filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
126K characters. Original on sec.gov · Markdown
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in our MD&A and elsewhere in this Form 10-K 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 Fiscal 2015” and “Business Outlook” below, anticipated future net revenue, future GAAP and non-GAAP net (loss) income per share, operating margin, operating expenses, billings, annualized recurring revenue, annualized revenue per subscription, other future financial results (by product type and geography) and subscriptions, the effectiveness of our efforts to successfully manage transitions to new business models and markets, our expectations regarding the continued transition of our business model, our ability to increase our subscription base, expected market trends, including the growth of cloud, mobile, and social computing, the effect of unemployment and availability of credit, our expectations for our restructuring, the effects of mixed global economic conditions, the effects of revenue recognition, our backlog, expected trends in certain financial metrics, including expenses, the impact of acquisitions and investment activities, expectations regarding our cash needs, the effects of fluctuations in exchange rates and our hedging activities on our financial results, our ability 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, the impact of economic volatility and geopolitical activities in certain countries, particularly emerging economy countries, and the effects of potential non-cash charges on our financial results and the resulting effect on our financial results. In addition, forward-looking statements also consist of statements involving expectations regarding product capability and acceptance, continuation of our stock repurchase program, remediations to our controls environment, 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 Annual Report on Form 10-K 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 above in 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.
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, digital artists, professionals, and non-professionals alike—the people who imagine, design, and 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 over 30 years ago, we believe our industry is undergoing a similar transition from the personal computer to cloud, mobile, and social computing. To address this transition we have accelerated our move to the cloud and mobile devices and are offering more flexible licensing. For example, Autodesk BIM 360, PLM 360, Fusion 360, and AutoCAD360 Pro, some of our cloud based offerings, provide tools, including mobile and social 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 the industries we serve to cloud based technologies and business models. This entails both a technological shift and a business model shift. We now have term-based license offerings, including desktop subscriptions, for certain products and flexible enterprise offerings. These offerings are designed to give our customers even more flexibility with how they use our products and service offerings and to address new types of customers such as project-based users and small businesses. As part of this transition, we discontinued licensing upgrades effective March 6, 2015, discontinued selling new
2016 Form 10-K 37
perpetual licenses of most individual software products effective February 1, 2016, and plan to discontinue selling new perpetual licenses of suites effective August 1, 2016.
With the discontinuation of the sale of most perpetual licenses, we are accelerating our transition away from selling a hybrid of perpetual licenses and term-based offerings toward a single subscription model. During the transition, billings, revenue, gross margin, operating margin, earnings (loss) per share, deferred revenue, and cash flow from operations will be impacted as more revenue is recognized ratably rather than up front and as new offerings bring a wider variety of price points.
As we progress through the business model transition, billings and reported revenue will become less relevant to measure the success of the business as perpetual license sales are discontinued in favor of subscription offerings, which have considerably lower up-front prices. Annualized recurring revenue ("ARR") and subscription additions will better reflect business momentum and provide additional transparency into the transition. To further analyze progress, we will also disaggregate our growth in these metrics between the original maintenance subscription model ("maintenance") and the new desktop, cloud and mobile, and enterprise flexible license agreements ("new model"). We expect maintenance subscriptions to peak as perpetual license sales end this year, and we expect them to decline slowly over time.
Another key element of our strategy is increasing our global penetration. Emerging economies, such as Brazil, Russia, India, and China, represent a construction and manufacturing opportunity. Emerging economies face many of the challenges that our design technology can help address, including infrastructure build-out and innovative design and manufacturing. However, conducting business in these countries presents significant challenges, including economic volatility, geopolitical risk, local competition, limited intellectual property protection, poorly developed business infrastructure, scarcity of talent, software piracy, and different purchase patterns as compared to the developed world. We believe that our move to the new model increases the number of potential markets for Autodesk. By connecting all of the participants in the process of designing and making things, we can sell new offerings into the construction and manufacturing spaces. In fiscal 2016, revenue from emerging economies decreased 4% as compared to fiscal 2015 and represented 15% of our total net revenue for both fiscal 2016 and fiscal 2015, respectively.
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.
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, educators, and students is a key competitive advantage. This network of partners and 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.
Autodesk is committed to helping fuel a lifelong passion for design in students of all ages. We offer free educational licenses of Autodesk software worldwide to students, educators, and educational institutions. In fiscal 2016, we initiated Project Ignite, a free and open learning platform delivering a unique package of technology, learning content, and services created specifically for the classroom. The Project Ignite learning platform additionally offers classroom bundles, which include hardware such as 3D printers and electronics kits along with professional development and training services to help educators. Through Autodesk Design Academy, we provide secondary and postsecondary school markets hundreds of standards-aligned class projects to support design-based disciplines in Science, Technology, Engineering, Digital Arts, and Math (STEAM) while using Autodesk's professional-grade 3D design, engineering and entertainment software used in industry. Beginning in the second quarter of fiscal 2016, we have also made Autodesk Design Academy curricula available on iTunes U. Our intention is to make Autodesk software ubiquitous and the design software of choice for those poised to become the next generation of professional users.
2016 Form 10-K 38
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 to successfully make the transition toward new cloud and mobile platforms, including the related technology and business model shifts; making our technology available to mainstream markets; leveraging our large global network of distributors, resellers, third-party developers, customers, educational institutions, and students; improving the performance and functionality of our products; and adequately protecting 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 I, Item 1A, “Risk Factors.”
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles. In preparing our Consolidated Financial Statements, we make assumptions, judgments, and estimates that can have a significant impact on amounts reported in our 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. We believe that of all our significant accounting policies, the following policies involve a higher degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection is probable. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.
For multiple element arrangements containing only software and software-related elements, we allocate the sales price among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on our vendor-specific objective evidence (“VSOE”) of fair value. VSOE is the price charged when an element is sold separately or a price set by management with the relevant authority. If we do not have VSOE of an undelivered software license, we defer revenue recognition on the entire sales arrangement until all elements for which we do not have VSOE are delivered. If we do not have VSOE for undelivered maintenance or services, the revenue for the arrangement is recognized over the longest contractual service period in the arrangement. We are required to exercise judgment in determining whether VSOE exists for each undelivered element based on whether our pricing for these elements is sufficiently consistent.
For multiple elements arrangements involving non-software elements, including cloud subscription services, our revenue recognition policy is based upon the accounting guidance contained in ASC 605, Revenue Recognition. For these arrangements, we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the non-software elements. We then further allocate consideration within the software group to the respective elements within that group using the residual method as described above. We exercise judgment and use estimates in connection with the determination of the amount of revenue to be recognized in each accounting period.
We allocate the total arrangement consideration among the various elements based on a selling price hierarchy. The selling price for a deliverable is based on its VSOE if available, third-party evidence ("TPE") if VSOE is not available, or the best estimated selling price ("BESP") if neither VSOE nor TPE is available. BESP represents the price at which Autodesk would transact for the deliverable if it were sold regularly on a standalone basis. To establish BESP for those elements for which neither VSOE nor TPE are available, we perform a quantitative analysis of pricing data points for historical standalone transactions involving such elements for a twelve-month period. As part of this analysis, we monitor and evaluate the BESP against actual pricing to ensure that it continues to represent a reasonable estimate of the standalone selling price, considering several other external and internal factors including, but not limited to, pricing and discounting practices, contractually stated prices, the geographies in which we offer our products and services, and the type of customer (i.e. distributor, value-added
2016 Form 10-K 39
reseller, and direct end user, among others). We analyze BESP at least annually or on a more frequent basis if a significant change in our business necessitates a more timely analysis or if we experience significant variances in our selling prices.
In situations when we have multiple contracts with a single counterparty, we use the guidance in ASC 985-605 to evaluate both the form and the substance of the arrangements to determine if they should be combined and accounted for as one arrangement or as separate arrangements.
Our assessment of the likelihood of collection is also a critical factor in determining the timing of revenue recognition. If we do not believe that collection is probable, the revenue will be deferred until the earlier of when collection is deemed probable or payment is received.
Our indirect channel model includes both a two-tiered distribution structure, where distributors sell to resellers, and a one-tiered structure where Autodesk sells directly to resellers. Our product license revenue from distributors and resellers are generally recognized at the time title to our product passes to the distributor, in a two-tiered structure, or reseller, in a one-tiered structure, provided all other criteria for revenue recognition are met. This policy is predicated on our ability to estimate sales returns, among other criteria. We are also required to evaluate whether our distributors and resellers have the ability to honor their commitment to make fixed or determinable payments, regardless of whether they collect payment from their customers. Our policy also presumes that we have no significant performance obligations in connection with the sale of our product licenses by our distributors and resellers to their customers. If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.
As part of the indirect channel model, we have a partner incentive program that uses quarterly attainment of monetary rewards to motivate distributors and resellers to achieve mutually agreed upon business goals in a specified time period. A portion of these incentives reduce license and other revenue in the current period. The remainder, which relates to incentives on our Subscription Program, is recorded as a reduction to deferred revenue in the period the subscription transaction is billed and subsequently recognized as a reduction to subscription revenue over the contract period. These incentive balances do not require significant assumptions or judgments. The reserves associated with the partner incentive program are treated on the balance sheet as either contra account receivable (when due to distributors and direct resellers) or accounts payable (when due to indirect resellers).
Marketable Securities. As described in Note 2, “Financial Instruments,” in the Notes to the Consolidated Financial Statements, our investments in marketable securities are measured at the end of each reporting period and reported at fair value. Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In determining the fair value of our investments we are sometimes required to use various alternative valuation techniques. Inputs to valuation techniques are either observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs have created the following fair value hierarchy:
| • | Level 1 - Quoted prices for identical instruments in active markets; |
| • | Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and |
| • | Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
This hierarchy requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. This is generally true for our cash and cash equivalents and the majority of our marketable securities, which we consider to be Level 1 assets and Level 2 assets. However, determining the fair value of marketable securities when observable inputs are not available (Level 3) requires significant judgment. For example, we use probability weighted discounted cash flow models, in which some of the inputs are unobservable in the market, to estimate the fair value of our convertible debt securities. These assumptions are inherently subjective and involve significant management judgment. Whenever possible, we use observable market data and rely on unobservable inputs only when observable market data is not available, when determining fair value.
