (14.1 )           (6 )%       $      226.8
Architecture, Engineering and Construction             172.1                   6.4              4  %              165.7
Manufacturing                                          139.1                  (6.5 )           (4 )%              145.6
Media and Entertainment                                 46.5                  (4.0 )           (8 )%               50.5
                                                $      570.4     $           (18.2 )           (3 )%       $      588.6

License and Other Revenue

License and other revenue consists of two components: all forms of product license revenue and other revenue. Product license revenue includes: software license revenue from the sale of new seat licenses and upgrades and product revenue for Creative Finishing. Other revenue includes revenue from consulting, training, Autodesk Developers Network and Creative Finishing customer support, and is recognized over time, as the services are performed.

Total license and other revenue decreased 9% during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012. This decrease was primarily due to a 9% decrease in product license revenue as compared to the same period in the prior fiscal year. The decline in product license revenue was primarily due to a 13% decline in revenue from our flagship products partially offset by a 3% increase in our suites products.

During the three months ended April 30, 2013, 23 percentage points of the 9% decrease in product licenses revenue were due to the decrease in the number of seats sold offset by 14 percentage points due to an increase in the average net revenue per seat. Product license revenue, as a percentage of license and other revenue, was 86% for the three months ended April 30, 2013 and 2012, respectively.

During the three months ended April 30, 2013, total other revenue represented 14% of License and other revenue. Other revenue decreased by 11% during the three months ended April 30, 2013, as compared to the three months ended April 30, 2012 primarily due to a 51% decrease in our education products as we began offering software licenses to educational institutions in emerging economies at little or no cost during the three months ended April 30, 2013, consistent with our strategy.


Backlog related to current software license product orders that had not shipped at the end of the quarter decreased by $18.3 million during the three months ended April 30, 2013 from $20.0 million at January 31, 2013 to $1.7 million at April 30, 2013. Backlog from current software license product orders that we have not yet shipped consists of orders for currently available licensed software products from customers with approved credit status and may include orders with current ship dates and orders with ship dates beyond the current fiscal period.

Subscription Revenue

Our subscription revenue consists of two components: maintenance revenue for our software products and revenue for our cloud service offerings, including Autodesk 360. Our maintenance program provides our commercial and educational customers with a cost effective and predictable budgetary option to obtain the productivity benefits of our new releases and enhancements when and if released during the term of their contracts. Under our maintenance program, customers are eligible to receive unspecified upgrades when and if available, downloadable . . .

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