filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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, future financial results (including 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 and mobile computing, the effect of unemployment, the availability of credit, our expectations for our restructuring, the effects of mixed global economic conditions, the effects of revenue recognition, 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, and the impact of economic volatility and geopolitical activities in certain countries, particularly emerging economy countries, the timing and amount of purchases under our newly announced stock buy-back plan, 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, remediation 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 a number of factors, including those 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 makes software for people who make things. If you've ever driven a high-performance car, admired a towering skyscraper, used a smartphone, or watched a great film, chances are you've experienced what millions of Autodesk customers are doing with our software. Autodesk gives you the power to make anything.
Autodesk was founded during the platform transition from mainframe computers 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. Our product subscriptions presently represent a hybrid of desktop software and cloud-based functionality, which provides a device-independent, collaborative design workflow for designers and their stakeholders. Our cloud service offerings, for example, BIM 360, Shotgun, Fusion 360, and AutoCAD 360 Pro, 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. As part of the transition, we discontinued selling new perpetual licenses of most individual software products effective February 1, 2016, and discontinued selling new perpetual licenses of suites while introducing industry collections effective August 1, 2016. Industry collections allow access to a broad set of products and services that exceeds those previously available in suites - simplifying the customer ability to get access to a complete set of tools for their industry. We now offer subscriptions for individual products and industry collections, cloud service offerings, and flexible enterprise business agreements ("new model subscription offerings"). These offerings are designed to give our customers more flexibility with how they use our products and service offerings and to attract a broader range of customers, such as project-based users and small businesses.
With the discontinuation of the sale of most perpetual licenses, we have accelerated our transition away from selling a mix of perpetual licenses and term-based product subscriptions toward a single subscription model. As a result of this shift and various other factors described in Note 13, "Segments" in the Notes to our Consolidated Financial Statements, we have
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reassessed the way we allocate resources and evaluate financial performance and now operate as a single operating segment. During the transition, revenue, margins, EPS, deferred revenue and cash flow from operations have been and will be impacted as more revenue is recognized ratably rather than upfront and as new product subscription offerings generally have a lower initial purchase price.
As we progress through the business model transition, reported revenue is less relevant to measure the success of the business as perpetual license sales have been discontinued in favor of subscription offerings, which have considerably lower upfront prices. Annualized recurring revenue ("ARR") and growth of subscriptions better reflect business momentum and provide additional transparency into the transition. To further analyze progress, we disaggregate our growth in these metrics between the original maintenance model ("maintenance") and the new model subscription offerings. Maintenance subscriptions peaked in the fourth quarter of our fiscal 2016, and we expect them to decline slowly over time.
We sell our products and services globally, through a combination of indirect and direct channels. During the fiscal year ended January 31, 2017, 2016, and 2015, our indirect channels, which include value added resellers, direct market resellers, distributors, computer manufacturers, and other software developers, were responsible for 72%, 79%, and 83% of our overall revenue, respectively. During the same periods, our direct channels, which include sales resources dedicated to selling in our largest accounts, our highly specialized products, and business transacted through our online Autodesk branded store, were responsible for 28%, 21%, and 17% of our overall revenue, respectively.
We anticipate that our channel mix will continue to change, particularly as we scale our digitally transacted online Autodesk branded store business and our largest accounts shift towards direct-only business models. Importantly, we expect our indirect channel will continue to transact and support the majority of our revenue as we move beyond the business model transition. We employ a variety of incentive programs and promotions to align our direct and indirect channels with our business strategies. In addition, we have a worldwide user group organization and we have created online user communities dedicated to the exchange of information related to the use of our products.
One of our key strategies is to maintain an open-architecture design of our software products to facilitate third-party development of complementary products and industry-specific software solutions. This approach enables customers and third parties to customize solutions for a wide variety of highly specific uses. We offer several programs that provide strategic investment funding, technological platforms, user communities, technical support, forums, and events to developers who develop add-on applications for our products. For example, we have established the Autodesk Spark program to support ideas that push the boundaries of 3D printing and nurture the companies that will advance innovations within 3D printing hardware and software. We have also created the Autodesk Forge program to support innovators that build solutions to facilitate the development of a single connected ecosystem for the future of how things are designed, made, and used.
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 subscriptions of Autodesk software worldwide to students, educators, and educational institutions. 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. We also have 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.
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.
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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 product subscriptions, 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 Accounting Standards Codification ("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 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.
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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 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 subscription revenue from distributors and resellers generally commences recognition at the time access is provided to their customers, 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. 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. Depending on how the payments are made, the reserves associated with the partner incentive program are treated on the balance sheet as either contra account receivable or accounts payable.
Marketable Securities and Privately Held Company Investments. 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 or convertible note investments in privately held companies 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.
All of Autodesk’s marketable securities and privately held company investments 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.
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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, trademark and existing customer relationship, as well as assumptions about the period of time the acquired trade name and trademark will continue to be used in the our 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.
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 cumulative losses in the U.S. 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 the U.S. to realize the deferred tax assets, we determined that it was more likely than not
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that the Company would not realize U.S. federal and state deferred tax assets and recorded a valuation allowance on our federal and state deferred tax assets. We continue to have a full valuation allowance against our U.S. deferred tax assets in fiscal 2017 and increased the amount of the valuation allowance to include deferred tax assets generated in fiscal 2017, including deferred tax assets that were established as a result of the adoption of ASU 2016-9 in the second quarter of fiscal 2017.
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 likely than not that the federal and state deferred tax assets will be realized; therefore, we will continue to evaluate the evidence around our ability to utilize 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.
Restructuring Charges and other facility exit costs, net and Accruals. In February 2016, the Board of Directors approved a world-wide restructuring plan (“Fiscal 2017 Plan”) in order to re-balance staffing levels and reduce operating expenses to better align them with the evolving needs of the Company's business. The Company’s restructuring plans include one–time termination benefits as well as certain contractual termination benefits. We record costs associated with exit activities related to restructuring plans in accordance with the ASC Topic 420, Exit or Disposal Obligations. Liabilities for costs associated with an exit or disposal activity are recognized in the period in which the liability is incurred. The timing of associated cash payments is dependent upon the type of exit cost and may extend over a 12-month period. We record restructuring charge liabilities in “Other accrued liabilities,” or "Other liabilities" in the consolidated balance sheet.
