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ADSK > SEC Filings for ADSK > Form 10-Q on 6-Dec-2013All Recent SEC Filings

Show all filings for AUTODESK INC

Form 10-Q for AUTODESK INC


6-Dec-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" and "Overview of the Three and Nine Months Ended October 31, 2013-Business Outlook" below, anticipated future net revenue, future GAAP and non-GAAP earnings per share, 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 professional 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.

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 transition we have accelerated our move to the cloud and are offering more flexible product licenses. More specifically, during the early part of this fiscal year, we announced more flexible term-based license offerings including rental access for certain products. These offerings are designed to give our customers even more flexibility with how they position us to engage with our products and address new types of customers such as project-based users and small businesses.
Our strategy is predicated upon our major business initiatives to grow, transform and expand our business:
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 and effectiveness. We are continuing to develop new ways to deliver capability and value to our customers, including flexible license and service offerings, product suites and cloud and social-based services, to better match the business needs of our customers. We will continue to emphasize developing 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"), Business Information Modeling ("BIM") and online simulation. Our goal is to lead our industry in transitioning to the cloud, and use cloud services to provide more value to new and existing subscribers.

Expand. We believe that the combination of cloud, social and mobile computing affords us the opportunity to expand our business into new markets and extend the value of our customers' digital design information into visualization, analysis and simulation. We have added new customers through our products and services that are delivered and experienced through the web, cloud and mobile devices providing our advanced visualization technologies to consumers - a whole new category of Autodesk customer. 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 nine months ended October 31, 2013, revenue from suites increased 21% and 16%, respectively, as compared to the same period in the prior fiscal year. As a percentage of revenue, suites consisted of 36% and 34% of our net revenue in the three and nine months ended October 31, 2013, respectively, as compared to 30% and 29% of our net revenue in the three and nine months ended October 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. Revenue from emerging economies increased 6% and decreased 1% during the three and nine months ended October 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% of net revenue for all periods presented. 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.

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 access to our software offerings, 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. 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. At October 31, 2013 we had $171.8 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, deferred compensation, 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 changes, 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 Nine Months Ended October 31, 2013

                            Three Months Ended      As a % of Net     Three Months Ended     As a % of Net
(in millions)                October 31, 2013          Revenue         October 31, 2012         Revenue
Net Revenue                 $           555.2              100 %      $           548.0             100 %
Cost of revenue                          67.1               12 %                   57.9              11 %
Gross Profit                            488.1               88 %                  490.1              89 %
Operating expenses                      420.0               76 %                  455.7              83 %
Income from Operations      $            68.1               12 %      $            34.4               6 %

                             Nine Months Ended      As a % of Net      Nine Months Ended     As a % of Net
(in millions)                October 31, 2013          Revenue         October 31, 2012         Revenue
Net Revenue                 $         1,687.3              100 %      $         1,705.3             100 %
Cost of revenue                         202.4               12 %                  176.5              10 %
Gross Profit                          1,484.9               88 %                1,528.8              90 %
Operating expenses                    1,251.8               74 %                1,307.5              77 %
Income from Operations      $           233.1               14 %      $           221.3              13 %

Our results in the three and nine months ended October 31, 2013, as compared to the same periods in the prior fiscal year, were driven by growth in our Architecture, Engineering and Construction ("AEC"), and Manufacturing ("MFG") segments and in our suites. Offsetting this growth were mixed results from other parts of our business such as decreases in revenue from our major products, ACAD and ACAD LT, our Platform Solutions and Emerging Business ("PSEB") and Media and Entertainment ("M&E") segments and some of our geographic areas during the three and nine months ended October 31, 2013 as compared to the same periods in the prior fiscal year. Negatively impacting revenue, especially within the Asia Pacific ("APAC") geography, between the three and nine months ended October 31, 2013 and the same periods in the prior fiscal year were changes in foreign currency rates. In addition, our strategic decision for our educational program to begin granting software licenses to educational institutions in select regions and to key partners negatively impacted revenue, especially within the Americas geography, between the three and nine months ended October 31, 2013 and the same periods in the prior fiscal year.

During the three months ended October 31, 2013, as compared to the same period in the prior fiscal year, net revenue increased 1%, gross profit remained flat and income from operations increased 98%. During the nine months ended October 31, 2013, as compared to the same period in the prior fiscal year, net revenue decreased 1%, gross profit decreased 3% and income from operations increased 5%. Contributing to the year over year impact to revenue during the three months ended October 31, 2013 were increases in subscription revenue partially offset by decreases in license and other revenue. Contributing to the year over year impact to revenue during the nine months ended October 31, 2013 were decreases in license and other revenue partially offset by increases in subscription revenue.