2016 Form 10-K 40
All of Autodesk’s marketable securities are subject to a periodic impairment review. We recognize an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. Autodesk considers various factors in determining whether to recognize an impairment charge, including the length of time and extent to which the fair value has been less than Autodesk’s cost basis, the financial condition and near-term prospects of the investee, and Autodesk’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market value.
Business Combinations. We allocate the fair value of the consideration transferred to the assets and liabilities acquired, as well as to in-process research and development based on their estimated fair values at the acquisition date. Any residual purchase price is recorded as goodwill. The purchase price allocation requires us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets and deferred revenue obligations.
Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates used in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
| • | future expected cash flows from sales, maintenance agreements, and acquired developed technologies; |
| • | the acquired company’s trade name and customer relationships as well as assumptions about the period of time the acquired trade name and customer relationships will continue to be used in the combined company’s product portfolio; |
| • | expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; and |
| • | discount rates used to determine the present value of estimated future cash flows. |
These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates, and if such events occur we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities.
Goodwill. When we acquire a business, a portion of the consideration transferred is typically allocated to acquired technology and other identifiable intangible assets, such as customer relationships and developed technology. The excess of the consideration transferred over the net of the acquisition-date fair value of identifiable assets acquired and liabilities assumed is recorded as goodwill. The amounts allocated to acquired technology and other intangible assets represent our estimates of their fair values at the acquisition date. We amortize the acquired technology and other intangible assets with finite lives over their estimated useful lives. The estimation of acquisition-date fair values of intangible assets and their useful lives requires us to make assumptions and judgments, including but not limited to an evaluation of macroeconomic conditions as they relate to our business, industry and market trends, projections of future cash flows, and appropriate discount rates.
We test goodwill for impairment annually in our fourth fiscal quarter or sooner should events or changes in circumstances indicate potential impairment. An optional assessment of qualitative factors of impairment (“optional assessment”) can be performed prior to necessitating a two-step quantitative impairment test. Should the optional assessment be performed for any given fiscal year, qualitative factors to consider include cost factors; financial performance; legal, regulatory, contractual, political, business, or other factors; entity specific factors; industry and market considerations, macroeconomic conditions, and other relevant events and factors affecting the reporting unit. If, after assessing the totality of events or circumstances, it is more likely than not that the fair value of the reporting unit is greater than its carrying value, then performing the two-step impairment test is unnecessary.
Under the two-step quantitative impairment test, we use discounted cash flow models that include assumptions regarding projected cash flows. Variances in these assumptions could have a significant impact on our conclusion as to whether goodwill is impaired, or the amount of any impairment charge. Impairment charges, if any, result from instances where the fair values of net assets associated with goodwill are less than their carrying values. As changes in business conditions and our assumptions occur, we may be required to record impairment charges.
2016 Form 10-K 41
For our annual impairment assessment in fiscal 2016, we utilized the optional assessment for the following reporting units: Platform Solutions and Emerging Business (“PSEB”), Manufacturing ("MFG"), Architecture, Engineering, and Construction ("AEC"), and Media and Entertainment (“M&E”). Based on a review of the qualitative factors described above, we determined that it was more likely than not that the fair value of each of the reporting units exceeded the carrying value. As a result, we concluded that performing the two-step impairment test was not necessary, and therefore the goodwill of our PSEB, MFG, AEC, and M&E reporting units were not impaired during the fiscal year ended January 31, 2016.
For the Delcam reporting unit, we deemed the two-step impairment test was necessary and used a discounted cash flow model which included assumptions regarding projected cash flows. Based on this testing, we estimated fair value was 16% in excess of the carrying value for Delcam, and therefore the goodwill was not impaired during the fiscal year ended January 31, 2016.
Estimating the fair value of the reporting units requires the use of estimates and significant judgments regarding future cash flows that are based on a number of factors including actual operating results, forecasted billings, revenue, and spend targets, discount rate assumptions, and long-term growth rate assumptions. The estimates and judgments described above could adversely change in future periods and we cannot provide absolute assurance that all of the targets will be achieved, which could lead to future impairment charges.
Realizability of Long-Lived Assets. We assess the realizability of our long-lived assets and related intangible assets, other than goodwill, annually during the fourth fiscal quarter, or sooner should events or changes in circumstances indicate the carrying values of such assets may not be recoverable. We consider the following factors important in determining when to perform an impairment review: significant under-performance of a business or product line relative to budget; shifts in business strategies which affect the continued uses of the assets; significant negative industry or economic trends; and the results of past impairment reviews. When such events or changes in circumstances occur, we assess recoverability of these assets.
We assess recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If impairment indicators were present based on our undiscounted cash flow models, which include assumptions regarding projected cash flows, we would perform a discounted cash flow analysis to assess impairments on long-lived assets. Variances in these assumptions could have a significant impact on our conclusion as to whether an asset is impaired or the amount of any impairment charge. Impairment charges, if any, result in situations where any fair values of these assets are less than their carrying values.
In addition to our recoverability assessments, we routinely review the remaining estimated useful lives of our long-lived assets. Any reduction in the useful life assumption will result in increased depreciation and amortization expense in the quarter when such determinations are made, as well as in subsequent quarters.
We will continue to evaluate the values of our long-lived assets in accordance with applicable accounting rules. As changes in business conditions and our assumptions occur, we may be required to record impairment charges.
Income Taxes. We account for income taxes under the asset and liability approach. Under this method, deferred tax assets, including those related to tax loss carryforwards and credits, and deferred tax liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We recognize the tax benefit for an uncertain tax position when it meets a more likely than not threshold. We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.
A valuation allowance is recorded to reduce deferred tax assets when management cannot conclude that it is more likely than not that the net deferred tax asset will be recovered. The valuation allowance is determined by assessing both positive and negative evidence to determine whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. Significant judgment is required in determining whether the valuation allowance should be recorded against deferred tax assets. In assessing the need for valuation allowance, we consider all available evidence including past operating results and estimates of future taxable income. Beginning in the second quarter of fiscal 2016, we considered recent cumulative losses in the United States arising from the Company’s business model transition as a significant source of negative evidence. Considering this negative evidence and the absence of sufficient positive objective evidence that we would generate sufficient taxable income in our United States tax jurisdiction to realize the deferred tax assets, we determined that is was not more likely than not that the Company would realize US federal and state deferred tax assets and recorded a valuation allowance on our federal and state deferred tax assets. As we continually strive to optimize our overall business model, tax planning strategies may become feasible and prudent whereby management may determine that it is more
2016 Form 10-K 42
likely than not that the federal and state deferred tax assets will be realized; therefore, we will continue to evaluate the realizability of our net deferred tax assets each quarter, both in the US and in foreign jurisdictions, based on all available evidence, both positive and negative.
Stock-Based Compensation. We measure stock-based compensation cost at the grant date fair value of the award, and recognize expense ratably over the requisite service period, which is generally the vesting period. We estimate the fair value of certain stock-based payment awards (including grants of employee stock purchases related to the employee stock purchase plan) using either the Black-Scholes-Merton option-pricing model or a binomial-lattice model (e.g., Monte Carlo simulation model). To determine the grant-date fair value of our stock-based payment awards, we use a Black-Scholes model or the quoted stock price on the date of grant, unless the awards are subject to market conditions, in which case we use the Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved. These variables include our expected stock price volatility over the expected term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate for the expected term of the award, and expected dividends. The variables used in these models are reviewed on a quarterly basis and adjusted, as needed. Share-based compensation cost for restricted stock is measured on the closing fair market value of our common stock on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense in our Consolidated Statements of Operations.
Legal Contingencies. As described in Part I, Item 3, “Legal Proceedings” and Part II, Item 8, Note 8, “Commitments and Contingencies,” in the Notes to Consolidated Financial Statements, we are periodically involved in various legal claims and proceedings. We routinely review the status of each significant matter and assess our potential financial exposure. If the potential loss from any matter is considered probable and the amount can be reasonably estimated, we record a liability for the estimated loss. Because of inherent uncertainties related to these legal matters, we base our loss accruals on the best information available at the time. As additional information becomes available, we reassess our potential liability and may revise our estimates. Such revisions could have a material impact on future quarterly or annual results of operations.
Recently Issued Accounting Standards
See Part II, Item 8, Note 1, “Business and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition.
Overview of Fiscal 2016
| Fiscal Year Ended January 31, 2016 | As a % of Net Revenue | Fiscal Year Ended January 31, 2015 | As a % of Net Revenue | ||||||||||
| (in millions) | |||||||||||||
| Net Revenue | $ | 2,504.1 | 100 | % | $ | 2,512.2 | 100 | % | |||||
| Cost of revenue | 370.7 | 15 | % | 342.1 | 14 | % | |||||||
| Gross Profit | 2,133.4 | 85 | % | 2,170.1 | 86 | % | |||||||
| Operating expenses | 2,132.1 | 85 | % | 2,049.4 | 82 | % | |||||||
| Income from Operations | $ | 1.3 | — | % | $ | 120.7 | 5 | % |
We are undergoing a business model transition in which we will discontinue selling new perpetual licenses in favor of subscriptions and flexible license arrangements. During the transition, billings, revenue, gross margin, operating margin, EPS, deferred revenue, and cash flow from operations will be impacted as more revenue is recognized ratably rather than up front and as new offerings bring a wider variety of price points. In order to help better understand our financial performance during and after the transition, we have introduced several new metrics including recurring revenue, total subscriptions, ARR, and annualized revenue per subscription ("ARPS"). ARR and ARPS are performance metrics and should be viewed independently of revenue, deferred revenue, and net billings as ARR and ARPS are not intended to be combined with any of these items.
During fiscal 2016, net revenue decreased slightly as compared to the prior fiscal year, gross profit decreased 2%, and income from operations decreased 99%. Contributing to the year over year decrease in income from operations during fiscal 2016 was an increase in both operating expenses and cost of revenue and a decrease in license and other revenue, partially offset by an increase in subscription revenue. Areas of revenue growth year-over-year included increases in our AEC segment,
2016 Form 10-K 43
highlighted by an increase in our flexible enterprise offerings, our MFG segment, fueled by growth in Delcam and AutoCAD Mechanical, and the Americas geographic area. We also experienced growth in our total subscriptions and billings during fiscal 2016, as compared to fiscal 2015, primarily due to strong maintenance renewals and growth in new offerings such as desktop subscriptions and enterprise offerings. Offsetting these areas of growth were year-over-year revenue declines in our PSEB segment, many of our major products, particularly AutoCAD LT, and the EMEA and APAC geographic areas.