Restructuring charges include employee termination costs, facility closure and relocation costs, and contract termination costs. One–time termination benefits are recognized as a liability at estimated fair value when the approved plan of termination has been communicated to employees, unless employees must provide future service, in which case the benefits are recognized ratably over the future service period. Ongoing termination benefits arrangements are recognized as a liability at estimated fair value when the amount of such benefits becomes estimable and payment is probable. For the facility facility-related restructuring charges, we recognize upon exiting all or a portion of a leased facility and meeting cease-use and other requirements. The amount of restructuring charges is based on the fair value of the lease obligation for the abandoned space, which includes a sublease assumption that could be reasonably obtained.
Restructuring charges require significant estimates and assumptions, including sub-lease income and expenses for severance and other employee separation costs. Our estimates involve a number of risks and uncertainties, some of which are beyond our control, including future real estate market conditions and our ability to successfully enter into subleases or termination agreements with terms as favorable as those assumed when arriving at our estimates. We monitor these estimates and assumptions on at least a quarterly basis for changes in circumstances and any corresponding adjustments to the accrual are recorded in our statement of operations in the period when such changes are known.
Recently Issued Accounting Standards
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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 2017
| Fiscal Year Ended January 31, 2017 | As a % of Net Revenue | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2016 | As a % of Net Revenue | ||||||||||||||||
| $ | % | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Net Revenue | $ | 2,031.0 | 100 | % | $ | (473.1 | ) | (19 | )% | $ | 2,504.1 | 100 | % | |||||||
| Cost of revenue | 341.9 | 17 | % | (28.8 | ) | (8 | )% | 370.7 | 15 | % | ||||||||||
| Gross Profit | 1,689.1 | 83 | % | (444.3 | ) | (21 | )% | 2,133.4 | 85 | % | ||||||||||
| Operating expenses | 2,188.7 | 108 | % | 56.6 | 3 | % | 2,132.1 | 85 | % | |||||||||||
| Income from Operations | $ | (499.6 | ) | (25 | )% | $ | (500.9 | ) | * | $ | 1.3 | — | % |
| * | Percentage is not meaningful. |
We are undergoing a business model transition in which we have discontinued selling new perpetual licenses for most of our products in favor of new model subscriptions. During the transition, revenue, margins, EPS, deferred revenue and cash flow from operations have been and will be impacted as more revenue is recognized ratably rather than upfront and as new product subscription offerings generally have a lower initial purchase price.
Revenue Analysis
During fiscal 2017, net revenue decreased 19%, as compared to the prior fiscal year, primarily due to a 40% decrease in license and other revenue resulting from the discontinuation of the sale of most individual perpetual products as of February 1, 2016, and of new perpetual licenses of suites effective August 1, 2016. The decrease in license and other revenue was partially offset by a 1% increase in subscription revenue, driven by a 39% increase in revenue from our new model subscription offerings, largely offset by a 3% decrease in maintenance revenue.
Further discussion of the drivers of these results are discussed below under the heading “Results from Operations.”
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 30%, 25%, and 25% of our consolidated net revenue during fiscal 2017, 2016, and 2015, respectively. 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. Consequently, we believe our business is not substantially dependent on Tech Data.
Operating Margin Analysis
Income from operations decreased in fiscal 2017 due to a $473.1 million decrease in revenue (as discussed above) and a $56.6 million increase in our operating expenses as compared to fiscal 2016. Our operating margin decreased to (25)% for fiscal 2017 from 0% for fiscal 2016. The increase in operating expenses between fiscal 2017 and 2016 was driven by restructuring charges and other facility exit costs.
Further discussion regarding the cost of revenue and operating expense activities are discussed below under the heading “Results of Operations.”
Business Model Transition Metrics
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,
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ARPS, and recurring revenue are performance metrics and should be viewed independently of revenue and deferred revenue as ARR and ARPS are not intended to be combined with those items. Please refer to the "Glossary of Terms" for further discussion regarding the new metric terminology.
Recurring revenue represents the revenue for the period from our maintenance plans and revenue from our new model subscription offerings, including portions of revenue allocated to license and other revenue for those offerings. It excludes 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 reported when total subscriptions are captured in our systems and may cause variability in the comparison of this calculation.
The following table outlines our recurring revenue for the fiscal year ended 2017, 2016, and 2015:
| Fiscal Year Ended January 31, 2017 | Fiscal Year Ended January 31, 2016 | Fiscal Year Ended January 31, 2015 | |||||||||||||||||||||||
| Change compared to prior fiscal year | Change compared to prior fiscal year | ||||||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| Subscription revenue | $ | 1,290.0 | $ | 12.8 | 1 | % | $ | 1,277.2 | $ | 106.4 | 9 | % | $ | 1,170.8 | |||||||||||
| Add: License and other revenue from new model subscription offerings (1) | 241.4 | 140.3 | 139 | % | 101.1 | 69.1 | 216 | % | 32.0 | ||||||||||||||||
| Less: other adjustments (2) | (31.0 | ) | 0.2 | (1 | )% | (31.2 | ) | 16.2 | (34 | )% | (47.4 | ) | |||||||||||||
| Total recurring revenue (3) | $ | 1,500.4 | $ | 153.3 | 11 | % | $ | 1,347.1 | $ | 191.7 | 17 | % | $ | 1,155.4 |
| (1) | Includes the portion of revenue for new model subscription offerings allocated to license & other revenue within our Condensed Consolidated Statements of Operations. |
| (2) | Other adjustments include subscription revenue related to select Creative Finishing product offerings, Autodesk Buzzsaw, Autodesk Constructware, education offerings, and third party products which are excluded from recurring revenue. |
| (3) | Total recurring revenue as presented does not represent total ARR in the next table, which is the annualized value of our recurring revenue for the trailing three months. |
During fiscal 2017, recurring revenue was 74% of total net revenue as compared to 54% and 46% of total net revenue for fiscal 2016 and 2015, respectively.