The reasons for these changes are discussed below under the heading "Results from Operations."

Revenue Analysis

Revenue from flagship products was 50% and 52% of total net revenue during the three and nine months ended October 31, 2013, respectively, a decrease of 9% and 10%, respectively, as compared to the same periods in the prior fiscal year. Revenue from suites was 36% and 34% of total net revenue for the three and nine months ended October 31, 2013, an increase of 21% and 16%, respectively, as compared to the same periods in the prior fiscal year. Revenue from new and adjacent products was 15% and 14% of total net revenue for the three and nine months ended October 31, 2013, respectively, and remained flat in the three and nine months ended October 31, 2013 as compared to the three and nine months ended October 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 nine months ended October 31, 2013, respectively, as compared to 24% and 23% in the three and nine months ended October 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 increased 98% in the three months ended October 31, 2013 due to a $35.7 million or 8% decline in our operating expenses and a $7.2 million or 1% increase in net revenue partially offset by a $9.2 million or 16% increase in cost of revenue, as compared to the same period in the prior fiscal year. Our operating margin increased to 12% for the three months ended October 31, 2013 from 6% for the three months ended October 31, 2012. The decrease in operating expenses and the corresponding increase in operating margin was primarily related to lower restructuring charges and stock-based compensation expense partially offset by an increase in employee-related costs related to fringe benefits, salaries and commissions during the three months ended October 31, 2013.

Income from operations increased 5% in the nine months ended October 31, 2013 due to a $55.7 million or 4% decline in our operating expenses partially offset by a $25.9 million or 15% increase in cost of revenue and an $18.0 million or 1% decline in net revenue, as compared to the same period in prior fiscal year. Our operating margin increased to 14% for the nine months ended October 31, 2013 from 13% for the nine months ended October 31, 2012. The decrease in operating expenses and the corresponding increase in operating margin was primarily related to lower restructuring charges and stock-based compensation expense.

Impacting the comparison between the three and nine months ended October 31, 2013 and the same periods in the prior fiscal year was the world-wide restructuring plan ("Fiscal 2013 Plan") approved by the Company during the three months ended October 31, 2012 and the one-time stock-based compensation expense associated with the acquisition of Socialcam during the three months ended October 31, 2012.

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 by foreign exchange rate changes during both the three and nine months ended October 31, 2013, as compared to the same periods in the prior fiscal year. Had applicable exchange rates from the three and nine months ended October 31, 2012 been in effect during the three and nine months ended October 31, 2013 and had we excluded foreign exchange hedge gains and losses from the three and nine months ended October 31, 2013, ("on a constant currency basis"), net revenue would have increased 4% and 2% during the three and nine months ended October 31, 2013, respectively, as compared to the same periods in the prior fiscal year.

Our total spend, defined as cost of revenue plus operating expenses, during the three and nine months ended October 31, 2013 declined 5% and 2%, respectively, on an as reported basis as compared to the same periods in the prior fiscal year. Had applicable exchange rates from the three months ended October 31, 2012 been in effect during the three months ended October 31, 2013 and had we excluded foreign exchange hedge gains and losses from the three months ended October 31, 2013, total spend would have been minimally impacted by foreign exchange rate changes and would have decreased 5% on a constant currency basis compared to the same period in the prior fiscal year. Had applicable exchange rates from the nine months ended October 31, 2012 been in effect during the nine months ended October 31, 2013 and had we excluded foreign exchange hedge gains and losses from the nine months ended October 31, 2013, total spend would have benefited from foreign exchange rates changes and would have decreased 1% on a constant currency basis compared to the same period 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 October 31, 2013, we had $2,479.0 million in cash and marketable securities. We completed the nine months ended October 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 October 31, 2013 included $698.7 million of deferred subscription revenue


primarily related to 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 decreased 6% to $380.0 million as of October 31, 2013 from $403.5 million at October 31, 2012. We repurchased 2.0 million shares of our common stock for $78.9 million during the three months ended October 31, 2013. Comparatively, we repurchased 4.0 million shares of our common stock for $130.2 million during the three months ended October 31, 2012. We repurchased 8.3 million shares of our common stock for $318.7 million during the nine months ended October 31, 2013. Comparatively, we repurchased 9.9 million shares of our common stock for $340.5 million during the nine months ended October 31, 2012. Further discussion regarding the balance sheet and cash flow activities are discussed below under the heading "Liquidity and Capital Resources."

Business Outlook

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 . . .

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