Income from operations for fiscal 2016 was negatively impacted by increased spend primarily from higher employee-related and cloud-related costs, as well as increased spending on other key initiatives.
The reasons for these changes are discussed below under the heading “Results from Operations.”
Revenue Analysis
Revenue from flagship products represented 45% and 48% of total net revenue during fiscal 2016 and fiscal 2015, respectively. Revenue from flagship products decreased by 5% as compared to the prior fiscal year. Revenue from suites represented 37% and 36% of total net revenue for fiscal 2016 and fiscal 2015, respectively, and remained flat compared to the prior fiscal year. Revenue from new and adjacent products represented 18% and 16% of total net revenue during fiscal 2016 and fiscal 2015, respectively. Revenue from new and adjacent products increased by 12% as compared to fiscal 2015.
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% of our consolidated net revenue during both fiscal 2016 and 2015, 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 99% in fiscal 2016 due to an $82.7 million or 4% increase in our operating expenses and a $28.6 million or 8% increase in cost of revenue, as compared to fiscal 2015. Our operating margin decreased to 0% for fiscal 2016 from 5% for fiscal 2015. The increase in cost of revenue was driven by employee related expenses as a result of increased employee headcount and product support costs. Also contributing to the increase in cost of revenue was an increase in cloud and hosting related costs in support of our business model transition. The increase in operating expenses between fiscal 2016 and 2015 was driven by higher employee related costs due to increased headcount and an increase in IT costs. Also impacting the increase in operating expenses during fiscal 2016 as compared to fiscal 2015 was an increase stock based compensation expense as a result of higher fair market value of awards granted.
Further discussion regarding the cost of revenue and operating expense activities are discussed below under the heading “Results of Operations.”
Business Model Transition Metrics
Recurring revenue represents the revenue for the period from our maintenance, desktop, cloud services and enterprise license offerings, including portions of revenue allocated to license & other revenue for those offerings. It excludes revenue from Autodesk Consulting Services, and subscription revenue related to education offerings, consumer product offerings, select Creative Finishing product offerings, Autodesk Buzzsaw, Autodesk Constructware, and third party products. Recurring revenue acquired with the acquisition of a business is captured and may cause variability in the comparison of this calculation. Recurring revenue is a statistical measure rather than a non-GAAP measure and is not meant as a substitute for net revenues.
During fiscal 2016, recurring revenue was 54% of total net revenue as compared to 46% of total net revenue for fiscal 2015.
2016 Form 10-K 44
The following table outlines our subscriptions, ARR and ARPS metrics as of fiscal years ended January 31, 2016 and January 31, 2015:
| Balance at | (Decrease)/Increase compared to prior fiscal year | |||||||||||||
| (in thousands) | January 31, 2016 | January 31, 2015 | % | |||||||||||
| Maintenance Subscriptions | 2,151.0 | 2,013.3 | 137.7 | 7 | % | |||||||||
| New Model Subscriptions | 427.2 | 220.4 | 206.8 | 94 | % | |||||||||
| Total Subscriptions | 2,578.2 | 2,233.7 | 344.5 | 15 | % | |||||||||
| (in millions) | ||||||||||||||
| Maintenance ARR | $ | 1,121.4 | $ | 1,103.8 | $ | 17.6 | 2 | % | ||||||
| New Model ARR | 255.0 | 151.6 | 103.4 | 68 | % | |||||||||
| Total ARR | $ | 1,376.4 | $ | 1,255.4 | $ | 121.0 | 10 | % | ||||||
| (ARR divided by Subscriptions) | ||||||||||||||
| Maintenance ARPS | $ | 521 | $ | 548 | $ | (27 | ) | (5 | )% | |||||
| New Model ARPS | 597 | 688 | (91 | ) | (13 | )% | ||||||||
| Total ARPS | $ | 534 | $ | 562 | $ | (28 | ) | (5 | )% |
Year-over-year maintenance subscriptions increased 7% as of January 31, 2016 as compared to the same period in the prior fiscal year. Year-over-year new model subscriptions increased 94% as of January 31, 2016 as compared to the same period in the prior fiscal year, primarily due to 292% growth in Desktop subscriptions over the corresponding period. Also contributing to the overall subscription growth was an increase in maintenance renewal rates.
Total Subscriptions ARR increased 10% as of January 31, 2016 as compared to the same period in the prior fiscal year primarily due to a 68% increase in New Model ARR driven by desktop license subscriptions and our flexible enterprise offerings. Also contributing to the increase was growth in Maintenance ARR, which increased 2% as compared to the same period in the prior fiscal year.
The 5% decrease in total ARPS was primarily due to growth in lower-priced subscription offerings causing total subscriptions growth to exceed total subscriptions ARR growth.
Foreign Currency Analysis
We generate a significant amount of our revenue in the U.S., Japan, Germany, France, and the United Kingdom. Total net revenue for fiscal 2016 was flat on an as reported basis compared to the prior fiscal year, and was negatively impacted by foreign exchange rate changes during fiscal 2016. Had applicable exchange rates from fiscal 2015 been in effect during fiscal 2016 and had we excluded foreign exchange hedge gains and losses from both fiscal 2015 and 2016 (“on a constant currency basis”), net revenue would have increased 4% compared to the prior fiscal year.
Our total spend, defined as cost of revenue plus operating expenses, during fiscal 2016 increased 5% on an as reported basis as compared to the prior fiscal year. Had applicable exchange rates from fiscal 2015 been in effect during fiscal 2016 and had we excluded foreign exchange hedge gains and losses from both fiscal 2015 and 2016, total spend would have increased 9% on a constant currency basis compared to 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 and spend of certain anticipated transactions but do not attempt to completely mitigate the impact of fluctuations of such foreign currency against the U.S. dollar.
2016 Form 10-K 45
Balance Sheet and Cash Flow Items
At January 31, 2016, we had $2.8 billion in cash and marketable securities. This amount includes the aggregate net proceeds of $742.0 million, after deducting the underwriting discounts and related offering expenses, from our June 2015 registered underwritten public offering of $450.0 million aggregate principal amount of 3.125% notes due June 15, 2020 and $300.0 million aggregate principal amount of 4.375% notes due June 15, 2025. We completed fiscal 2016 with higher deferred revenue and accounts receivable balances as compared to the prior fiscal year. Our deferred revenue balance at January 31, 2016 included $1.1 billion 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 42% to $414.0 million as of January 31, 2016 from $708.1 million at January 31, 2015. We repurchased 8.5 million shares of our common stock for $458.0 million during fiscal 2016. Comparatively, we repurchased 6.9 million shares of our common stock for $372.4 million during fiscal 2015. Further discussion regarding the balance sheet and cash flow activities are discussed below under the heading “Liquidity and Capital Resources.”
Business Outlook
Autodesk is undergoing a business model transition in which the company will discontinue selling new perpetual licenses in favor of subscriptions and flexible license arrangements. During the transition, billings, revenue, gross margin, operating margin, EPS, deferred revenue, and cash flow from operations will be impacted as more revenue is recognized ratably rather than up front and as new offerings bring a wider variety of price points. Over time, we expect our business model transition to expand our customer base by eliminating higher up-front licensing costs and provide more flexibility in how customers gain access to and pay for our products. In the future, we expect this business model transition will increase our long-term revenue growth rate by increasing total subscriptions, ARR, and customer value over time.
In February 2016 we commenced a restructuring plan to reduce headcount by approximately 10% and to consolidate certain facilities around the world in order to accelerate the Company’s move to the cloud and its transition to a subscription-based business model. Through the restructuring, we seek to reduce expenses, streamline the organization, and reallocate resources to align more closely with the Company’s needs going forward. See further discussion of our restructuring plan in Note 17, “Subsequent Events” of the Notes to Consolidated Financial Statements. As a result of these actions, we have incurred and will incur additional costs in the short term that negatively impact our net income and cash flows from operating activities and have the effect of reducing our operating margins.
| Q1 FY17 Guidance Metrics | Q1 FY17 (ending April 30, 2016) |
| Revenue (in millions) | $500 - $520 |
| EPS GAAP | ($0.98) - ($0.89) |
| EPS Non-GAAP (1) | ($0.17) - ($0.12) |
(1) Non-GAAP earnings per diluted share exclude $0.28 related to restructuring expense, $0.27 related to stock-based compensation expense, between $0.18 and $0.14 of GAAP-only tax charges, and $0.10 for the amortization of acquisition related intangibles, offset by $0.02 for gains on strategic investments.
2016 Form 10-K 46
| FY17 Guidance Metrics | FY17 (ending January 31, 2017) |
| Revenue (in millions) (1) | $1,950 - $2,050 |
| GAAP Spend (cost of revenue plus operating expenses) | 3% - 4% |
| Non-GAAP Spend (cost of revenue plus operating expenses) (2) | (1%) - flat |
| EPS GAAP | ($3.32) - ($2.91) |
| EPS Non-GAAP (3) | ($0.85) - ($0.60) |
| Net Subscription Additions | 475,000 - 525,000 |
(1) Excluding the impact of foreign currency rates and hedge gains/losses revenue guidance would be $2.0 - $2.1 billion.
(2) Non-GAAP spend excludes $234 million related to stock-based compensation expense, $88 million related to restructuring expense, and $67 million for the amortization of acquisition related intangibles.
(3) Non-GAAP earnings per diluted share excludes $1.05 related to stock-based compensation expense, between $0.75 and $0.59 of GAAP-only tax charges, $0.39 related to restructuring expense, and $0.30 for the amortization of acquisition related intangibles, offset by $0.02 for gains on strategic investments.
We remain diligent about managing our spend while making essential investments to drive growth.