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The following table outlines our subscriptions, ARR and ARPS metrics as of fiscal years ended January 31, 2017 and January 31, 2016:
| Balance at | (Decrease)/Increase compared to prior fiscal year | |||||||||||||
| (in thousands) | January 31, 2017 | January 31, 2016 | % | |||||||||||
| Maintenance Subscriptions | 2,020.1 | 2,151.0 | (130.9 | ) | (6 | )% | ||||||||
| New Model Subscriptions | 1,087.8 | 427.2 | 660.6 | 155 | % | |||||||||
| Total Subscriptions | 3,107.9 | 2,578.2 | 529.7 | 21 | % | |||||||||
| (in millions) | ||||||||||||||
| Maintenance ARR | $ | 1,071.3 | $ | 1,121.4 | $ | (50.1 | ) | (4 | )% | |||||
| New Model ARR | 528.6 | 255.0 | 273.6 | 107 | % | |||||||||
| Total ARR | $ | 1,599.9 | $ | 1,376.4 | $ | 223.5 | 16 | % | ||||||
| (ARR divided by Subscriptions) | ||||||||||||||
| Maintenance ARPS | $ | 530 | $ | 521 | $ | 9 | 2 | % | ||||||
| New Model ARPS | 486 | 597 | (111 | ) | (19 | )% | ||||||||
| Total ARPS | $ | 515 | $ | 534 | $ | (19 | ) | (4 | )% |
Year-over-year maintenance subscriptions decreased 6% as of January 31, 2017 as compared to the prior fiscal year, primarily as a result of the discontinuation of new perpetual license sales for most individual products at the end of the fourth quarter of fiscal 2016 and the end of perpetual suites at the end of second quarter of fiscal 2017, partially offset by the addition of approximately 14,000 maintenance subscriptions associated with an acquisition in the first quarter of fiscal 2017. Year-over-year new model subscriptions increased 155% as of January 31, 2017 as compared to the prior fiscal year, primarily driven by growth in all new model subscription types, led by product subscription. New model subscriptions also benefited from a promotion aimed at converting legacy non-subscribers, which captured approximately 75,000 additional product subscriptions.
Total ARR increased 16% as of January 31, 2017 as compared to the prior fiscal year primarily due to a 107% increase in New Model ARR driven by growth in all new model subscription types, led by product subscription. ARR growth was negatively impacted by 3 percentage points from the allocation of our market development funds ("MDF").
The 4% decrease in total ARPS was primarily due to a 19% decrease in new model ARPS. The decline in new model ARPS is a result of individual product subscriptions leading the growth in new model subscriptions, which are priced lower than our flexible enterprise business agreements, and in turn, decreases ARPS.
Our ARPS is also declining because of various factors including mix, foreign currency, and the contra-revenue impact of MDF discussed above. Going forward the ARPS calculation will continue to be extremely sensitive to short-term shifts in term-length, geography mix and promotions. We expect to see ARPS fluctuate up or down on a quarterly basis and we do not expect it will increase evenly throughout the year. As we complete our business model transition, we expect all of these impacts to start to stabilize.
Foreign Currency Analysis
We generate a significant amount of our revenue in the U.S., Germany, Japan, the United Kingdom and Canada. Total net revenue for fiscal 2017 decreased 19% on an as reported basis compared to the prior fiscal year, and was negatively impacted by foreign exchange rate changes during fiscal 2017. Had applicable exchange rates from fiscal 2016 been in effect during fiscal 2017 and had we excluded foreign exchange hedge gains and losses from both fiscal 2016 and 2017, net revenue would have decreased 16% on a constant currency basis compared to the prior fiscal year.
Our total spend, defined as cost of revenue plus operating expenses, during fiscal 2017 increased 1% on an as reported basis as compared to the prior fiscal year. Had applicable exchange rates from fiscal 2016 been in effect during fiscal 2017 and
2017 Form 10-K 44
had we excluded foreign exchange hedge gains and losses from both fiscal 2016 and 2017, total spend would have increased 3% 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.
Balance Sheet and Cash Flow Items
At January 31, 2017, we had $2.2 billion in cash and marketable securities. We completed fiscal 2017 with higher deferred revenue and lower accounts receivable balances as compared to the prior fiscal year. Our deferred revenue balance at January 31, 2017 was $1.8 billion, which will be recognized as revenue ratably over the life of the contracts. The term of our subscription contracts is typically between one and three years. Our cash flow from operations decreased 59% to $169.7 million as of January 31, 2017 from $414.0 million at January 31, 2016. We repurchased 9.7 million shares of our common stock for $631.6 million during fiscal 2017. Comparatively, we repurchased 8.5 million shares of our common stock for $458.0 million during fiscal 2016. Further discussion regarding the balance sheet and cash flow activities are discussed below under the heading “Liquidity and Capital Resources.”
