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ADSK > SEC Filings for ADSK > Form 10-Q on 3-Sep-2013All Recent SEC Filings

Show all filings for AUTODESK INC

Form 10-Q for AUTODESK INC


3-Sep-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 efforts to successfully manage transitions to new business models and markets, 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, the effects of revenue recognition, 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 and services 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, beginning the three months ended April 30, 2013, we initiated a new program granting software licenses to educational institutions in select regions and to key partners. Through our partners, we 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 desktop 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, including flexible license and service offerings, 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 products' 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 and six months ended July 31, 2013, revenue from suites increased 18% and 13%, respectively, as compared to the same period in the prior fiscal year. As a percentage of revenue, suites consisted of 34% and 33% of our net revenue in the three and six months ended July 31, 2013, respectively, as compared to 29% and 28% of our net revenue in the three and six months ended July 31, 2012, respectively.

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 2% and 5% during the three and six months ended July 31, 2013, respectively, as compared to the same periods of the prior fiscal year, we believe that emerging economies continue to present long-term growth opportunities for us. Revenue from emerging countries represented 15% and 14% of net revenue for the three and six months ended July 31, 2013, respectively, as compared to 15% of net revenue for both the three and six months ended July 31, 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 $176.9 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 and Six Months Ended July 31, 2013

                            Three Months Ended     As a % of Net     Three Months Ended    As a % of Net
(in millions)                 July 31, 2013           Revenue          July 31, 2012          Revenue
Net Revenue                 $          561.7              100 %      $          568.7             100 %
Cost of revenue                         67.8               12 %                  59.8              11 %
Gross Profit                           493.9               88 %                 508.9              89 %
Operating expenses                     410.3               73 %                 416.0              73 %
Income from Operations      $           83.6               15 %      $           92.9              16 %

                             Six Months Ended      As a % of Net      Six Months Ended     As a % of Net
(in millions)                 July 31, 2013           Revenue          July 31, 2012          Revenue
Net Revenue                 $        1,132.1              100 %      $        1,157.3             100 %
Cost of revenue                        135.3               12 %                 118.6              10 %
Gross Profit                           996.8               88 %               1,038.7              90 %
Operating expenses                     831.8               73 %                 851.8              74 %
Income from Operations      $          165.0               15 %      $          186.9              16 %

Our results in the three and six months ended July 31, 2013, as compared to the same periods in the prior fiscal year, were driven by strong results in our AEC segment and continued growth in our suites which were offset by mixed contributions from other parts of our business. Additionally our results reflected foreign currency headwinds and the strategic decision for our educational program to begin granting software licenses to educational institutions in select regions and to key partners. During the three months ended July 31, 2013, as compared to same period in the prior fiscal year, net revenue decreased 1%, gross profit decreased 3% and income from operations decreased 10%. During the six months ended July 31, 2013, as compared to same period in the prior fiscal year, net revenue decreased 2%, gross profit decreased 4% and income from operations decreased 12%. Contributing to the year over year decreases in revenue during the three and six months ended July 31, 2013 were decreases in license and other revenue partially offset by increases in subscription revenue. We experienced decreases in revenue from many of our major products, led by ACAD and ACAD Mechanical, reportable segments and geographic areas during the three and six months ended July 31, 2013 as compared to the same periods in the prior fiscal year. The reasons for these decreases are discussed below under the heading "Results from Operations."

Revenue Analysis

Revenue from flagship products was 51% and 53% of total net revenue during the three and six months ended July 31, 2013, respectively, a decrease of 11% and 10%, respectively, as compared to the same periods in the prior fiscal year. Revenue from suites was 34% and 33% of total net revenue for the three and six months ended July 31, 2013, an increase of 18% and 13%, respectively, as compared to the same periods in the prior fiscal year. Revenue from new and adjacent products was 14% of total net revenue for each of the three and six months ended July 31, 2013, respectively, a decrease of 1% compared to the three months ended July 31, 2012 and flat as compared to the six months ended July 31, 2012. 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 continue to decline as a percentage of revenue.

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 24% and 25% of our consolidated net revenue during the three and six months ended July 31, 2013, respectively, as compared to 23% and 22% in the three and six months ended July 31, 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.