Results of Operations
| Fiscal Year Ended January 31, 2016 | Increase (decrease) compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | Increase (decrease) compared to prior fiscal year | Fiscal Year Ended January 31, 2014 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| Net Revenue: | |||||||||||||||||||||||||
| License and other | $ | 1,226.9 | $ | (114.5 | ) | (9 | )% | $ | 1,341.4 | $ | 86.5 | 7 | % | $ | 1,254.9 | ||||||||||
| Subscription | 1,277.2 | 106.4 | 9 | % | 1,170.8 | 151.8 | 15 | % | 1,019.0 | ||||||||||||||||
| $ | 2,504.1 | $ | (8.1 | ) | — | % | $ | 2,512.2 | $ | 238.3 | 10 | % | $ | 2,273.9 | |||||||||||
| Net Revenue by Geographic Area: | |||||||||||||||||||||||||
| Americas | $ | 972.8 | $ | 74.8 | 8 | % | $ | 898.0 | $ | 79.1 | 10 | % | $ | 818.9 | |||||||||||
| Europe, Middle East, and Africa | 934.6 | (45.4 | ) | (5 | )% | 980.0 | 128.2 | 15 | % | 851.8 | |||||||||||||||
| Asia Pacific | 596.7 | (37.5 | ) | (6 | )% | 634.2 | 31.0 | 5 | % | 603.2 | |||||||||||||||
| $ | 2,504.1 | $ | (8.1 | ) | — | % | $ | 2,512.2 | $ | 238.3 | 10 | % | $ | 2,273.9 | |||||||||||
| Net Revenue by Operating Segment: | |||||||||||||||||||||||||
| Architecture, Engineering, and Construction | $ | 949.1 | $ | 76.5 | 9 | % | $ | 872.6 | $ | 142.0 | 19 | % | $ | 730.6 | |||||||||||
| Manufacturing | 724.6 | 49.0 | 7 | % | 675.6 | 96.2 | 17 | % | 579.4 | ||||||||||||||||
| Platform Solutions and Emerging Business | 670.4 | (126.3 | ) | (16 | )% | 796.7 | 7.5 | 1 | % | 789.2 | |||||||||||||||
| Media and Entertainment | 160.0 | (7.3 | ) | (4 | )% | 167.3 | (7.4 | ) | (4 | )% | 174.7 | ||||||||||||||
| $ | 2,504.1 | $ | (8.1 | ) | — | % | $ | 2,512.2 | $ | 238.3 | 10 | % | $ | 2,273.9 |
Fiscal 2016 Net Revenue Compared to Fiscal 2015 Net Revenue
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 perpetual licenses, term-based licenses from our desktop subscription and enterprise offerings, 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.
2016 Form 10-K 47
Total License and other revenue decreased 9% during fiscal 2016 as compared to fiscal 2015. This decrease was primarily due to an 11% decrease in product license revenue as compared to the same period in the prior fiscal year. The decrease in product license revenue was primarily due to a 14% decrease in revenue from our flagship products and a 12% decrease in our suites revenue. Product license revenue, as a percentage of license and other revenue, was 88% and 89% for fiscal 2016 and fiscal 2015, respectively.
During fiscal 2016, the 11% decrease in product license revenue was due to an 18% decrease in the average net revenue per seat while the number of seats sold increased by 7% compared to the prior fiscal year. Starting in the first quarter of fiscal 2017, and in connection with the discontinuation of sales of individual perpetual licenses, we will stop reporting changes in revenue attributable to average net revenue per seat and number of seats sold. We are replacing these disclosures with disclosure regarding changes in ARPS disclosed within Overview above. ARPS is more relevant to determine whether changes in net revenues are attributable to increases in price or volume.
During fiscal 2016, total other revenue represented 12% of license and other revenue, and 6% of total net revenue. Other revenue increased by 12% during fiscal 2016 as compared to fiscal 2015. This increase is primarily due to an 11% increase in revenue from consulting and a 38% increase in revenue from our consumer product offerings, partially offset by a decrease in revenue from our education products as a result of our strategic transition to offer free educational licenses of Autodesk software to students, educators, and institutions.
Backlog related to current software license product orders that had not shipped at the end of the fiscal year decreased by $9.0 million from $40.4 million at January 31, 2015 to $31.4 million at January 31, 2016. 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
Our Subscription revenue consists of three components: (1) maintenance revenue from our software products; (2) maintenance revenue from our term-based desktop subscription and enterprise offerings; and (3) revenue from our cloud service offerings. Our maintenance program provides our customers of software products 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 training courses, and online support. We recognize maintenance revenue ratably over the term of the maintenance agreement, which is generally between one and three years. Revenue for our cloud service offerings is recognized ratably over the contract term commencing with the date our service is made available to customers and all other revenue recognition criteria have been satisfied.
Subscription revenue increased 9% during fiscal 2016 as compared to fiscal 2015 primarily due to a 9% increase in commercial maintenance revenue. The 9% increase in commercial maintenance revenue was due to a 12% increase from commercial enrollment during the corresponding maintenance contract term, offset by a 3% decrease from net revenue per maintenance seat. Commercial maintenance revenue represented 96% of Subscription revenue for both fiscal 2016 and fiscal 2015, respectively. Starting in the first quarter of fiscal 2017, and in connection with the discontinuation of sales of individual perpetual licenses, we will stop reporting changes in revenue attributable to average net revenue per seat and number of seats sold. We are replacing these disclosures with disclosure regarding changes in ARPS disclosed within Overview above. ARPS is more relevant to determine whether changes in net revenues are attributable to increases in price or volume.
Changes in Subscription revenue lag changes in net billings for subscription contracts because we recognize the revenue from those contracts ratably over their contract terms. Net subscription billings increased 16% during fiscal 2016 as compared to the prior fiscal year primarily due to an increase in multi-year maintenance subscription billings.
Our deferred subscription revenue balance at January 31, 2016 and January 31, 2015 was $1.1 billion and $0.9 billion, respectively, and primarily related to customer maintenance agreements, which will be recognized as revenue ratably over the term of the maintenance agreement.
2016 Form 10-K 48
Net Revenue by Geographic Area
Net revenue in the Americas geography increased by 8% as reported and 9% on a constant currency basis during fiscal 2016, as compared to the prior fiscal year, primarily due to a 20% increase in our new and adjacent product revenue and an 8% increase in our suites revenue in this geography during fiscal 2016 as compared to fiscal 2015. The increase in this geography was led by the U.S.
Net revenue in the EMEA geography decreased by 5% on an as reported basis and increased 3% on a constant currency basis during fiscal 2016 as compared to the prior fiscal year. This decrease was primarily due to a 7% decrease in our flagship products and a 5% decrease in our suites revenue in this geography during fiscal 2016 as compared to fiscal 2015. The decrease in our revenue in this geography was led by Germany and Russia, partially offset by an increase in revenue from Ireland.
Net revenue in the APAC geography decreased 6% on an as reported basis and 1% on a constant currency basis, during fiscal 2016 as compared to the prior fiscal year, primarily due to a 10% decrease in our flagship products, partially offset by an 8% increase in our new and adjacent product revenue in this geography. The decrease in revenue in this geography during fiscal 2016 was led by Japan, partially offset by an increase in revenue from China.
Net revenue in emerging economies decreased 4% on an as reported basis and 2% on a constant currency basis, during fiscal 2016 as compared to the prior fiscal year, primarily due to decreases in revenue from Russia and Brazil, partially offset by an increase in revenue from China. Revenue from emerging economies represented 15% of total net revenue for both fiscal 2016 and 2015, respectively.
International net revenue represented 68% and 71% of our total net revenue for fiscal 2016 and 2015, respectively. We believe that international revenue will continue to comprise a majority of our total net revenue. Unfavorable economic conditions in the countries that contribute a significant portion of our net revenue, including in emerging economies, may have an adverse effect on our business in those countries and our overall financial performance. Changes in the value of the U.S. dollar relative to other currencies have significantly affected, and could continue to significantly affect, our financial results for a given period even though we hedge a portion of our current and projected revenue. Additionally, weak global economic conditions that have been characterized by restructuring of sovereign debt, high unemployment, and volatility in the financial markets may impact our future financial results.
Net Revenue by Operating Segment
We have four reportable segments: AEC, MFG, PSEB, and M&E. We have no material inter-segment revenue.
Net revenue for AEC increased by 9% during fiscal 2016 as compared to the prior fiscal year primarily due to an 8% increase in revenue from our AEC suites, which was primarily driven by Autodesk Building Design Suite and Autodesk Infrastructure Design Suite.
Net revenue for MFG increased by 7% during fiscal 2016 as compared to the prior fiscal year primarily due to a 78% increase in revenue from our Delcam products as a result of including 12 months of Delcam operating results during fiscal 2016, compared to 10 months during fiscal 2015. Also contributing to the increase in net revenue for MFG during fiscal 2016 was a 12% increase in revenue from our flagship product AutoCAD Mechanical.
Net revenue for PSEB decreased by 16% during fiscal 2016 as compared to the prior fiscal year primarily due to a 26% decrease in revenue from our flagship product AutoCAD LT. Revenue from AutoCAD decreased by 4% in fiscal 2016 as compared to fiscal 2015.
Net revenue for M&E decreased by 4% during fiscal 2016 as compared to the prior fiscal year, primarily due to a 21% decrease in revenue from Creative Finishing, partially offset by a 1% increase in revenue from Animation. The decline in Creative Finishing was marked by a decrease in revenue from Creative Finishing hardware products and by a general decrease in the M&E industry end-market demand. The slight increase in Animation revenue was primarily due to a 168% increase in our Shotgun product offering as a result of including a full year of Shotgun operating results in fiscal 2016 as compared to six months during fiscal 2015, and a 7% increase in our Maya flagship product offerings, partially offset by a 46% decrease in our Middleware product offerings. M&E revenue is impacted by a general decrease in the M&E industry end-market demand, the planned inclusion of our M&E products in other Autodesk industry suites, and the business model transition as customers are opting for desktop subscription and flexible enterprise offerings. At the beginning of the fourth quarter of fiscal 2016, we exited
2016 Form 10-K 49
the Creative Finishing hardware business. This was an immaterial portion of our overall business and comes with substantially lower margins, so we expect that exiting this business will improve our margins within M&E over time.
Fiscal 2015 Net Revenue Compared to Fiscal 2014 Net Revenue
License and Other Revenue
Total License and other revenue increased 7% during fiscal 2015 as compared to fiscal 2014. This increase was primarily due to a 7% increase in product license revenue as compared to the same period in the prior fiscal year. The increase in product license revenue was primarily due to an 8% increase in suites revenue and an increase of 4% in revenue from our flagship products.