Current Period Adjustments
Subsequent to furnishing preliminary financial statements on Form 8-K on March 2, 2017 for fiscal year 2017, we identified certain adjustments resulting in changes to the Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Balance Sheet, Condensed Consolidated Statements of Cash Flows, and Consolidated Statements of Stockholder's Equity as reflected in this Annual Report on Form 10-K that adjusted the Income Statement and Balance Sheet line items as follows:
| (in millions, except per share) | As furnished in the March 2, 2017 8-K | Adjustment | Adjusted balances as reflected within this 10-K | |||||||||
| Income Statement | ||||||||||||
| Provision for income taxes | $ | (55.4 | ) | $ | (2.9 | ) | $ | (58.3 | ) | |||
| Net loss | $ | (579.2 | ) | $ | (2.9 | ) | $ | (582.1 | ) | |||
| Basic net loss per share | $ | (2.60 | ) | $ | (0.01 | ) | $ | (2.61 | ) | |||
| Diluted net loss per share | $ | (2.60 | ) | $ | (0.01 | ) | $ | (2.61 | ) | |||
| Balance Sheet | ||||||||||||
| Short term deferred revenue | $ | 1,282.8 | $ | (12.7 | ) | $ | 1,270.1 | |||||
| Long term deferred revenue | $ | 505.2 | $ | 12.7 | $ | 517.9 |
2017 Form 10-K 45
Results of Operations
| Fiscal Year Ended January 31, 2017 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2016 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| Net Revenue: | |||||||||||||||||||||||||
| Subscription | $ | 1,290.0 | $ | 12.8 | 1 | % | $ | 1,277.2 | $ | 106.4 | 9 | % | $ | 1,170.8 | |||||||||||
| License and other | 741.0 | (485.9 | ) | (40 | )% | 1,226.9 | (114.5 | ) | (9 | )% | 1,341.4 | ||||||||||||||
| $ | 2,031.0 | $ | (473.1 | ) | (19 | )% | $ | 2,504.1 | $ | (8.1 | ) | — | % | $ | 2,512.2 | ||||||||||
| Net Revenue by Product Family: | |||||||||||||||||||||||||
| Architecture, Engineering, and Construction | $ | 880.9 | $ | (68.2 | ) | (7 | )% | $ | 949.1 | $ | 76.5 | 9 | % | $ | 872.6 | ||||||||||
| Manufacturing | 625.8 | (98.8 | ) | (14 | )% | 724.6 | 49.0 | 7 | % | 675.6 | |||||||||||||||
| AutoCAD and AutoCAD LT (1) | 326.7 | (268.1 | ) | (45 | )% | 594.8 | (100.3 | ) | (14 | )% | 695.1 | ||||||||||||||
| Media and Entertainment | 138.9 | (21.1 | ) | (13 | )% | 160.0 | (7.3 | ) | (4 | )% | 167.3 | ||||||||||||||
| Other (1) | 58.7 | (16.9 | ) | (22 | )% | 75.6 | (26.0 | ) | (26 | )% | 101.6 | ||||||||||||||
| $ | 2,031.0 | $ | (473.1 | ) | (19 | )% | $ | 2,504.1 | $ | (8.1 | ) | — | % | $ | 2,512.2 |
| (1) | Prior periods have been adjusted to conform with current period's presentation. |
Fiscal 2017 Net Revenue Compared to Fiscal 2016 Net Revenue
Subscription Revenue
Our Subscription revenue consists of three components: (1) maintenance plan revenue from our perpetual software products; (2) maintenance revenue from our term-based product subscriptions and flexible enterprise business agreements; and (3) revenue from our cloud service offerings. Our maintenance plan provides our customers with a cost effective and predictable budgetary option to obtain the productivity benefits of our new releases and enhancements when and if released during the term of their contracts. Under our maintenance plan, customers are eligible to receive unspecified upgrades when and if available, and online support. We recognize maintenance plan revenue over the term of the agreements, generally between one and three years. With the discontinuation of our perpetual license sales, we no longer offer new maintenance subscriptions and expect our maintenance subscription revenue to decline over time. Our flexible enterprise business agreements are designed to give our customers increased flexibility with how they use our products and service offerings and to attract a broader range of customers such as project-based users and small businesses. We recognize maintenance revenue from these enterprise agreements ratably over their contract terms. 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 when all other revenue recognition criteria have been satisfied.
Subscription revenue increased 1% during fiscal 2017 as compared to fiscal 2016 primarily due to a 39% increase in new model subscription revenue, partially offset by a 3% decrease in maintenance plan revenue. The 39% increase in new model subscription revenue was primarily attributable to a 186% increase in product subscription revenue and a 28% increase in revenue from flexible enterprise business agreements. The 3% decrease in maintenance plan revenue was attributable to the business model transition, as we expect maintenance plan revenue will slowly decline as perpetual license sales have ended, and customers adopt our new model subscription offerings.
Maintenance revenue from perpetual software products represented 86% and 90% of subscription revenue for the fiscal 2017 and 2016, respectively. New model subscription revenue represented 14% and 10% of subscription revenue for the fiscal year ended January 31, 2017 and 2016, respectively.
2017 Form 10-K 46
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 product subscriptions and flexible enterprise business agreements, and product revenue for Creative Finishing. Other revenue includes revenue from consulting, training, Autodesk Developers Network and Creative Finishing customer support, and is recognized over time, as the services are performed.
License and other revenue decreased 40% during fiscal 2017 as compared to fiscal 2016. Product license revenue, as a percentage of license and other revenue, was 82% and 88% for fiscal 2017 and 2016, respectively. The decrease in product license revenue was due to the business model transition, which led to a 63% decrease in revenue from perpetual licenses as we have discontinued selling perpetual seats of most of our product offerings. This decrease was partially offset by a 122% increase in license revenue from our new model subscription offerings.
Other revenue decreased by 7% during fiscal 2017 as compared to fiscal 2016. Other revenue represented 7% and 6% of total net revenue for fiscal 2017 and 2016, respectively.
There was no backlog at January 31, 2017 compared to $31.4 million at January 31, 2016. Due to the business model transition, we do not expect material backlog in future periods.
Net Revenue by Product Family
Our product offerings are focused in four primary product families: AEC, MFG, AutoCAD and AutoCAD LT (“ACAD”), and M&E. During the business model transition, revenue has been and will be negatively impacted as more revenue is recognized ratably rather than upfront and as new product offerings generally have a lower initial purchase price. As part of the transition, we discontinued selling new perpetual licenses of most individual software products effective February 1, 2016, and discontinued selling new perpetual licenses of suites effective August 1, 2016. These broad impacts are reflected in the drivers below.
Net revenue for AEC product family decreased by 7% during fiscal 2017 as compared to the prior fiscal year, primarily due to 15% decrease in revenue from individual product offerings.
Net revenue for MFG product family decreased by 14% during fiscal 2017 as compared to the prior fiscal year, primarily due to a 14% decrease in individual product offerings and a 13% decrease in our MFG suites.
Net revenue for ACAD product family decreased by 45% during fiscal 2017 as compared to the prior fiscal year. As part of the transition to term-based product subscriptions for our individual software products in February 2016, products like AutoCAD and ACAD LT are negatively impacted when compared to the same period in the prior fiscal year as revenue is recognized ratably rather than upfront.
Net revenue for M&E product family decreased by 13% during fiscal 2017 as compared to the prior fiscal year, primarily due to a 50% decrease in Creative Finishing, as we exited the Creative Finishing hardware business at the beginning of the fourth quarter of fiscal 2016.
