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ADSK > SEC Filings for ADSK > Form 10-Q on 3-Jun-2014All Recent SEC Filings

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Form 10-Q for AUTODESK INC


3-Jun-2014

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 Months Ended April 30, 2014-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, 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 licenses. For example, in fiscal 2014, we began offering Autodesk BIM 360, PLM 360, Sim 360 and Fusion 360, a few of our cloud based offerings, which provide tools, including social and mobile capabilities, to help streamline design, collaboration, and data management processes. We believe that customer adoption of these new offerings will continue to grow as customers across a range of industries begin to take advantage of the scalable computing power and flexibility provided through these new services. Our strategy is to lead our customers and the industries they serve to the new cloud and mobile platforms. This entails both a technological shift and a business model shift. During fiscal 2014, we announced more flexible term-based license offerings, including term-based desktop subscriptions, for certain products. These offerings are designed to give our customers even more flexibility with how they use our products and service offerings and address new types of customers such as project-based users and small businesses.


Over the next four years, we expect to significantly increase our subscription base and the annual value per subscription, which we believe will help drive billings growth. During the transition, revenue, deferred revenue, operating margin, and earnings per share will be impacted as more revenue is recognized ratably rather than up front and as new offerings bring a wider variety of price points.
For the three months ended April 30, 2014, our billings increased 10% as compared to the same period in the prior fiscal year. The 6 percentage point delta from our 4% year over year growth in GAAP revenue and our 10% year over year growth in billings is the result of 7 percentage points from the change in deferred revenue offset by 1 percentage point primarily related to the change in acquisition-related deferred revenue. At April 30, 2014 and January 31, 2014, our total subscriptions were approximately 1.94 million and 1.85 million, respectively.
For the past three years, suites have been an important growth area to 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, 2014, revenue from suites increased 19% as compared to the same period in the prior fiscal year. As a percentage of revenue, suites increased to 35% in the three months ended April 30, 2014 as compared to 31% of our net revenue in the three months ended April 30, 2013.

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, including infrastructure build-out and innovative design and manufacturing. Revenue from emerging countries increased 5% during the three months ended April 30, 2014 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% for both the three months ended April 30, 2014 and 2013. 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 are committed to helping fuel a lifelong passion for design in students of all ages, and inspiring and supporting educators. As such, we offer extensive educational programs supporting our software and services including a new program, initiated in fiscal 2014, under which we grant software licenses to educational institutions in select regions and to key partners for little or no fees. Through these programs we intend to further Science, Technology, Engineering, Digital Arts, and Math (STEAM) 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, 2014. 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.

Overview of the Three Months Ended April 30, 2014 and 2013

                             Three Months Ended      As a % of Net      Three Months Ended     As a % of Net
(in millions)                  April 30, 2014           Revenue           April 30, 2013          Revenue
Net Revenue                 $            592.5              100 %      $            570.4             100 %
Cost of revenue                           78.7               13 %                    67.5              12 %
Gross Profit                             513.8               87 %                   502.9              88 %
Operating expenses                       471.6               80 %                   421.5              74 %
Income from Operations      $             42.2                7 %      $             81.4              14 %

During the three months ended April 30, 2014, as compared to the same period in the prior fiscal year, net revenue increased 4%, and gross profit increased 2%, while income from operations decreased 48%. Our business experienced year over year growth in our Architecture, Engineering and Construction ("AEC") and Manufacturing ("MFG") segments, many of our major products, particularly our AEC suites, and all of our geographic areas, especially within the Asia Pacific ("APAC") geography. Also contributing to the year over year impact to revenue during the three months ended April 30, 2014, were increases in subscription revenue partially offset by decreases in license and other revenue.

During the latter part of fiscal year 2014, we announced a business model transition as we began offering more flexible license and service offerings that have ratable revenue streams. As expected, we experienced growth in our total subscriptions and billings during the three months ended April 30, 2014, and our income from operations was negatively impacted by increased spend, including higher employee-related costs, as a result of this transition.

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


Revenue Analysis

Revenue from flagship products was 50% of total net revenue during the three months ended April 30, 2014 and decreased 4% as compared to the same period in the prior fiscal year. Revenue from suites was 35% of total net revenue for the three months ended April 30, 2014 and increased 19% as compared to the same period in the prior fiscal year. Revenue from new and adjacent products was 14% of total net revenue for the three months ended April 30, 2014 and increased 2% as compared to the same period in the prior fiscal year. We anticipate that, as our new and existing customers migrate from our stand-alone products to suites, 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 26% and 25% of Autodesk's total net revenue for the three months ended April 30, 2014 and 2013, 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 48% in the three months ended April 30, 2014 due to a $50.1 million or 12% increase in our operating expenses and an $11.2 million or 17% increase in cost of revenue, as compared to the same period in the prior fiscal year. Partially offsetting the increase in our spend was a $22.1 million or 4% increase in net revenue, as compared to the same period in the prior fiscal year. Our operating margin decreased to 7% for the three months ended April 30, 2014 from 14% for the three months ended April 30, 2013. The increase in operating expenses and the corresponding decrease in operating margin was primarily related to higher employee-related costs and professional fees during the three months ended April 30, 2014. The increase in employee-related costs was primarily due to an increase in salaries, coupled with an increase in bonuses, both of which were primarily driven by an increase in headcount compared to the corresponding period in the previous fiscal year.