During fiscal 2015, the 7% increase in product license revenue was due to a 7% increase in the average net revenue per seat while the number of seats sold remained flat compared to the prior fiscal year. Product license revenue, as a percentage of License and other revenue, was 89% for both fiscal 2015 and fiscal 2014.
During fiscal 2015, total other revenue represented 11% of license and other revenue, and 6% of total net revenue. Other revenue increased by 7% during fiscal 2015 as compared to fiscal 2014. This increase is primarily due to a 17% increase in revenue from consulting, partially offset by a 65% decrease in revenue from our education products as a result of our strategic transition to offer free educational licenses of Autodesk software to students, educators, and institutions.
Backlog related to current software license product orders that had not shipped at the end of the fiscal year increased by $20.7 million from $19.7 million at January 31, 2014 to $40.4 million at January 31, 2015. 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
Subscription revenue increased 15% during fiscal 2015 as compared to fiscal 2014 primarily due to a 15% increase in commercial maintenance revenue. The 15% increase in commercial maintenance revenue was due to a 9% increase from net revenue per maintenance seat and a 6% increase from commercial enrollment during the corresponding maintenance contract term. Commercial maintenance revenue represented 96% and 95% of Subscription revenue for fiscal 2015 and fiscal 2014, respectively.
Changes in Subscription revenue lag changes in net billings for subscription contracts because we recognize the revenue from those contracts ratably over their contract terms. Net subscription billings increased 22% during fiscal 2015 as compared to the prior fiscal year primarily due to an increase in maintenance subscription billings.
Our deferred subscription revenue balance at January 31, 2015 and January 31, 2014 was $936.8 million and $789.3 million, respectively, and primarily related to customer maintenance agreements, which will be recognized as revenue ratably over the term of the maintenance agreement.
Net Revenue by Geographic Area
Net revenue in the Americas geography increased by 10% as reported and on a constant currency basis during fiscal 2015, as compared to the prior fiscal year. This increase was primarily due to a 16% increase in our suites revenue and an 18% increase in our new and adjacent product revenue in this geography during fiscal 2015 as compared to fiscal 2014. The increase in this geography was led by the U.S.
Net revenue in the EMEA geography increased by 15% on an as reported basis and 13% on a constant currency basis during fiscal 2015 as compared to the prior fiscal year. This increase was primarily due to a 24% increase in our suites products and a 45% increase in our new and adjacent product revenue in this geography during fiscal 2015 as compared to fiscal 2014. The increase in our revenue in this geography was led by Germany and France.
Net revenue in the APAC geography increased 5% on an as reported basis and 11% on a constant currency basis, during fiscal 2015 as compared to the prior fiscal year, primarily due to a 4% increase in our flagship products and a 5% increase in our suites products in this geography. Our revenue in this geography during fiscal 2015 benefited from increases in revenue from South Korea and India, partially offset by a decrease in revenue from Japan.
2016 Form 10-K 50
Net revenue in emerging economies increased 14% on an as reported basis and 13% on a constant currency basis, during fiscal 2015 as compared to the prior fiscal year, primarily due to increases in revenue from India and Mexico. Revenue from emerging economies represented 15% of total net revenue for both fiscal 2015 and 2014.
International net revenue represented 71% and 70% of our total net revenue for fiscal 2015 and 2014, respectively. We believe that international revenue will continue to comprise a majority of our total net revenue.
Net Revenue by Operating Segment
Net revenue for AEC increased by 19% during fiscal 2015 as compared to the prior fiscal year primarily due to a 31% increase in revenue from our AEC suites, which was primarily driven by Autodesk Building Design Suite and Autodesk Infrastructure Design Suite.
Net revenue for PSEB increased by 1% during fiscal 2015 as compared to the prior fiscal year primarily due to a 3% increase in revenue from our flagship product AutoCAD LT. Revenue from AutoCAD remained flat in fiscal 2015 as compared to fiscal 2014.
Net revenue for MFG increased by 17% during fiscal 2015 as compared to the prior fiscal year primarily due to the acquisition of Delcam plc ("Delcam"). Also contributing to the increase in net revenue for MFG was a 9% increase in revenue from our MFG suites, which was primarily driven by the Autodesk Product Design Suite, as compared to fiscal 2014.
Net revenue for M&E decreased by 4% during fiscal 2015 as compared to the prior fiscal year, primarily due to an 11% decrease in revenue from Creative Finishing and a 2% decrease in revenue from Animation. The decline in Creative Finishing was marked by a general decrease in the M&E industry end-market demand, partially offset by a 33% increase in sales of our Creative Finishing hardware products. The decrease in Animation revenue was primarily due to a 20% decrease in revenue from our M&E suites, which was driven by our Autodesk Entertainment Creation Suite, partially offset by a 5% increase in our flagship product 3ds Max.
Cost of Revenue and Operating Expenses
Cost of Revenue
| Fiscal Year Ended January 31, 2016 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2014 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||||
| License and other | $ | 214.6 | $ | 6.1 | 3 | % | $ | 208.5 | $ | 29.8 | 17 | % | $ | 178.7 | |||||||||||
| Subscription | 156.1 | 22.5 | 17 | % | 133.6 | 38.0 | 40 | % | 95.6 | ||||||||||||||||
| $ | 370.7 | $ | 28.6 | 8 | % | $ | 342.1 | $ | 67.8 | 25 | % | $ | 274.3 | ||||||||||||
| As a percentage of net revenue | 15 | % | 14 | % | 12 | % |
Cost of license and other revenue includes labor costs associated with product setup and fulfillment and costs of consulting and training services contracts and collaborative project management services contracts. Cost of license and other revenue also includes stock-based compensation expense, direct material and overhead charges, amortization of developed technology, allocated IT and facilities costs, professional services fees and royalties. Direct material and overhead charges include the cost of hardware sold (mainly PC-based workstations for Creative Finishing in the M&E segment), and costs associated with electronic and physical fulfillment.
Cost of license and other revenue increased 3% during fiscal 2016 as compared to fiscal 2015, primarily due to an increase in hardware related costs from our consumer related products, an increase in allocated IT costs, and employee related costs for product support and fulfillment driven by an increase in headcount, partially offset by a decrease in amortization of developed technology. Cost of license and other revenue increased 17% during fiscal 2015, as compared to fiscal 2014,
2016 Form 10-K 51
primarily from the acquisition of Delcam and consulting support costs associated with an increased headcount and increased professional fees related to the building out of the consulting services offered within customer contracts.
Cost of subscription revenue includes the labor costs of providing product support to our maintenance and cloud subscription customers, including rent and occupancy, shipping and handling costs, professional services fees related to operating our network infrastructure, depreciation expense and operating lease payments associated with computer equipment, data center costs, salaries, related expenses of network operations, and allocated IT and facilities costs.
Cost of subscription revenue increased 17% during fiscal 2016 as compared to fiscal 2015 primarily due to an increase in cloud and hosting related costs in support of our business model transition, and an increase in employee related costs driven by increased employee headcount and product support costs. Cost of subscription revenue increased 40% during fiscal 2015 as compared to fiscal 2014 primarily due to higher employee related costs as a result of increased premium support headcount as well as an increase in cloud services related expenses.
Cost of revenue, at least over the near term, is affected by the volume and mix of product sales, mix of physical versus electronic fulfillment, fluctuations in consulting costs, amortization of purchased technology, new customer support offerings, royalty rates for licensed technology embedded in our products, and employee stock-based compensation expense.
We expect cost of revenue to decrease in absolute dollars and increase as a percentage of net revenue during fiscal 2017, as compared to fiscal 2016.
Marketing and Sales
| Fiscal Year Ended January 31, 2016 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2014 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| Marketing and sales | $ | 1,015.5 | $ | 17.5 | 2 | % | $ | 998.0 | $ | 155.4 | 18 | % | $ | 842.6 | |||||||||||
| As a percentage of net revenue | 41 | % | 40 | % | 37 | % |
Marketing and sales expenses include salaries, bonuses, benefits, and stock-based compensation expense for our marketing and sales employees, the expense of travel, entertainment and training for such personnel, the costs of programs aimed at increasing revenue, such as advertising, trade shows and expositions, and various sales and promotional programs. Marketing and sales expenses also include labor costs associated with sales and order processing, sales and dealer commissions, rent and occupancy, payment processing fees, the cost of supplies and equipment, and allocated IT and facilities costs.
Marketing and sales expenses increased 2% during fiscal 2016, as compared to fiscal 2015, primarily due to an increase in stock based compensation expense as a result of higher fair market value of awards granted, an increase in salaries predominantly driven by increased headcount, and an increase in IT costs allocated to marketing and sales. Partially offsetting the increase in expense was a decrease in sales commission expense.
Marketing and sales expenses increased 18% during fiscal 2015, as compared to fiscal 2014, primarily due to higher employee-related costs from salaries, commissions, and bonuses as well as advertising and promotional expenses.
We expect marketing and sales expense to decrease in absolute dollars and increase as a percentage of net revenue in fiscal 2017 as compared to fiscal 2016.
2016 Form 10-K 52
Research and Development
| Fiscal Year Ended January 31, 2016 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2014 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| Research and development | $ | 790.0 | $ | 64.8 | 9 | % | $ | 725.2 | $ | 114.1 | 19 | % | $ | 611.1 | |||||||||||
| As a percentage of net revenue | 32 | % | 29 | % | 27 | % |
Research and development expenses, which are expensed as incurred, consist primarily of salaries, bonuses, benefits, and stock-based compensation expense for research and development employees, and the expense of travel, entertainment and training for such personnel, rent and occupancy, professional services such as fees paid to software development firms and independent contractors, and allocated IT and facilities costs.
Research and development expenses increased 9% during fiscal 2016, as compared to fiscal 2015, primarily due to an increase in employee-related costs from salaries and fringe benefits predominantly driven by increased headcount, an increase in IT costs allocated to research and development, and an increase in stock based compensation expense due to higher fair market value of awards granted.
Research and development expenses increased 19% during fiscal 2015, as compared to fiscal 2014, primarily due to an increase in employee-related costs from salaries and bonuses and an increase in professional fees.