2017 Form 10-K 47
Net Revenue by Geographic Area
| Fiscal Year Ended January 31, 2017 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2016 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| Net Revenue: | |||||||||||||||||||||||||
| Americas | $ | 871.9 | $ | (100.9 | ) | (10 | )% | $ | 972.8 | $ | 74.8 | 8 | % | $ | 898.0 | ||||||||||
| Europe, Middle East, and Africa | 800.4 | (134.2 | ) | (14 | )% | 934.6 | (45.4 | ) | (5 | )% | 980.0 | ||||||||||||||
| Asia Pacific | 358.7 | (238.0 | ) | (40 | )% | 596.7 | (37.5 | ) | (6 | )% | 634.2 | ||||||||||||||
| $ | 2,031.0 | $ | (473.1 | ) | (19 | )% | $ | 2,504.1 | $ | (8.1 | ) | — | % | $ | 2,512.2 |
Net revenue in the Americas geography decreased by 10% on an as reported basis and on a constant currency basis during fiscal 2017, as compared to the prior fiscal year. Net revenue in the Americas attributable to the United States was approximately 85% and 83% for fiscal 2017 and 2016, respectively.
International net revenue represented 63% and 68% of our net revenue for fiscal 2017 and 2016, respectively. Net revenue in the Europe, Middle East and Africa ("EMEA") geography decreased by 14% on an as reported basis and 8% on a constant currency basis during fiscal 2017 as compared to the prior fiscal year. Net revenue in the Asia Pacific ("APAC") geography decreased 40% on an as reported basis and 39% on a constant currency basis, during fiscal 2017 as compared to the prior fiscal year, primarily as a result of the business model transition and continued weakness in Japan.
We believe that international revenue will continue to comprise a majority of our net revenue. Unfavorable economic conditions in the countries that contribute a significant portion of our net revenue, including in emerging economies such as Brazil, Russia, India, and China, 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. 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. Additionally during the business model transition, revenue has been and will be negatively impacted as more revenue is recognized ratably rather than upfront and as new product offerings generally have a lower initial purchase price. This transition has a particular impact to emerging economies as sales of perpetual licenses have historically comprised a greater percentage of total emerging economy sales in comparison to mature markets.
Net revenue in emerging economies decreased 38% on an as reported basis and 37% on a constant currency basis, during fiscal 2017 as compared to the prior fiscal year. Revenue from emerging economies represented 11% and 15% of total net revenue for fiscal 2017 and 2016, respectively.
Fiscal 2016 Net Revenue Compared to Fiscal 2015 Net Revenue
Discussion has been update to provide comparability to the discussion between fiscal 2017 and 2016.
Subscription Revenue
Subscription revenue increased 9% during fiscal 2016 as compared to fiscal 2015 due to a 7% increase in maintenance plan revenue and a 36% increase in new model subscription revenue. The 36% increase in new model subscription revenue was due to a 38% increase in revenue from flexible enterprise business agreements and a 231% increase in product subscription revenue.
Maintenance plan revenue from perpetual license software products represented 90% and 92% of subscription revenue for fiscal 2016 and 2015, respectively. New model subscription revenue represented 10% and 8% of subscription revenue for fiscal 2016 and 2015, respectively.
2017 Form 10-K 48
License and Other Revenue
Total license and other revenue decreased 9% during fiscal 2016 as compared to fiscal 2015. Product license revenue, as a percentage of license and other revenue, was 88% and 90% for fiscal 2016 and 2015, respectively. The decrease in product license revenue was led by a 17% decrease in revenue from perpetual licenses, partially offset by a 198% increase in license revenue from our new model subscription offerings.
Other revenue increased by 12% during fiscal 2016 as compared to fiscal 2015. Other revenue represented 6% and 5% of total net revenue for fiscal 2016 and 2015, respectively.
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.
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. Net revenue in the Americas attributable to the United States was approximately 83% and 82% for fiscal 2016 and 2015, respectively.
International net revenue represented 68% and 71% of our total net revenue for fiscal 2016 and 2015, respectively. 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. 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.
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.
Net Revenue by Product Family
Net revenue for the AEC product family 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 the MFG product family 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 the ACAD product family decreased by 14% during fiscal 2016 as compared to the prior fiscal year primarily due to a 26% decrease in revenue from 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 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.
Cost of Revenue and Operating Expenses
2017 Form 10-K 49
Cost of Revenue
| Fiscal Year Ended January 31, 2017 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2016 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||||
| Subscription | $ | 151.3 | $ | (4.8 | ) | (3 | )% | $ | 156.1 | $ | 22.5 | 17 | % | $ | 133.6 | ||||||||||
| License and other | 190.6 | (24.0 | ) | (11 | )% | 214.6 | 6.1 | 3 | % | 208.5 | |||||||||||||||
| $ | 341.9 | $ | (28.8 | ) | (8 | )% | $ | 370.7 | $ | 28.6 | 8 | % | $ | 342.1 | |||||||||||
| As a percentage of net revenue | 17 | % | 15 | % | 14 | % |
Cost of subscription revenue includes the labor costs of providing product support to our maintenance and new model subscription customers, including allocated IT and facilities costs, shipping and handling costs, professional services fees related to operating our network and cloud infrastructure, depreciation expense and operating lease payments associated with computer equipment, data center costs, salaries, related expenses of network operations, amortization of developed technologies, and stock-based compensation expense.
Cost of subscription revenue decreased 3% during fiscal 2017 as compared to fiscal 2016 primarily due to lower amortization expense of developed technologies as a result of fewer assets acquired, as well as a decrease in employee related costs from reduced headcount, and lower professional fees. 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 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 associated with electronic and physical fulfillment.
Cost of license and other revenue decreased 11% during fiscal 2017 as compared to fiscal 2016, primarily due to lower professional fees and employee related costs as a result of reduced headcount. Also contributing to lower costs is the elimination of our Creative Finishing hardware business, which we exited in the fourth quarter of fiscal 2016. 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 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 developed technology, new customer support offerings, royalty rates for licensed technology embedded in our products and stock-based compensation expense.
We expect cost of revenue to decrease in absolute dollars and as a percentage of net revenue during fiscal 2018, as compared to fiscal 2017.