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, France, and the United Kingdom. Our revenue was negatively impacted by foreign exchange rate changes during the three months ended April 30, 2014, as compared to the same periods in the prior fiscal year. Had applicable exchange rates from the three months ended April 30, 2013 been in effect during the three months ended April 30, 2014 and had we excluded foreign exchange hedge gains and losses from the three months ended April 30, 2014, ("on a constant currency basis"), net revenue would have increased 5% during the three months ended April 30, 2014, as compared to the same period in the prior fiscal year.

Our total spend, defined as cost of revenue plus operating expenses, during the three months ended April 30, 2014 increased 13% on an as reported basis as compared to the same period in the prior fiscal year. Had applicable exchange rates from the three months ended April 30, 2013 been in effect during the three months ended April 30, 2014 and had we excluded foreign exchange hedge gains and losses from the three months ended April 30, 2014, total spend would have been minimally impacted by foreign exchange rate changes and would have increased 13% 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 fluctuations of such foreign currency against the U.S. dollar.

Balance Sheet and Cash Flow Items

At April 30, 2014, we had $2,387.9 million in cash and marketable securities. We completed the three months ended April 30, 2014 with higher deferred revenue and lower accounts receivable balances as compared to the end of the fiscal year ended January 31, 2014. Our deferred revenue balance at April 30, 2014 included $848.1 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 2% to $218.7 million as of April 30, 2014 from $224.1 million at April 30, 2013. We repurchased 2.0 million shares of our common stock for $102.5 million during the three months ended April 30, 2014. Comparatively, we repurchased 3.2 million shares of our common stock for $129.2 million during the three months ended April 30, 2013. 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. 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 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 customers use our products. However, we expect the business model transition to cause our traditional 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 increasing the annual value per subscription and increasing total subscriptions over time.
We expect net revenue for the second quarter of fiscal 2015 will range from $595 million to $610 million, and that GAAP diluted earnings per share will range from $0.05 to $0.10 while non-GAAP diluted earnings per share will range from $0.25 to $0.30. Non-GAAP earnings per diluted share exclude $0.11 related to stock-based compensation expense and $0.09 related to the amortization of acquisition related intangibles, net of tax.
We expect net revenue for fiscal 2015 to increase by approximately 4% to 6% compared to fiscal 2014. We expect billings for fiscal 2015 to increase by approximately 7% to 9% compared to fiscal 2014. Autodesk anticipates fiscal 2015 GAAP operating margin to be approximately 3% to 5% and non-GAAP operating margin to be approximately 14% to 16%. The 14% to 16% non-GAAP operating margin excludes 7 percentage points related to stock-based compensation expense, and 4 percentage points related to the amortization of acquisition related intangibles. Autodesk expects to add 150,000-200,000 subscriptions during fiscal 2015.
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

                                                   Three Months    (Decrease)/ Increase compared to    Three Months
                                                      Ended               prior fiscal year               Ended
(in millions)                                     April 30, 2014       $                  %           April 30, 2013
Net Revenue:
License and other                                 $      316.2     $   (7.3 )             (2 )%       $      323.5
Subscription                                             276.3         29.4               12  %              246.9
                                                  $      592.5     $   22.1                4  %       $      570.4
Net Revenue by Geographic Area:
Americas                                          $      205.7     $    3.5                2  %       $      202.2
Europe, Middle East and Africa                           225.5          9.3                4  %              216.2
Asia Pacific                                             161.3          9.3                6  %              152.0
                                                  $      592.5     $   22.1                4  %       $      570.4
Net Revenue by Operating Segment:
Platform Solutions and Emerging Business          $      211.9     $   (0.8 )              -  %       $      212.7
Architecture, Engineering and Construction               195.5         23.4               14  %              172.1
Manufacturing                                            147.3          8.2                6  %              139.1
Media and Entertainment                                   37.8         (8.7 )            (19 )%               46.5
                                                  $      592.5     $   22.1                4  %       $      570.4

License and Other Revenue

License and other revenue consists of two components: (1) all forms of product license revenue and (2) other revenue. Product license revenue includes software license revenue from the sale of seat licenses, software license revenue from the sale of seat term-based licenses from our desktop subscription and enterprise offerings, 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 as the services are performed.

Total License and other revenue decreased 2% during the three months ended April 30, 2014, as compared to the three months ended April 30, 2013. This decrease was primarily due to a 1% 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 decrease of 4% in revenue from our flagship products partially offset by an increase of 6% in our suites products.

During the three months ended April 30, 2014, the 1% decrease in product license revenue was due to a 4% decrease in the number of seats sold partially offset by a 3% increase in the average net revenue per seat. Product license revenue, as a percentage of License and other revenue, was 87% for the three months ended April 30, 2014 and 86% for the three months ended April 30, 2013.

During the three months ended April 30, 2014, total other revenue represented 13% of License and other revenue. Other revenue decreased by 10% during the three months ended April 30, 2014, as compared to the three months ended April 30, 2013 primarily due to a 44% decrease in revenue from our education products as a result of our transition to granting software licenses to educational institutions in select regions and to key partners, consistent with our strategy.

Backlog related to current software license product orders that had not shipped at the end of the quarter increased by $12.3 million during the three months ended April 30, 2014 from $19.7 million at January 31, 2014 to $32.0 million at April 30, 2014. 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.


Subscription Revenue

Autodesk subscription revenue consists of three components: (1) maintenance . . .

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