We expect research and development expense to increase in absolute dollars and as a percentage of net revenue during fiscal 2017, as compared to fiscal 2016.
General and Administrative
For comparability, the balances at January 31, 2015 and January 31, 2014, including the table, were adjusted to align to current year presentation, and therefore the discussion has been updated accordingly.
| Fiscal Year Ended January 31, 2016 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2014 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| General and administrative | $ | 293.4 | $ | 10.1 | 4 | % | $ | 283.3 | $ | 71.5 | 34 | % | $ | 211.8 | |||||||||||
| As a percentage of net revenue | 12 | % | 11 | % | 9 | % |
General and administrative expenses include salaries, bonuses, benefits and stock-based compensation expense for our finance, human resources and legal employees, as well as professional fees for legal and accounting services, certain foreign business taxes, gains and losses on our operating expense cash flow hedges, expense of travel, entertainment and training, expense of communication and the cost of supplies and equipment.
General and administrative expenses increased 4% from fiscal 2015 to fiscal 2016 primarily due to an increase in employee-related costs from salaries predominantly driven by increased headcount. Partially offsetting the increase in expense was a decrease in certain foreign business taxes.
General and administrative expenses increased 34% from fiscal 2014 to fiscal 2015, primarily due to an increase in employee-related costs from salaries and bonuses and an increase in professional fees.
We expect general and administrative expense to increase in absolute dollars and as a percentage of net revenue during fiscal 2017, as compared to fiscal 2016.
2016 Form 10-K 53
Amortization of Purchased Intangibles
| Fiscal Year Ended January 31, 2016 | Decrease compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2014 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| Amortization of purchased intangibles | $ | 33.2 | $ | (6.6 | ) | (17 | )% | $ | 39.8 | $ | 3.3 | 9 | % | $ | 36.5 | ||||||||||
| As a percentage of net revenue | 1 | % | 2 | % | 2 | % |
Amortization of purchased intangibles decreased 17% from fiscal 2015 to fiscal 2016, primarily related to the accumulated effects associated with amortization expense of intangible assets purchased over time, including $59.1 million in assets purchased in fiscal 2016 as compared to $164.1 million purchased in fiscal 2015.
Amortization of purchased intangibles increased 9% from fiscal 2014 to fiscal 2015, primarily related to the accumulated effects associated with amortization expense of intangible assets purchased over time, including $164.1 million in assets purchased in fiscal 2015 as compared to $40.3 million purchased in fiscal 2014.
We expect amortization of purchased intangibles expense to decrease in absolute dollars and remain flat as a percentage of net revenue during fiscal 2017, as compared to fiscal 2016.
Restructuring Charges, Net
| Fiscal Year Ended January 31, 2016 | Decrease compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | Decrease compared to prior fiscal year | Fiscal Year Ended January 31, 2014 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| Restructuring charges, net | $ | — | $ | (3.1 | ) | (100 | )% | $ | 3.1 | $ | (9.7 | ) | (76 | )% | $ | 12.8 | |||||||||
| As a percentage of net revenue | — | % | — | % | 1 | % |
During fiscal 2016, Autodesk recorded no restructuring charges. We have substantially completed the actions authorized under the previous restructuring plans. See Note 15, “Restructuring Reserves” in Notes to Consolidated Financial Statements for further discussion regarding the previous restructuring plans.
On February 2, 2016, our Board of Directors approved a world-wide restructuring plan that includes a reduction in force that will result in the termination of approximately 10% of the Company’s workforce, or approximately 925 employees, and the consolidation of certain leased facilities. See Note 17, "Subsequent Events (Unaudited)," for further discussion regarding the anticipated amount and timing of the expenditures related to this action.
Interest and Other Expense, Net
The following table sets forth the components of interest and other expense, net:
| Fiscal Year Ended January 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (in millions) | |||||||||||
| Interest and investment expense, net | $ | (33.9 | ) | $ | (13.2 | ) | $ | (9.8 | ) | ||
| (Loss) gain on foreign currency | — | (3.9 | ) | 4.0 | |||||||
| Gain (loss) on strategic investments | 3.8 | (23.3 | ) | (1.8 | ) | ||||||
| Other income | 8.5 | 2.7 | 2.7 | ||||||||
| Interest and other expense, net | $ | (21.6 | ) | $ | (37.7 | ) | $ | (4.9 | ) |
2016 Form 10-K 54
Interest and other expense, net, decreased $16.1 million during fiscal 2016, as compared to fiscal 2015, The decrease is primarily related to non-recurring settlement gains on certain of our privately-held strategic investments and mark-to-mark gains recognized on the derivative portion on certain of our other privately-held strategic investments during the current fiscal year. Comparatively, we incurred non-recurring impairment losses on certain of our privately-held strategic investments in the same periods in the prior fiscal year. This decrease was offset by an increase in interest expense resulting from the June 2015 issuance of $450.0 million aggregate principal amount of 3.125% senior notes due June 15, 2020 and $300.0 million aggregate principal amount of 4.375% senior notes due June 15, 2025.
Interest and other expense, net, increased $32.8 million during fiscal 2015, as compared to fiscal 2014, primarily due to an increase in losses on our privately held strategic investments. The increase in the loss on strategic investments during fiscal 2016 as compared to fiscal 2015 is primarily due to other-than-temporary impairments on two of our privately held strategic investments and losses on the derivative portion of our strategic investments that are marked-to-market each period.
Provision for Income Taxes
We account for income taxes and the related accounts under the liability method. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted rates expected to be in effect during the year in which the basis differences reverse.
Income tax expense was $310.2 million and $1.2 million for fiscal 2016 and 2015, respectively, relative to a pre-tax loss of $20.3 million and pre-tax income of $83.0 million, respectively, for the same periods. Tax expense for fiscal 2016 consists primarily of foreign taxes and changes to valuation allowances, including a $230.8 million valuation allowance against the Company's U.S. federal and remaining state deferred tax assets recorded in the second quarter of fiscal 2016. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we considered recent cumulative losses in the United States arising from the Company's business model transition as a significant piece of negative evidence and determined that it was more likely than not that the federal and state deferred tax assets would not be realized.
Income tax expense was $1.2 million and $51.1 million for fiscal 2015 and 2014, respectively, relative to pre-tax income of $83.0 million and $279.9 million, respectively, for the same periods. Our effective tax rate was 1% and 18% during fiscal 2015 and 2014, respectively. Our effective tax rate decreased seventeen percentage points from fiscal 2014 to fiscal 2015 due to an increase in tax benefits from foreign earnings taxed at different rates in fiscal 2015 compared to fiscal 2014, and increased benefit from research credits, offset in part by lower tax benefits from stock-based compensation.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 enacted on December 18, 2015 extended and made permanent the federal R&D tax credit. As a result, our income tax provision for Fiscal 2016 includes a tax benefit of $9.4 million which was offset by the valuation allowance against our U.S. deferred tax assets.
Our future effective annual tax rate may be materially impacted by the amount of benefits and charges from tax amounts associated with our foreign earnings that are taxed at rates different from the federal statutory rate, changes in valuation allowances, level of profit before tax, accounting for uncertain tax positions, business combinations, closure of statute of limitations or settlement of tax audits, and changes in tax laws including possible U.S. tax law changes that, if enacted, could significantly impact how U.S. multinational companies are taxed on foreign subsidiary earnings. A significant amount of our earnings is generated by our Europe and Asia Pacific subsidiaries. Our future effective tax rates may be adversely affected to the extent earnings are lower than anticipated in countries where we have lower statutory tax rates or we repatriate certain foreign earnings on which U.S. taxes have not previously been provided.
At January 31, 2016, we had non-current foreign net deferred tax assets of $9.2 million which management believes are more likely than not to be realized in future years.
For additional information regarding our income tax provision and reconciliation of our effective rate to the federal statutory rate of 35%, see Note 4, “Income Taxes,” in the Notes to Consolidated Financial Statements.
2016 Form 10-K 55
Other Financial Information
In addition to our results determined under U.S. generally accepted accounting principles (“GAAP”) discussed above, we believe the following non-GAAP measures are useful to investors in evaluating our operating performance. For the fiscal years ended January 31, 2016, 2015, and 2014, our gross profit, gross margin, income from operations, operating margin, net (loss) income, and diluted net (loss) income per share on a GAAP and non-GAAP basis were as follows (in millions except for year-over-year change in total net revenue and billings, year-over-year change in net subscription revenue and billings, gross margin, operating margin, and per share data):
| Fiscal Year Ended January 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (Unaudited) | |||||||||||
| Year-over-year change in total net revenue | — | % | 10 | % | (2 | )% | |||||
| Year-over-year change in total net billings (1) | 5 | % | 18 | % | (4 | )% | |||||
| Year-over-year change in net subscription revenue | 9 | % | 15 | % | 7 | % | |||||
| Year-over-year change in net subscription billings (1) | 16 | % | 22 | % | (1 | )% | |||||
| Gross profit | $ | 2,133.4 | $ | 2,170.1 | $ | 1,999.6 | |||||
| Non-GAAP gross profit | $ | 2,194.2 | $ | 2,232.2 | $ | 2,049.8 | |||||
| Gross margin | 85 | % | 86 | % | 88 | % | |||||
| Non-GAAP gross margin | 88 | % | 89 | % | 90 | % | |||||
| Income from operations | $ | 1.3 | $ | 120.7 | $ | 284.8 | |||||
| Non-GAAP income from operations | $ | 280.7 | $ | 382.4 | $ | 510.5 | |||||
| Operating margin | — | % | 5 | % | 13 | % | |||||
| Non-GAAP operating margin | 11 | % | 15 | % | 22 | % | |||||
| Net (loss) income | $ | (330.5 | ) | $ | 81.8 | $ | 228.8 | ||||
| Non-GAAP net income | $ | 194.1 | $ | 272.3 | $ | 385.6 | |||||
| Diluted net (loss) income per share (2) | $ | (1.46 | ) | $ | 0.35 | $ | 1.00 | ||||
| Non-GAAP diluted income per share (2) | $ | 0.84 | $ | 1.17 | $ | 1.68 | |||||
| GAAP diluted shares used in per share calculation | 226.0 | 227.1 | 224.0 | ||||||||
| Non-GAAP diluted weighted average shares used in per share calculation | 230.7 | 232.4 | 229.6 |
| (1) | Prior period was adjusted to conform with current period's presentation to include the effects from hedging on billings. |
| (2) | Net (loss) income per share were computed independently for each of the periods presented; therefore the sum of the net (loss) income per share amount for the quarters may not equal the total for the year. |
For our internal budgeting and resource allocation process and as a means to evaluate period-to-period comparisons, we use non-GAAP measures to supplement our consolidated financial statements presented on a GAAP basis. These non-GAAP measures do not include certain items that may have a material impact upon our reported financial results. We also use non-GAAP measures in making operating decisions because we believe those measures provide meaningful supplemental information regarding our earning potential and performance for management by excluding certain expenses and charges that may not be indicative of our core business operating results. For the reasons set forth below, we believe these non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business. This allows investors and others to better understand and evaluate our operating results and future prospects in the same manner as management, compare financial results across accounting periods and to those of peer companies and to better understand the long-term performance of our core business. We also use some of these measures for purposes of determining company-wide incentive compensation.