2017 Form 10-K 50
Marketing and Sales
| Fiscal Year Ended January 31, 2017 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2016 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| Marketing and sales | $ | 1,022.5 | $ | 7.0 | 1 | % | $ | 1,015.5 | $ | 17.5 | 2 | % | $ | 998.0 | |||||||||||
| As a percentage of net revenue | 50 | % | 41 | % | 40 | % |
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 management, sales and dealer commissions, payment processing fees, the cost of supplies and equipment, gains and losses on our operating expense cash flow hedges, and allocated IT and facilities costs.
Marketing and sales expenses increased 1% during fiscal 2017, as compared to fiscal 2016, primarily due to an increase in stock based compensation expense as a result of higher fair market value of awards granted, and an increase in advertising and promotional expense driven by search-engine marketing spend. Offsetting the increase in expense was a decrease in employee-related costs from reduced headcount, and lower professional fees.
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.
We expect marketing and sales expenses to increase in absolute dollars and as a percentage of net revenue in fiscal 2018 as compared to fiscal 2017.
2017 Form 10-K 51
Research and Development
| Fiscal Year Ended January 31, 2017 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2016 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| Research and development | $ | 766.1 | $ | (23.9 | ) | (3 | )% | $ | 790.0 | $ | 64.8 | 9 | % | $ | 725.2 | ||||||||||
| As a percentage of net revenue | 38 | % | 32 | % | 29 | % |
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, professional services such as fees paid to software development firms and independent contractors, gains and losses on our operating expense cash flow hedges, and allocated IT and facilities costs.
Research and development expenses decreased 3% during fiscal 2017, as compared to fiscal 2016, primarily due to a decrease in professional fees and employee related costs, partially offset by an increase in stock-based compensation expense due to higher fair market value of awards granted.
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.
We expect research and development expenses to increase in absolute dollars and as a percentage of net revenue during fiscal 2018, as compared to fiscal 2017.
General and Administrative
| Fiscal Year Ended January 31, 2017 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2016 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| General and administrative | $ | 287.8 | $ | (5.6 | ) | (2 | )% | $ | 293.4 | $ | 10.1 | 4 | % | $ | 283.3 | ||||||||||
| As a percentage of net revenue | 14 | % | 12 | % | 11 | % |
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, IT and facilities costs, and the cost of supplies and equipment.
General and administrative expenses decreased 2% from fiscal 2016 to fiscal 2017 primarily due to decreases in bad debt expense and professional fees.
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.
We expect general and administrative expenses to remain relatively flat in absolute dollars and as a percentage of net revenue during fiscal 2018, as compared to fiscal 2017.
2017 Form 10-K 52
Amortization of Purchased Intangibles
| Fiscal Year Ended January 31, 2017 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2016 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | |||||||||||||||||||||
| $ | % | $ | % | ||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||
| Amortization of purchased intangibles | $ | 31.8 | $ | (1.4 | ) | (4 | )% | $ | 33.2 | $ | (6.6 | ) | (17 | )% | $ | 39.8 | |||||||||
| As a percentage of net revenue | 2 | % | 1 | % | 1 | % |
Amortization of purchased intangibles includes amortization expenses from customer relationships, trade names and other non-current intangible assets acquired through business combinations and asset purchase agreements.
Amortization of purchased intangibles decreased 4% from fiscal 2016 to fiscal 2017, primarily as a result of the accumulated effects associated with amortization expense of intangible assets purchased over time, including lower amortization expense from intangible assets acquired during fiscal 2017 as compared to fiscal 2016. In fiscal 2017, we acquired $14.0 million in intangible assets as compared to $25.2 million acquired in fiscal 2016.
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 $25.2 million in assets purchased in fiscal 2016 as compared to $86.2 million purchased in fiscal 2015.
We expect amortization of purchased intangibles to decrease in absolute dollars and remain relatively flat as a percentage of net revenue during fiscal 2018, as compared to fiscal 2017.
Restructuring Charges and Other Facility Exit Costs, Net
| Fiscal Year Ended January 31, 2017 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2016 | Change compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | ||||||||||||||||||||
| $ | % | $ | % | |||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Restructuring charges and other facility exit costs, net | $ | 80.5 | $ | 80.5 | * | $ | — | $ | (3.1 | ) | (100 | )% | $ | 3.1 | ||||||||||
| As a percentage of net revenue | 4 | % | — | % | — | % |
| * | Percentage is not meaningful. |
In February 2016, the Board of Directors approved a world-wide restructuring plan (“Fiscal 2017 Plan”) in order to re-balance staffing levels and reduce operating expenses to better align them with the evolving needs of the Company's business. Under the Fiscal 2017 Plan, we recorded $70.9 million in employee termination benefits, lease termination costs and other exit costs during fiscal 2017. Additionally, during fiscal 2017, we recorded $9.6 million in other facility exit costs not related to the Fiscal 2017 Plan. During fiscal 2016 Autodesk recorded no restructuring charges. We have substantially completed the actions authorized under all of the restructuring plans. See Note 15, "Restructuring charges and other facility exit costs, net" in the Notes to Consolidated Financial Statements for additional information.
2017 Form 10-K 53
Interest and Other Expense, Net
The following table sets forth the components of interest and other expense, net:
| Fiscal Year Ended January 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| (in millions) | |||||||||||
| Interest and investment expense, net | $ | (29.7 | ) | $ | (33.9 | ) | $ | (13.2 | ) | ||
| Loss on foreign currency | (3.3 | ) | — | (3.9 | ) | ||||||
| Gain (loss) on strategic investments | 0.3 | 3.8 | (23.3 | ) | |||||||
| Other income | 8.5 | 8.5 | 2.7 | ||||||||
| Interest and other expense, net | $ | (24.2 | ) | $ | (21.6 | ) | $ | (37.7 | ) |
Interest and other expense, net, increased $2.6 million during fiscal 2017, as compared to fiscal 2016, primarily related to a decrease in gains on certain of our privately-held strategic investments and an increase in losses on foreign currency. This increase was partially offset by a decrease in interest and investments expense, net, that was primarily driven by mark to market gains on deferred compensation plans partially 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, 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.