Operating Margin Analysis

Income from operations decreased 10% in the three months ended July 31, 2013 due to a $7.0 million or 1% decline in net revenue partially offset by a $5.7 million or 1% decline in our operating expenses, as compared to the same period in the prior fiscal year. The decrease in operating expenses was primarily related to lower employee related costs during the three months ended July 31, 2013. Our operating margin decreased to 15% for the three months ended July 31, 2013 from 16% for


the three months ended July 31, 2012 due primarily to lower revenue related to foreign currency exchange headwinds and increased cost of goods sold during the three months ended July 31, 2013.

Income from operations decreased 12% in six months ended July 31, 2013 due to a $25.2 million or 2% decline in net revenue partially offset a $20.0 million or 2% decline in our operating expenses, as compared to the period in prior fiscal year. The decrease in operating expenses was primarily related to lower employee related costs and marketing related costs. Our operating margin decreased to 15% for the six months ended July 31, 2013 from 16% for the six months ended July 31, 2012 due primarily to lower revenue related to foreign currency exchange headwinds and increased costs of goods sold during the six months ended July 31, 2013.

Further discussion regarding the cost of goods sold and operating expense activities are discussed below under the heading "Results of Operations."

Foreign Currency Analysis

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 both the three and six months ended July 31, 2013, as compared to the same periods in the prior fiscal year. Had applicable exchange rates from the three months ended July 31, 2012 been in effect during the three and six months ended July 31, 2013 and had we excluded foreign exchange hedge gains and losses from the three and six months ended July 31, 2013, ("on a constant currency basis"), net revenue would have increased 2% and 1%, respectively, compared to the prior fiscal year. Our total spend, defined as cost of revenue plus operating expenses, during both the three and six months ended July 31, 2013 benefited from foreign exchange rate changes and remained relatively flat on an as reported basis as compared to the same period in the prior fiscal year. Had applicable exchange rates been in effect during the three and six months ended July 31, 2013 and had we excluded foreign exchange hedge gains and losses from the three and six months ended July 31, 2013, ("on a constant currency basis") total spend would have increased 1% and 7%, respectively, 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.

Balance Sheet and Cash Flow Items

At July 31, 2013, we had $2,408.0 million in cash and marketable securities. We completed the six months ended July 31, 2013 with lower deferred revenue and accounts receivable balances as compared to the end of the fiscal year ended January 31, 2013. Our deferred revenue balance at July 31, 2013 included $736.0 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. Our cash flow from operations increased 17% to $289.4 million as of July 31, 2013 from $246.4 million at January 31, 2013. We repurchased 3.1 million shares of our common stock for $110.6 million during the three months ended July 31, 2013. Comparatively, we repurchased 3.4 million shares of our common stock for $111.1 million during the three months ended July 31, 2012. We repurchased 6.3 million shares of our common stock for $239.8 million during the six months ended July 31, 2013. Comparatively, we repurchased 5.9 million shares of our common stock for $210.3 million during the six months ended July 31, 2012. Further discussion regarding the balance sheet and cash flow activities are discussed below under the heading "Liquidity and Capital Resources."

Business Outlook

For the third quarter of fiscal 2014, challenging dynamics within some of the end-markets that we serve has led us to lower our growth assumptions. We now expect net revenue for the third quarter of fiscal 2014 will be from $540 million to $555 million, and that GAAP diluted earnings per share will range from $0.19 to $0.23 while non-GAAP diluted earnings per share will range from $0.36 to $0.40. Non-GAAP earnings per diluted share exclude $0.11 related to stock-based compensation expense and $0.06 for the amortization of acquisition related intangibles.
Autodesk's business model is evolving. We continue to assess current business offerings including introducing more flexible license and service offerings that have ratable revenue streams, such as rental license and cloud-based offerings. The accounting impact of these offerings and other business decisions are expected to result in an increase in the percentage of our ratable revenue, making for a more predictable business over time, while correspondingly reducing our upfront perpetual revenue stream. Over time, we expect our business model transition to expand our customer base by eliminating higher up-front licensing costs and providing more flexibility with how they use our products. However, we expect the business model


transition to cause our traditional upfront perpetual license revenue to decline without a corresponding decrease in expenses. In the future, we expect this business model transition will increase our long-term revenue growth rate by attracting new users. Additionally, the shift is expected to increase the amount of our recurring revenue that is ratably reported over the next several years. We currently are working through our plans for this business model transition in terms of the timeframe and magnitude and, as a result, we are not providing full year fiscal 2014 guidance as of the date of the filing of this quarterly report. While our near-term revenue target is lower, we remain diligent about managing our spend while making essential investments to drive growth. If we are unable to successfully achieve our major business initiatives we may not achieve our financial goals.

Results of Operations

Net Revenue

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