There are limitations in using non-GAAP financial measures because non-GAAP financial measures are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. The non-GAAP financial measures included above are limited in value because they exclude certain items that may have a material impact upon our reported financial results. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which charges are excluded from the non-GAAP financial measures. We compensate for these limitations by
2016 Form 10-K 56
analyzing current and future results on a GAAP basis as well as a non-GAAP basis and also by providing GAAP measures in our public disclosures. The presentation of non-GAAP financial information is meant to be considered in addition to, not as a substitute for or in isolation from, the directly comparable financial measures prepared in accordance with GAAP. We urge investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.
2016 Form 10-K 57
Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures
(In millions except for year-over-year changes, gross margin, operating margin, and per share data):
| Fiscal Year Ended January 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (Unaudited) | |||||||||||
| Year-over-year change in total net revenue | — | % | 10 | % | (2 | )% | |||||
| Change in deferred revenue | 4 | % | 8 | % | (2 | )% | |||||
| Change in hedge gain applicable to billings (1) | 1 | % | — | % | — | % | |||||
| Change in acquisition related deferred revenue and other | — | % | — | % | — | % | |||||
| Year-over-year change in total net billings | 5 | % | 18 | % | (4 | )% | |||||
| Year-over-year change in net subscription revenue | 9 | % | 15 | % | 7 | % | |||||
| Change in deferred subscription revenue | 5 | % | 10 | % | (7 | )% | |||||
| Change in hedge gain applicable to subscription billings (1) | 1 | % | — | % | — | % | |||||
| Change in acquisition related deferred subscription revenue and other | 1 | % | (3 | )% | (1 | )% | |||||
| Year-over-year change in net subscription billings (1) | 16 | % | 22 | % | (1 | )% | |||||
| Gross profit | $ | 2,133.4 | $ | 2,170.1 | $ | 1,999.6 | |||||
| Stock-based compensation expense | 11.8 | 8.9 | 6.0 | ||||||||
| Amortization of developed technologies | 49.0 | 53.2 | 44.2 | ||||||||
| Non-GAAP gross profit | $ | 2,194.2 | $ | 2,232.2 | $ | 2,049.8 | |||||
| Gross margin | 85 | % | 86 | % | 88 | % | |||||
| Stock-based compensation expense | 1 | % | 1 | % | — | % | |||||
| Amortization of developed technologies | 2 | % | 2 | % | 2 | % | |||||
| Non-GAAP gross margin | 88 | % | 89 | % | 90 | % | |||||
| Income from operations | $ | 1.3 | $ | 120.7 | $ | 284.8 | |||||
| Stock-based compensation expense | 197.2 | 165.6 | 132.2 | ||||||||
| Amortization of developed technologies | 49.0 | 53.2 | 44.2 | ||||||||
| Amortization of purchased intangibles | 33.2 | 39.8 | 36.5 | ||||||||
| Restructuring charges, net | — | 3.1 | 12.8 | ||||||||
| Non-GAAP income from operations | $ | 280.7 | $ | 382.4 | $ | 510.5 | |||||
| Operating margin | — | % | 5 | % | 13 | % | |||||
| Stock-based compensation expense | 8 | % | 7 | % | 6 | % | |||||
| Amortization of developed technologies | 2 | % | 2 | % | 2 | % | |||||
| Amortization of purchased intangibles | 1 | % | 1 | % | 1 | % | |||||
| Restructuring charges, net | — | % | — | % | — | % | |||||
| Non-GAAP operating margin | 11 | % | 15 | % | 22 | % | |||||
| Net (loss) income | $ | (330.5 | ) | $ | 81.8 | $ | 228.8 | ||||
| Stock-based compensation expense | 197.2 | 165.6 | 132.2 | ||||||||
| Amortization of developed technologies | 49.0 | 53.2 | 44.2 | ||||||||
| Amortization of purchased intangibles | 33.2 | 39.8 | 36.5 | ||||||||
| Restructuring charges, net | — | 3.1 | 12.8 | ||||||||
| Loss on strategic investments | (3.7 | ) | 23.3 | 1.8 | |||||||
| Establishment of valuation allowance on deferred tax assets | 230.9 | — | — | ||||||||
| Discrete tax provision items | 0.8 | (18.7 | ) | (10.2 | ) | ||||||
| Income tax effect of non-GAAP adjustments | 17.2 | (75.8 | ) | (60.5 | ) | ||||||
| Non-GAAP net income | $ | 194.1 | $ | 272.3 | $ | 385.6 |
2016 Form 10-K 58
| Fiscal Year Ended January 31, | |||||||||||
| 2016 | 2015 | 2014 | |||||||||
| (Unaudited) | |||||||||||
| Diluted net (loss) income per share (2) | $ | (1.46 | ) | $ | 0.35 | $ | 1.00 | ||||
| Stock-based compensation expense | 0.86 | 0.71 | 0.57 | ||||||||
| Amortization of developed technologies | 0.21 | 0.23 | 0.19 | ||||||||
| Amortization of purchased intangibles | 0.15 | 0.17 | 0.16 | ||||||||
| Restructuring charges, net | — | 0.01 | 0.06 | ||||||||
| Loss on strategic investments | (0.01 | ) | 0.10 | — | |||||||
| Establishment of valuation allowance on deferred tax assets | 1.01 | — | — | ||||||||
| Discrete tax provision items | — | (0.08 | ) | (0.04 | ) | ||||||
| Income tax effect of non-GAAP adjustments | 0.08 | (0.32 | ) | (0.26 | ) | ||||||
| Non-GAAP diluted net income per share (2) | $ | 0.84 | $ | 1.17 | $ | 1.68 |
| (1) | Prior period was adjusted to conform with current period's presentation to include the effects from hedging on billings. |
| (2) | Net (loss) income per share were computed independently for each of the periods presented; therefore the sum of the net (loss) income per share amount for the quarters may not equal the total for the year. |
Our non-GAAP financial measures may exclude the following:
Stock-based compensation expenses. We exclude stock-based compensation expenses from non-GAAP measures primarily because they are non-cash expenses and management finds it useful to exclude certain non-cash charges to assess the appropriate level of various operating expenses to assist in budgeting, planning, and forecasting future periods. Moreover, because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use under FASB ASC Topic 718, we believe excluding stock-based compensation expenses allows investors to make meaningful comparisons between our recurring core business operating results and those of other companies.
Amortization of acquisition-related developed technologies and purchased intangibles. We incur amortization of acquisition-related developed technology and purchased intangibles in connection with acquisitions of certain businesses and technologies. Amortization of developed technologies and purchased intangibles is inconsistent in amount and frequency and is significantly affected by the timing and size of our acquisitions. Management finds it useful to exclude these variable charges from our cost of revenues to assist in budgeting, planning, and forecasting future periods. Investors should note that the use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of developed technologies and purchased intangible assets will recur in future periods.
Goodwill impairment. This is a non-cash charge to write-down goodwill to fair value when there was an indication that the asset was impaired. As explained above, management finds it useful to exclude certain non-cash charges to assess the appropriate level of various operating expenses to assist in budgeting, planning, and forecasting future periods.
Restructuring charges (benefits), net. These expenses are associated with realigning our business strategies based on current economic conditions. In connection with these restructuring actions, we recognize costs related to termination benefits for former employees whose positions were eliminated, and the closure of facilities and cancellation of certain contracts. We exclude these charges because these expenses are not reflective of ongoing business and operating results. We believe it is useful for investors to understand the effects of these items on our total operating expenses.
Loss (gain) on strategic investments. We exclude gains and losses related to our strategic investments from our non-GAAP measures primarily because management finds it useful to exclude these variable gains and losses on these investments in assessing our financial results. Included in these amounts are non-cash unrealized gains and losses on the derivative components and realized gains and losses on the sale or losses on the impairment of these investments. We believe excluding these items is useful to investors because these excluded items do not correlate to the underlying performance of our business and these losses or gains were incurred in connection with strategic investments which do not occur regularly.
2016 Form 10-K 59
Establishment of a valuation allowance on certain net deferred tax assets. This is a non-cash charge to record a valuation allowance on certain deferred tax assets. As explained above, management finds it useful to exclude certain non-cash charges to assess the appropriate level of various cash expenses to assist in budgeting, planning, and forecasting future periods.
Discrete tax items. We exclude the GAAP tax provision, including discrete items, from the non-GAAP measure of income, and include a non-GAAP tax provision based upon the projected annual non-GAAP effective tax rate. Discrete tax items include income tax expenses or benefits that do not relate to ordinary income from continuing operations in the current fiscal year, unusual or infrequently occurring items, or the tax impact of certain stock-based compensation. Examples of discrete tax items include, but are not limited to, certain changes in judgment and changes in estimates of tax matters related to prior fiscal years, certain costs related to business combinations, certain changes in the realizability of deferred tax assets or changes in tax law. Management believes this approach assists investors in understanding the tax provision and the effective tax rate related to ongoing operations. We believe the exclusion of these discrete tax items provides investors with useful supplemental information about the Company's operational performance.