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 $58.3 million and $310.2 million for fiscal 2017 and 2016, respectively, relative to a pre-tax loss of $523.8 million and pre-tax income of $20.3 million, respectively, for the same periods. Tax expense for fiscal 2017 consists primarily of foreign tax expense including withholding tax, and tax amortization on indefinite-lived intangibles. Tax expense for fiscal 2016 related to foreign tax expense and the establishment of 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 U.S. arising from our 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 $310.2 million and $1.2 million for fiscal 2016 and 2015, respectively, relative to pre-tax income of $20.3 million and $83.0 million, respectively, for the same periods. Our tax expense increased from fiscal 2015 to fiscal 2016 due to the establishment of a valuation allowance on our U.S. federal and state deferred tax assets in fiscal 2016 recorded in the second quarter of fiscal 2016.
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. 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
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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, 2017, we had non-current foreign net deferred tax assets of $49.7 million that 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.
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, 2017, 2016, and 2015, our gross profit, gross margin, (loss) income from operations, operating margin, net (loss) income, diluted net (loss) income per share and diluted shares used in per share calculation on a GAAP and non-GAAP basis were as follows (in millions except for gross margin, operating margin, and per share data):
| Fiscal Year Ended January 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Gross profit | $ | 1,689.1 | $ | 2,133.4 | $ | 2,170.1 | |||||
| Non-GAAP gross profit | $ | 1,743.2 | $ | 2,194.2 | $ | 2,232.2 | |||||
| Gross margin | 83 | % | 85 | % | 86 | % | |||||
| Non-GAAP gross margin | 86 | % | 88 | % | 89 | % | |||||
| (Loss) income from operations | $ | (499.6 | ) | $ | 1.3 | $ | 120.7 | ||||
| Non-GAAP (loss) income from operations | $ | (125.5 | ) | $ | 280.7 | $ | 382.4 | ||||
| Operating margin | (25 | )% | — | % | 5 | % | |||||
| Non-GAAP operating margin | (6 | )% | 11 | % | 15 | % | |||||
| Net (loss) income | $ | (582.1 | ) | $ | (330.5 | ) | $ | 81.8 | |||
| Non-GAAP net (loss) income | $ | (111.0 | ) | $ | 194.1 | $ | 272.3 | ||||
| Diluted net (loss) income per share (1) | $ | (2.61 | ) | $ | (1.46 | ) | $ | 0.35 | |||
| Non-GAAP diluted (loss) income per share (1) | $ | (0.50 | ) | $ | 0.84 | $ | 1.17 | ||||
| GAAP diluted weighted average shares used in per share calculation | 222.7 | 226.0 | 232.4 | ||||||||
| Non-GAAP diluted weighted average shares used in per share calculation | 222.7 | 230.7 | 232.4 |
| (1) | 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 provide consistency in 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 benefits, credits, 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
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management about which charges are excluded from the non-GAAP financial measures. We compensate for these limitations by 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.
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Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures
(In millions except for gross margin, operating margin, and per share data):
| Fiscal Year Ended January 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Gross profit | $ | 1,689.1 | $ | 2,133.4 | $ | 2,170.1 | |||||
| Stock-based compensation expense | 14.1 | 11.8 | 8.9 | ||||||||
| Amortization of developed technologies | 40.0 | 49.0 | 53.2 | ||||||||
| Non-GAAP gross profit | $ | 1,743.2 | $ | 2,194.2 | $ | 2,232.2 | |||||
| Gross margin | 83 | % | 85 | % | 86 | % | |||||
| Stock-based compensation expense | 1 | % | 1 | % | 1 | % | |||||
| Amortization of developed technologies | 2 | % | 2 | % | 2 | % | |||||
| Non-GAAP gross margin | 86 | % | 88 | % | 89 | % | |||||
| (Loss) income from operations | $ | (499.6 | ) | $ | 1.3 | $ | 120.7 | ||||
| Stock-based compensation expense | 221.8 | 197.2 | 165.6 | ||||||||
| Amortization of developed technologies | 40.0 | 49.0 | 53.2 | ||||||||
| Amortization of purchased intangibles | 31.8 | 33.2 | 39.8 | ||||||||
| Restructuring charges and other facility exit costs, net | 80.5 | — | 3.1 | ||||||||
| Non-GAAP (loss) income from operations | $ | (125.5 | ) | $ | 280.7 | $ | 382.4 | ||||
| Operating margin | (25 | )% | — | % | 5 | % | |||||
| Stock-based compensation expense | 11 | % | 8 | % | 7 | % | |||||
| Amortization of developed technologies | 2 | % | 2 | % | 2 | % | |||||
| Amortization of purchased intangibles | 2 | % | 1 | % | 1 | % | |||||
| Restructuring charges and other facility exit costs, net | 4 | % | — | % | — | % | |||||
| Non-GAAP operating margin | (6 | )% | 11 | % | 15 | % | |||||
| Net (loss) income | $ | (582.1 | ) | $ | (330.5 | ) | $ | 81.8 | |||
| Stock-based compensation expense | 221.8 | 197.2 | 165.6 | ||||||||
| Amortization of developed technologies | 40.0 | 49.0 | 53.2 | ||||||||
| Amortization of purchased intangibles | 31.8 | 33.2 | 39.8 | ||||||||
| Restructuring charges and other facility exit costs, net | 80.5 | — | 3.1 | ||||||||
| (Gain) Loss on strategic investments | (0.3 | ) | (3.7 | ) | 23.3 | ||||||
| Establishment of valuation allowance on deferred tax assets | — | 230.9 | — | ||||||||
| Discrete tax provision items | (2.7 | ) | 0.8 | (18.7 | ) | ||||||
| Income tax effect of non-GAAP adjustments | 100.0 | 17.2 | (75.8 | ) | |||||||
| Non-GAAP net (loss) income | $ | (111.0 | ) | $ | 194.1 | $ | 272.3 | ||||
| Diluted net (loss) income per share (1) | $ | (2.61 | ) | $ | (1.46 | ) | $ | 0.35 | |||
| Stock-based compensation expense | 1.00 | 0.86 | 0.71 | ||||||||
| Amortization of developed technologies | 0.18 | 0.21 | 0.23 | ||||||||
| Amortization of purchased intangibles | 0.14 | 0.15 | 0.17 | ||||||||
| Restructuring charges and other facility exit costs, net | 0.35 | — | 0.01 | ||||||||
| (Gain) Loss on strategic investments | — | (0.01 | ) | 0.10 | |||||||
| Establishment of valuation allowance on deferred tax assets | — | 1.01 | — | ||||||||
| Discrete tax provision items | (0.01 | ) | — | (0.08 | ) | ||||||
| Income tax effect of non-GAAP adjustments | 0.45 | 0.08 | (0.32 | ) | |||||||
| Non-GAAP diluted (loss) income per share (1) | $ | (0.50 | ) | $ | 0.84 | $ | 1.17 |
2017 Form 10-K 57
| (1) | 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 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 and other facility exit costs, net. These expenses are associated with realigning our business strategies based on current economic conditions. In connection with these restructuring actions or other exit actions, we recognize costs related to termination benefits for former employees whose positions were eliminated, 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.
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 ability to utilize 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 our 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 and other facilities exit costs, net for GAAP and non-GAAP measures.
Liquidity and Capital Resources
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Our primary source of cash is from the sale and maintenance of 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, 2017, our principal sources of liquidity were cash, cash equivalents, and marketable securities totaling $2.2 billion and net accounts receivable of $452.3 million. Net of our senior notes, we have cash, cash equivalents, and marketable securities totaling $0.7 billion at January 31, 2017.
In June 2015, we issued $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. 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 21, 2017, 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 with a May 2020 maturity date. As a result of the business model transition, the leverage ratio requirement of the credit agreement was waived during the fourth quarter of fiscal 2017. Autodesk is discussing amendments to the financial covenants in the credit agreement with the lenders and expects to conclude this process during the first quarter of fiscal 2018. As of March 21, 2017, we have no amounts outstanding under the credit facility. 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.
Our cash, cash equivalents, and marketable securities decreased to $2.2 billion at January 31, 2017, from $2.8 billion at January 31, 2016, primarily as a result of cash used for repurchases of our common stock (net of stock issuance proceeds), acquisitions including business combinations and technology purchases, and capital expenditures. The decrease in our cash, cash equivalents, and marketable securities was partially offset by the cash generated through operations. 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 $169.7 million in fiscal 2017 was $356.8 million of cash flow provided by the change in operating assets and liabilities and $322.2 million of non-cash expenses, including stock-based compensation expense, and depreciation, amortization and accretion expense, offsetting our net loss of $582.1 million. The primary working capital sources of cash was an increase in deferred revenue and a decrease in accounts receivable for fiscal 2017 compared to fiscal 2016. The primary working capital use of cash was a decrease in other accrued liabilities for fiscal 2017 compared to fiscal 2016. Our days sales outstanding in trade receivables was 86 at January 31, 2017, compared to 92 at January 31, 2016. The decrease in days sales outstanding primarily relates to changes in billings linearity within each comparative period.
At January 31, 2017, our short-term investment portfolio had an estimated fair value of $686.8 million and a cost basis of $684.5 million. The portfolio fair value consisted of $234.5 million invested in corporate debt securities, $157.3 million invested in certificates of deposit, $109.2 million invested in commercial paper, $43.4 million invested in municipal securities,$32.3 million invested in U.S. treasury bills, $30.0 million invested in sovereign debt, $19.6 million invested in asset backed securities, and $13.2 million invested in U.S. government agency securities.
At January 31, 2017, $47.3 million of trading securities were 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: repayment of debt; 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
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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 United States. As of January 31, 2017, approximately 91% of our total cash or cash equivalents, and marketable securities are located in foreign jurisdictions and that percentage will fluctuate subject to business needs. There are several factors that can impact our ability to utilize foreign cash balances, such as foreign exchange restrictions, foreign regulatory restrictions or adverse tax costs. Our intent is that amounts related to foreign earnings permanently reinvested outside the U.S. will remain outside the United States. We expect to meet our U.S. liquidity needs through ongoing cash flows, foreign cash for which U.S. federal income taxes have been provided, external borrowings, or a combination. 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.
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.
Contractual Obligations
The following table summarizes our significant financial contractual obligations at January 31, 2017 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
| Total | Fiscal 2018 | Fiscal Years 2019-2020 | Fiscal Years 2021-2022 | Thereafter | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Notes | $ | 1,738.3 | $ | 446.7 | $ | 79.6 | $ | 506.7 | $ | 705.3 | |||||||||
| Operating lease obligations | 212.5 | 59.3 | 78.7 | 33.3 | 41.2 | ||||||||||||||
| Purchase obligations | 166.4 | 75.7 | 90.7 | — | — | ||||||||||||||
| Deferred compensation obligations | 47.3 | 3.1 | 6.6 | 6.5 | 31.1 | ||||||||||||||
| Pension obligations | 37.5 | 4.2 | 7.3 | 6.9 | 19.1 | ||||||||||||||
| Asset retirement obligations | 10.4 | 5.2 | 4.7 | 0.5 | — | ||||||||||||||
| Total (1) | $ | 2,212.4 | $ | 594.2 | $ | 267.6 | $ | 553.9 | $ | 796.7 |
| (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 described above.
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.
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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.
Asset retirement obligations represent the estimated costs to bring certain office buildings that we lease back to their original condition after the termination of the lease.
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.
Issuer Purchases of Equity Securities
Autodesk's stock repurchase program provides Autodesk with the ability to offset the dilution from the issuance of stock under our employee stock plans and reduce shares outstanding over time, and has the effect of returning excess cash generated from our business to stockholders. Under the share repurchase program, Autodesk may repurchase shares from time to time in open market transactions, privately-negotiated transactions, accelerated share repurchase programs, tender offers, or by other means. The share repurchase program does not have an expiration date and the pace and timing of repurchases will depend on factors such as cash generation from operations, available surplus, the volume of employee stock plan activity, remaining shares available in the authorized pool, cash requirements for acquisitions, economic and market conditions, stock price and legal and regulatory requirements.
In September 2016, the Board of Directors authorized the repurchase of up to 30.0 million shares of the Company's common stock. During the three and twelve months ended January 31, 2017, we repurchased 2.9 million and 9.7 million shares of our common stock, respectively. At January 31, 2017, 26.6 million shares remained available for repurchase under the repurchase programs approved by the Board of Directors. These programs do 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, 2017, 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.
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