Income tax effects on the difference between GAAP and non-GAAP costs and expenses. The income tax effects that are excluded from the non-GAAP measures relate to the tax impact on the difference between GAAP and non-GAAP expenses, primarily due to stock-based compensation, amortization of purchased intangibles and restructuring charges (benefits) for GAAP and non-GAAP measures.
Liquidity and Capital Resources
Our primary source of cash is from the sale of licenses to our products. Our primary use of cash is payment of our operating costs, which consist primarily of employee-related expenses, such as compensation and benefits, as well as general operating expenses for marketing, facilities, and overhead costs. In addition to operating expenses, we also use cash to fund our stock repurchase program and invest in our growth initiatives, which include acquisitions of products, technology, and businesses. See further discussion of these items below.
At January 31, 2016, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $2.8 billion and net accounts receivable of $653.6 million. Net of long-term debt, we have cash, cash equivalents, and marketable securities totaling $1.3 billion at January 31, 2016.
In June 2015, we issued $450.0 million aggregate principal amount of 3.125% senior notes due June 15, 2020 and $300.0 million aggregate principal amount of 4.375% senior notes due June 15, 2025. In December 2012, we issued $400.0 million aggregate principal amount of 1.95% notes due December 15, 2017 and $350.0 million aggregate principal amount of 3.6% notes due December 15, 2022 (all four series of notes collectively, the “Notes”). As of March 23, 2016, we have $1.5 billion aggregate principal amount of Notes outstanding. In addition, we have a line of credit facility that permits unsecured short-term borrowings of up to $400.0 million. As of March 23, 2016, we have no amounts outstanding under the credit facility. In May 2015, Autodesk amended and restated the credit agreement to extend the facility's maturity date from May 2018 to May 2020 and to amend the financial covenants. Borrowings under the credit facility and the net proceeds from the offering of the Notes are available for general corporate purposes.
Our cash and cash equivalents are held by diversified financial institutions globally. Our primary commercial banking relationship is with Citigroup and its global affiliates. In addition, Citibank N.A., an affiliate of Citigroup, is one of the lead lenders and agent in the syndicate of our $400.0 million line of credit.
The increase in our cash, cash equivalents, and marketable securities to $2.8 billion at January 31, 2016 from $2.3 billion at January 31, 2015 was primarily the result of the proceeds from the issuance of our June 2015 notes and the result of cash generated from operations. These increases to cash, cash equivalents and marketable securities were partially offset by cash used for repurchases of our common stock (net of stock issuance proceeds), acquisitions including business combinations and technology purchases, capital expenditures, and other investing activities. The cash proceeds from issuance of common stock vary based on our stock price, stock option exercise activity and the volume of employee purchases under the Employee Stock Purchase Plan.
The primary source of net cash provided by operating activities of $414.0 million in fiscal 2016 was $578.9 million of non-cash expenses, including our deferred tax asset valuation allowance, stock-based compensation expense, and depreciation, amortization and accretion expense, offsetting our net loss of $330.5 million. In addition, net cash flow provided by changes in operating assets and liabilities was $190.6 million. The primary working capital sources of cash was an increase in deferred revenue for fiscal 2016 compared to fiscal 2015. Our days sales outstanding in trade receivables was 92 at January 31, 2016
2016 Form 10-K 60
compared to 63 at January 31, 2015. The increase in days sales outstanding primarily relates to a shift in billings linearity. The primary working capital use of cash was an increase in accounts receivable for fiscal 2016 compared to fiscal 2015.
At January 31, 2016, our short-term investment portfolio had an estimated fair value of $897.9 million and a cost basis of $899.0 million. The portfolio fair value consisted of $376.9 million invested in corporate debt securities, $190.3 million invested in certificates of deposit, $141.1 million invested in commercial paper, $74.6 million invested in U.S. treasury bills, $39.9 million invested in U.S. government agency securities, $20.1 million invested in sovereign debt, $9.7 million invested in municipal securities, and $7.3 million invested in asset backed securities, and $38.0 million of trading securities invested in a defined set of mutual funds as directed by the participants in our Deferred Compensation Plan (see Note 6, “Deferred Compensation,” in the Notes to Consolidated Financial Statements for further discussion).
Long-term cash requirements for items other than normal operating expenses are anticipated for the following: common stock repurchases; the acquisition of businesses, software products, or technologies complementary to our business; and capital expenditures, including the purchase and implementation of internal-use software applications.
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, 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 decision to acquire businesses or technology is dependent on our business needs, the availability of suitable sellers and technology, and our own financial condition.
Our cash, cash equivalents, and marketable securities balances are concentrated in a few locations around the world, with substantial amounts held outside of the U.S. As of January 31, 2016, approximately 74% of our total cash, cash equivalents, and marketable securities are located offshore and will fluctuate subject to business needs. Certain amounts held outside the U.S. could be repatriated to the U.S. (subject to local law restrictions), but under current U.S. tax law, could be subject to U.S. income taxes less applicable foreign tax credits. We have provided for the U.S. income tax liability on foreign earnings, except for foreign earnings that are considered permanently reinvested outside the U.S. Our intent is that amounts related to foreign earnings permanently reinvested outside the U.S. will remain outside the U.S. and we will meet our U.S. liquidity needs through ongoing cash flows, external borrowings, or both. We regularly review our capital structure and consider a variety of potential financing alternatives and planning strategies to ensure we have the proper liquidity available in the locations in which it is needed and to fund our existing stock buyback program with cash that has not been permanently reinvested outside the U.S.
Cash from operations could also be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part I, Item 1A titled “Risk Factors.” However, based on our current business plan and revenue prospects, we believe that our existing balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for at least the next 12 months.
Our revenue, earnings, cash flows, receivables, and payables are subject to fluctuations due to changes in foreign currency exchange rates, for which we have put in place foreign currency contracts as part of our risk management strategy. See Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” for further discussion.
2016 Form 10-K 61
Contractual Obligations
The following table summarizes our significant financial contractual obligations at January 31, 2016 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
| Total | Fiscal 2017 | Fiscal Years 2018-2019 | Fiscal Years 2020-2021 | Thereafter | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Notes | $ | 1,785.9 | $ | 47.6 | $ | 486.4 | $ | 520.8 | $ | 731.1 | |||||||||
| Operating lease obligations | 252.7 | 60.5 | 96.8 | 44.2 | 51.2 | ||||||||||||||
| Purchase obligations | 100.2 | 75.1 | 21.0 | 4.1 | — | ||||||||||||||
| Deferred compensation obligations | 38.0 | 1.9 | 4.5 | 5.5 | 26.1 | ||||||||||||||
| Pension obligations | 37.6 | 3.9 | 7.6 | 7.0 | 19.1 | ||||||||||||||
| Asset retirement obligations | 11.1 | 1.6 | 7.5 | 1.7 | 0.3 | ||||||||||||||
| Total (1) | $ | 2,225.5 | $ | 190.6 | $ | 623.8 | $ | 583.3 | $ | 827.8 |
| (1) | This table generally excludes amounts already recorded on the balance sheet as current liabilities, certain purchase obligations as discussed below, long term deferred revenue, and amounts related to income tax liabilities for uncertain tax positions, since we cannot predict with reasonable reliability the timing of cash settlements to the respective taxing authorities (see Note 4, “Income Taxes” to the Notes to Consolidated Financial Statements). |
Notes consist of the Senior Notes issued in December 2012 and June 2015. The 2012 Senior Notes consist of $400.0 million aggregate principal amount of 1.95% senior notes due December 15, 2017 notes and $350.0 million aggregate principal amount of 3.6% senior notes due December 15, 2022. The 2015 Senior Notes consist of $450.0 million aggregate principal amount of 3.125% senior notes due June 15, 2020 and $300.0 million aggregate principal amount of 4.375% senior notes due June 15, 2025.
Operating lease obligations consist primarily of obligations for facilities, net of sublease income, computer equipment and other equipment leases.
Purchase obligations are contractual obligations for purchase of goods or services and are defined as agreements that are enforceable and legally binding on Autodesk and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum, or variable price provisions; and the approximate timing of the transaction. Purchase obligations relate primarily to enterprise subscription agreements, IT infrastructure costs, and marketing costs.
Deferred compensation obligations relate to amounts held in a rabbi trust under our non-qualified deferred compensation plan. See Note 6, “Deferred Compensation,” in our Notes to Consolidated Financial Statements for further information regarding this plan.
Pension obligations relate to our obligations for pension plans outside of the U.S. See Note 14, “Retirement Benefit Plans,” in our Notes to Consolidated Financial Statements for further information regarding these obligations.
Purchase orders or contracts for the purchase of supplies and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current procurement or development needs and are fulfilled by our vendors within short time horizons. We do not have significant agreements for the purchase of supplies or other goods specifying minimum quantities or set prices that exceed our expected requirements for three months. In addition, we have certain software royalty commitments associated with the shipment and licensing of certain products.
The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.
We provide indemnifications of varying scopes and certain guarantees, including limited product warranties. Historically, costs related to these warranties and indemnifications have not been significant, but because potential future costs are highly variable, we are unable to estimate the maximum potential impact of these guarantees on our future results of operations.
2016 Form 10-K 62
Issuer Purchases of Equity Securities
Autodesk's stock repurchase program is largely to help offset the dilution from the issuance of stock under our employee stock plans and for such other purposes as may be in the interests of Autodesk and its stockholders, and has the effect of returning excess cash generated from our business to stockholders. The number of shares acquired and the timing of the purchases are based on several factors, including general market and economic conditions, the number of employee stock option exercises and restricted stock unit issuances, the trading price of Autodesk common stock, cash on hand and available in the United States, cash requirements for acquisitions, and Company defined trading windows.During the three and twelve months ended January 31, 2016, we repurchased 1.6 million and 8.5 million shares of our common stock, respectively. At January 31, 2016, 6.3 million shares remained available for repurchase under our current repurchase program approved by the Board of Directors. This program does not have a fixed expiration date. See Note 9, “Stockholders' Equity,” in the Notes to Consolidated Financial Statements for further discussion.
Off-Balance Sheet Arrangements
As of January 31, 2016, we did not have any significant off-balance sheet arrangements other than operating leases, as defined in Item 303(a)(4)(ii) of Regulation S-K.
2016 Form 10-K 63
Previous: Item 6. SELECTED FINANCIAL DATA · Next: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK