UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 31, 2016
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-14338
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AUTODESK, INC.
(Exact name of registrant as specified in its charter)
Delaware | 94-2819853 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer Identification No.) | |
111 McInnis Parkway, San Rafael, California | 94903 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (415) 507-5000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.01 Par Value | The NASDAQ Stock Market LLC (NASDAQ Global Select Market) | |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”). Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 31, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, there were approximately 225.6 million shares of the registrant’s common stock outstanding that were held by non-affiliates, and the aggregate market value of such shares held by non-affiliates of the registrant (based on the closing sale price of such shares on the NASDAQ Global Select Market on July 31, 2015) was approximately $11.4 billion. Shares of the registrant’s common stock held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 9, 2016, the registrant had outstanding 224,493,192 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant’s Annual Meeting of Stockholders (the “Proxy Statement”), are incorporated by reference in Part III of this Form 10-K to the extent stated herein. The Proxy Statement will be filed within 120 days of the registrant’s fiscal year ended January 31, 2016.
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2016 Form 10-K 2
AUTODESK, INC. FORM 10-K
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FORWARD-LOOKING INFORMATION
The discussion in this Annual Report on 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, anticipated future net revenue, future GAAP and non-GAAP (loss) income per share, operating margin, operating expenses, billings, annualized recurring revenue, annualized revenue per subscription, other future financial results (by product type and geography) and subscriptions, the effectiveness of our efforts to successfully manage transitions to new business models and markets, our expectations regarding the continued transition of our business model, revenue from our channel partners and changes in mix of channel partners, our ability to increase our subscription base, expected market trends, including the growth of cloud, mobile and social computing, the effect of unemployment and availability of credit, the effects of mixed global economic conditions, our expectations for our restructuring, the effects of revenue recognition, our backlog, expected trends in certain financial metrics, including expenses and the predictability and ratability of our revenue over time, 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, and the effects of potential non-cash charges on our financial results and the resulting effect on our financial results. In addition, forward-looking statements also consist of statements involving expectations regarding product capability and acceptance, continuation of our stock repurchase program, remediations to our controls environment, statements regarding our liquidity and short-term and long-term cash requirements, as well as statements involving trend analyses and statements including such words as “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” and similar expressions or the negative of these terms or other comparable terminology. These forward-looking statements speak only as of the date of this Annual Report on Form 10-K and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of a number of factors, including those set forth below 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.
PART I
ITEM 1. | BUSINESS |
Note: A glossary of terms used in this Form 10-K appears at the end of this Item 1.
GENERAL
We are a global leader in design software and services, offering customers productive business solutions through powerful technology products and services. We serve customers in the architecture, engineering and construction; manufacturing; and digital media, consumer, and entertainment industries. Our sophisticated software products enable our customers to experience their ideas before they are real. Customers are able to imagine, design, and create their ideas by visualizing, simulating and analyzing real-world performance early in the design process by creating and manipulating digital prototypes. These capabilities allow our customers to foster innovation, optimize and improve their designs, save time and money, improve quality, communicate plans, and collaborate with others. Our professional software products are sold globally, both directly to customers and through a network of resellers and distributors. Additionally, we offer tools and user communities for personal design and creativity. These applications and user communities are available over the Internet and through various digital storefronts, including the Apple App Store and the Google Play Store.
Segments
We report based on four reportable operating segments:
• | Architecture, Engineering, and Construction (“AEC”), which accounted for 38% of our net revenue in fiscal 2016; |
• | Manufacturing (“MFG”), which accounted for 29% of our net revenue in fiscal 2016; |
2016 Form 10-K 4
• | Platform Solutions and Emerging Business (“PSEB”), which accounted for 27% of our net revenue in fiscal 2016; and |
• | Media and Entertainment (“M&E”), which accounted for 6% of our net revenue in fiscal 2016. |
A summary of our net revenue and results of operations for our business segments is found in Note 13, “Segments,” in the Notes to our Consolidated Financial Statements.
Our AEC, MFG, and PSEB segments derive revenue from the sale of licenses and subscriptions for software products and services to customers who design, build, and own buildings, infrastructure, and manufactured products. In addition to software products, the AEC, MFG, and PSEB segments offer a range of services, including consulting, support, and training, largely dedicated to enhancing our ability to sell licenses and subscriptions to our software products. Our M&E segment derives revenue from the sale of licenses and subscriptions for software products to creative professionals, post-production facilities, and broadcasters for a variety of applications, including feature films, television programs, commercials, music and corporate videos, interactive game production, web design, and interactive web streaming. In addition, our animation products produced by our M&E segment are often used by customers of products from our other segments for the visualization of their designs.
The principal products and services of these segments include the following:
• | Flagship products, which accounted for approximately 45% of our net revenue in fiscal 2016, are our core individual horizontal, vertical, and model-based design products including AutoCAD, AutoCAD LT, AutoCAD Mechanical, AutoCAD Civil 3D, AutoCAD Architecture, AutoCAD Map, Autodesk Maya, and 3ds Max. |
• | Suites, which accounted for approximately 37% of our net revenue in fiscal 2016, are a combination of products that target a specific user objective (product design, building design, etc.) and support a set of workflows for that objective, including Autodesk Building Design Suites, Autodesk Product Design Suites, Autodesk Infrastructure Design Suites, and AutoCAD Design Suites. |
• | New and Adjacent products, which accounted for approximately 18% of our net revenue in fiscal 2016, are new product offerings as well as products that are not considered flagship or suites, including Delcam, Moldflow, Alias Design, Vault, and Autodesk Creative Finishing products. |
Corporate Information
We were incorporated in California in April 1982 and were reincorporated in Delaware in May 1994. Our principal executive office is located at 111 McInnis Parkway, San Rafael, California 94903, and the telephone number at that address is (415) 507-5000. Our internet address is www.autodesk.com. The information posted on our website is not incorporated into this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on the Investor Relations portion of our web site at www.autodesk.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The public may also read and copy any material we file with the SEC at the SEC's Public Reference Room at 100 F Street N.E. Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1 (800) SEC-0330.
PRODUCTS
The principal product offerings from Autodesk’s different segments are as follows:
AEC
Our AEC software products help to improve the way building, civil infrastructure, process plant and construction projects are designed, built, and used. A broad portfolio of solutions enables greater efficiency, accuracy, and sustainability across the entire project lifecycle. Our AEC solutions include advanced technology for building information modeling (“BIM”), AutoCAD-based design and documentation productivity software, sustainable design analysis applications, collaboration, and project management solutions. BIM, an integrated process for building and infrastructure design, analysis, documentation, and construction, uses consistent, coordinated information to improve communication and collaboration between the extended project team. AEC provides a comprehensive portfolio of BIM solutions that help customers deliver projects faster and more economically, while minimizing environmental impact. The segment’s principal product offerings included the following during fiscal 2016:
2016 Form 10-K 5
• | Autodesk Building Design Suites |
Autodesk Building Design Suites ("BDS") give the power of BIM or computer-aided design ("CAD"), with tools for modeling, visualization, and documentation. With a comprehensive set of tools, BDS gives customers the ability to manage all phases of design and construction. Three editions of BDS are available to meet each customer's particular business needs and offer the depth and breadth of the Autodesk portfolio.
• | Autodesk Infrastructure Design Suites |
The Infrastructure Design Suites are the BIM for Infrastructure design solution that combines intelligent, model-based tools to help the user to gain more accurate, accessible, and actionable insight. With unique access to the Autodesk infrastructure software portfolio, users can benefit throughout the execution and lifecycle of transportation, land, and water projects. Three editions of Infrastructure Design Suites are available to meet each customer's particular business needs and offer the depth and breadth of the Autodesk portfolio.
• | AutoCAD Civil 3D |
AutoCAD Civil 3D products provide a surveying, design, analysis, and documentation solution for civil engineering, including land development, transportation, and environmental projects. Using a model-centric approach that automatically updates documentation as design changes are made, AutoCAD Civil 3D products enable civil engineers, designers, drafters, and surveyors to significantly boost productivity and deliver higher-quality designs and construction documentation faster. With AutoCAD Civil 3D products, the entire project team works from the same consistent, up-to-date model so they stay coordinated throughout all project phases.
• | AutoCAD Map 3D |
AutoCAD Map 3D software provides direct access to data needed for infrastructure planning, design, and management activities. AutoCAD Map 3D software helps professionals working on transportation, land development, water, and power projects to more easily create, manage, and analyze design geographic information system and asset data.
• | Autodesk Revit |
Purpose-built for BIM, the Autodesk Revit products collect information about a building project and allow this information to be coordinated across all other representations of the project, so that every drawing sheet, 2D and 3D view and schedule is based on internally consistent and complete information from the same underlying building database. The Autodesk Revit products, including AutoCAD Revit Architecture Suite, AutoCAD Revit MEP Suite, and AutoCAD Revit Structure Suite, provide an intuitive, sophisticated, model-based design and documentation system for architects; mechanical, electrical, and plumbing ("MEP") engineers; structural engineers; design-build teams; and other design and building industry professionals.
MFG
Our MFG segment provides manufacturers in automotive and transportation, industrial machinery, consumer products and building products with comprehensive digital engineering solutions that bring together data from all phases of the product development and production life cycle creating a single digital model based on Autodesk Inventor software. Our solutions are scalable, attainable, cost-effective, and allow for real-world simulation, enabling a broad group of manufacturers to realize benefits with minimal disruption to existing workflows. In addition, Autodesk is redefining the product development process with the introduction of a cloud-based Product Innovation Platform consisting of next generation technologies like Fusion 360 and PLM 360. These solutions support manufacturers' transformation to "agile" based product development processes versus the traditional "waterfall" cycle conventional PLM technologies offer. MFG’s principal product offerings included the following during fiscal 2016:
• | Autodesk Product Design Suites |
Autodesk Product Design Suites ("PDS") is a comprehensive solution for digital prototyping, delivering 3D design, visualization and simulation tools to complete the entire engineering process. The digital prototyping capabilities of PDS can help customers design better products, reduce development costs and get to market faster. Two editions of PDS are available to meet each customer's particular business needs and offer the depth and breadth of the Autodesk portfolio.
2016 Form 10-K 6
• | AutoCAD Mechanical |
AutoCAD Mechanical software is purpose-built to accelerate the mechanical design process. AutoCAD Mechanical software offers users significant productivity gains and helps save hours of design time by including all the functionality of AutoCAD software, in addition to comprehensive libraries of standards-based parts and tools for automating common design tasks.
• | Autodesk Delcam |
The Autodesk Delcam family of products provides CAD and computer-aided manufacturing ("CAM") software for the manufacturing industry. PowerMILL, Delcam's leading product, is a CAM software solution allowing production of complex shapes, providing our customers with advanced toolpath strategies to minimize machining times and maximize component quality.
• | Autodesk Moldflow |
The Autodesk Moldflow family of injection molding simulation software provides tools that help manufacturers optimize the design of plastic parts and injection molds, and study the injection molding process.
• | Autodesk Inventor |
Autodesk Inventor allows manufacturers to go beyond 3D design to digital prototyping by giving engineers a comprehensive and flexible set of tools for 3D mechanical design, simulation, analysis, tooling, visualization, and documentation. With Autodesk Inventor, engineers can integrate AutoCAD drawings and model-based design data into a single digital model, creating a virtual representation of a final product that enables them to validate the form, fit, and function of the product before it is ever built.
• | Autodesk PLM 360 |
PLM 360 is a cloud-based product lifecycle management ("PLM") application that automates key tasks related to the management of processes, projects, and people. Because PLM 360 is on the cloud, software deployment, management and organizational access to data can be achieved instantly compared to traditional PLM technologies.
• | Autodesk Fusion 360 |
Fusion 360 offers a cloud-based product development environment comprising CAD, CAM, and computer-aided engineering ("CAE") software which enables an integrated concept-to-production toolset. Fusion 360 enables manufacturers to integrate industrial design, mechanical engineering, simulation and manufacturing workflows, in a single solution that supports data management and collaboration on the cloud.
PSEB
Our PSEB segment includes our design platform product, AutoCAD. AutoCAD underpins our design product offerings for all the industries we serve. For example, our AEC and MFG segments offer tailored versions of AutoCAD software for their respective industries. AutoCAD also provides a platform for our developer partners to build custom solutions for a range of diverse design-oriented markets. PSEB's revenue primarily includes revenue from sales of licenses of our design products, AutoCAD and AutoCAD LT, as well as the AutoCAD Design Suite and many other design and consumer products. The segment’s principal product offerings included the following during fiscal 2016:
• | AutoCAD |
AutoCAD software, which is our largest single revenue-generating product, is a customizable and extensible CAD application for professional design, drafting, detailing, and visualization. AutoCAD software provides digital tools that can be used independently and in conjunction with other specific applications in fields ranging from construction to manufacturing, civil engineering, and process plant design.
2016 Form 10-K 7
• | AutoCAD LT |
AutoCAD LT software is purpose built for professional drafting and detailing. AutoCAD LT includes document sharing capability without the need for software customization or certain advanced functionality found in AutoCAD. Users can share all design data with team members who use AutoCAD or other Autodesk products built on AutoCAD. AutoCAD LT software is our second largest revenue-generating product.
M&E
Our M&E segment consists of two product groups: Animation and Creative Finishing. Animation products are sold as software only and provide tools for digital sculpting, modeling, animation, effects, rendering, and compositing for design visualization, visual effects and games production. Creative Finishing products are sold as software solutions for editing, finishing and visual effects design and color grading. Principal product offerings in our M&E segment’s Animation and Creative Finishing product groups included the following during fiscal 2016:
Animation
• | Autodesk Maya |
Autodesk Maya software provides 3D modeling, animation, effects, rendering and compositing solutions that enable film and video artists, game developers, and design visualization professionals to digitally create engaging, lifelike images, realistic animations and simulations, extraordinary visual effects, and full length animated feature films.
• | Autodesk 3ds Max |
Autodesk 3ds Max software provides 3D modeling, animation, and rendering solutions that enable game developers, design visualization professionals and visual effects artists to digitally create realistic images, animations, and complex scenes and to digitally communicate abstract or complex mechanical, architectural, engineering, and construction concepts.
Creative Finishing
• | Autodesk Flame and Autodesk Lustre |
Autodesk Flame software is an interactive real-time design, finishing, grading, and visual effects solution for supervised post-production. Autodesk Lustre software is a high-performance color grading solution used by artists for creative look development and final color and lighting effects for both film and television.
PRODUCT DEVELOPMENT AND INTRODUCTION
The technology industry is characterized by rapid technological change in computer hardware, operating systems, and software. In addition, our customers’ requirements and preferences rapidly evolve, as do their expectations of the performance of our software. To keep pace with these changes, we maintain a vigorous program of new product development to address demands in the marketplace for our products.
The software industry is undergoing a transition from the personal computer to cloud, social, and mobile computing. In fiscal 2016, we continued to successfully implement a strategic transition of our business model announced in fiscal 2014. We accelerated our move to the cloud and expanded our flexible product license offerings. We continued to expand desktop subscription for a broader range of our product portfolio, expanded our token-based licensing program to more enterprise customers, and continued to expand our industry-leading cloud-based offerings, including the launch of our North American eStore which creates a better customer experience and can meaningfully increase the volume of our online business. These offerings are designed to give our customers even more value and flexibility to use our products, and also to attract new types of customers, such as project-based users and small businesses that have more variable needs. Further, to support our transition, effective February 1, 2016, we discontinued the sale of new commercial seats of most individual software products, which are now exclusively available by desktop subscription, and we plan to discontinue selling perpetual licenses of suites products effective August 1, 2016.
We dedicate considerable technical and financial resources to research and development to further enhance our existing products and to create new products and technologies to expand our market opportunity. For example, in fiscal 2016, we began
2016 Form 10-K 8
investing in an Internet of Things ("IoT") platform integrated with our cloud infrastructure. IoT will allow our customers to develop applications for predictive maintenance, improved design quality, and smarter connected design systems. We believe that IoT will play an increasingly important role for our customers as the buildings and products they design contain embedded sensors and computation. IoT provides a unique opportunity for our customers to connect designing, making, and using. We anticipate ongoing investment in IoT to both serve existing customers and expand market opportunity.
Research and development expenditures were $790.0 million or 32% of fiscal 2016 net revenue, $725.2 million or 29% of fiscal 2015 net revenue and $611.1 million or 27% of fiscal 2014 net revenue. Our software is primarily developed internally; however, we also use independent firms and contractors to perform some of our product development activities. Additionally, we acquire products or technology developed by others by purchasing or licensing products and technology from third parties. We continually review these investments in an effort to ensure that we are generating sufficient revenue or gaining a competitive advantage to justify their costs.
The majority of our research and product development is performed in the United States, China, Singapore, and Canada. However, we employ experienced software developers in many of our other locations. Translation and localization of our products are performed in a number of local markets, principally Singapore and Switzerland. We generally localize and translate our products into German, French, Italian, Spanish, Russian, Japanese, Korean, and simplified and traditional Chinese.
We plan to continue to manage significant product development operations internationally over the next several years. We believe that our ability to conduct research and development at various locations throughout the world allows us to optimize product development, lower costs, and integrate local market knowledge into our development activities. We continually assess the significant costs and challenges, including intellectual property protection, against the benefits of our international development activities.
In addition, our business and our customers benefit from our relationships with a network of over 4,100 third-party developers who develop and sell their own products that further enhance the range of integrated solutions available to our customers.
For further discussion regarding risks from our product development and introduction efforts, see Item 1A, “Risk Factors.”
MARKETING AND SALES
We license or sell our products and services globally, primarily through indirect channels consisting of distributors and resellers. To a lesser extent we also transact directly with a select set of customers who are primarily large corporations. 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. We have a network of approximately 2,000 resellers and distributors worldwide. For fiscal 2016, approximately 79% of our revenue was derived from indirect channel sales through distributors and resellers, and we expect that the majority of our revenue will continue to be derived from indirect channel sales in the future. We anticipate that our channel mix will change to support our new business model and are proactively working with our channel partners to ensure a smooth transition. We employ a variety of incentive programs and promotions to align our reseller channel with our business strategies. Sales through our largest distributor, Tech Data Corporation and its affiliates, accounted for 25%, 25%, and 24% of our net revenue for fiscal years 2016, 2015, and 2014, respectively. We believe our business is not substantially dependent on Tech Data. Our customers through Tech Data are the resellers and end users who purchase our software licenses and services. Should any of the agreements between us and Tech Data 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. No other distributor, reseller, or direct customer accounted for 10% or more of our revenue.
Our customer-related operations are divided into three geographic regions, the Americas; Europe, Middle East, and Africa (“EMEA”), and Asia Pacific (“APAC”). Each geographic region is supported by global marketing and sales organizations. These organizations develop and manage overall marketing and sales programs and work closely with a network of domestic and international sales offices. Fiscal 2016 net revenue in the Americas, EMEA, and APAC was $972.8 million (39%), $934.6 million (37%), and $596.7 million (24%), respectively. We intend to continue to make our products available in foreign languages. We believe that international sales will continue to comprise the majority of our total net revenue. Adverse economic conditions and currency exchange rates in the countries that contribute a significant portion of our net revenue, including emerging economies, may have an adverse effect on our business in those countries and our overall financial performance. A summary of our financial information by geographic location is found in Note 13, “Segments,” in the Notes to Consolidated
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Financial Statements. Our international operations and sales subject us to a variety of risks; see Item 1A, “Risk Factors,” for further discussion.
We also work directly with reseller and distributor sales organizations, computer manufacturers, other software developers, and peripherals manufacturers in cooperative advertising, promotions, and trade-show presentations. We employ mass-marketing techniques such as webcasts, seminars, telemarketing, direct mailings, sponsorships, advertising in business and trade journals, and social media. 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.
We generate revenue through several subscription-based business models in addition to perpetual use software license sales. The largest is our maintenance program, under which customers who own a perpetual use license for the most recent version of the underlying product are able to purchase maintenance that provides them with unspecified upgrades when-and-if-available and are able to download e-Learning courses and receive online support over a one year or multi-year maintenance service period. We also offer more flexible term-based license offerings to our customers.
Our ability to effectively distribute our products depends in part upon the financial and business condition of our distributor and reseller networks. The loss of, or a significant reduction in, business with any one of our major distributors or large resellers could harm our business; see Item 1A, “Risk Factors,” for further discussion.
CUSTOMER AND RESELLER SUPPORT
We provide technical support and training to customers through a multi-tiered support model, augmented by direct programs designed to address certain specific customer needs. Most of our customers receive support and training from the resellers and distributors from which they purchased subscriptions or licenses for our products or services, with Autodesk in turn providing second tier support to the resellers and distributors. Other customers are supported directly via self-service using the Autodesk Knowledge Network which guides customers to answers in our online support assets, support forums, webinars or to support representatives using a number of different modalities such as social media, phone, email and webchat. We also support our resellers and distributors through technical product training, sales training classes, webinars and other knowledge sharing programs.
EDUCATION, SUSTAINABILITY, AND PHILANTHROPIC PROGRAMS
Education
Autodesk is committed to helping fuel a lifelong passion for design in students of all ages. We offer free educational licenses of Autodesk software worldwide to students, educators, and educational institutions. In fiscal 2016, we initiated Project Ignite, a free and open learning platform delivering a unique package of technology, learning content, and services created specifically for the classroom. The Project Ignite learning platform additionally offers classroom bundles, which include hardware such as 3D printers and electronics kits along with professional development and training services to help educators.
Through Autodesk Design Academy, we provide secondary and postsecondary school markets hundreds of standards-aligned class projects to support design-based disciplines in Science, Technology, Engineering, Digital Arts, and Math (STEAM) while using Autodesk's professional-grade 3D design, engineering and entertainment software used in industry. Beginning in the second quarter of fiscal 2016, we also made Autodesk Design Academy curricula available on iTunes U. Our intention is to make Autodesk software ubiquitous and the design software of choice for those poised to become the next generation of professional users.
Sustainability Programs
To help our customers imagine, design, and create a better world, our Sustainability Programs focus our efforts where we can have the greatest impact: providing sustainability solutions, delivering sustainable design learning and training opportunities, expanding access to technology, and leading by example with our sustainable business practices. This benefits our customers, who use our products and services to improve design decisions to have long-term positive social and environmental impacts. Through the Autodesk Foundation, the Autodesk Technology Impact Program, and the Autodesk Entrepreneur Program, we’re helping nonprofits and entrepreneurs design high-impact solutions to social and environmental challenges by providing them with funding, training, and easy access to our professional software suites at either no charge or for a small license fee.
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Climate Change
Autodesk recognizes inherent opportunities related to climate change, which have potential to expand our business. Opportunities driven by changes in regulation, changes in building code, physical climate parameters and other climate-related developments can directly and indirectly create more demand for existing and new Autodesk products and services in the short and long-term. Opportunities relating to Autodesk’s leadership on climate action can further improve our reputation in the marketplace.
Climate Change Management Actions
To drive continued progress and meet growing demand, we continue to expand the solutions, education, and support we offer, helping customers secure a competitive advantage for a low carbon future by designing high-performance buildings, resilient cities and infrastructure, and more efficient transportation and products. To continue to grow this market, we provide software and support to early stage entrepreneurs and start-up companies who are designing clean technologies. We plan to expand these offerings in the future based upon demand and opportunity in response to challenges posed by climate change.
Internally, we are investing in best practices to mitigate our greenhouse gas emissions and climate change risk through investments in renewable energy, energy efficiency, disaster management and recovery strategies, and materials innovation. We are on track to meet our science-based greenhouse gas reduction target of 43% absolute emissions by 2020.
Climate Change Governance
Ultimately, our CEO, Carl Bass, has the highest level of direct responsibility for addressing our climate-change related risks and opportunities. Autodesk has established an Environmental Core Team which reports indirectly to Mr. Bass. The Environmental Core Team has direct responsibility for setting and implementing the corporate sustainability strategy, including the climate change strategy.
Emissions Performance & Other Key Performance Indicators
Autodesk has reduced its greenhouse gas emissions for its operational boundary by 27% from our fiscal year 2009 baseline to 76,700 metric tons of carbon dioxide equivalent. This reduction was accomplished through increased investment in renewable energy, LEED certification and energy efficiency in our global real estate portfolio, and continued transition from physical software delivery to cloud and electronic software delivery. More information about our sustainability commitment can be found in our annual sustainability reports, which we have published on our website since 2008.
Philanthropy
The Autodesk Foundation (the "Foundation"), a privately funded 501(c)(3) charity organization established and solely funded by us, leads our philanthropic efforts. The purpose of the Foundation is twofold: to support employees to create a better world at work, at home, and in the community by matching employee’s volunteer time and/or donations to nonprofit organizations; and to support organizations and individuals using design to drive positive social and environmental impact. In the latter case, we use grant funding, software donations, and training to accomplish this goal, selecting the most impactful and innovative organizations around the world, thus, leading to a better future for our planet. On our behalf, the Foundation also administers a discounted software donation program to nonprofit organizations, social and environmental entrepreneurs, and others who are developing design solutions that will shape a more sustainable future.
DEVELOPER PROGRAMS
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. Through our programs, over 4,100 developers in the Autodesk Developer Network create interoperable products that further enhance the range of integrated solutions available to our customers.
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COMPETITION
The markets for our products are highly competitive and subject to rapid change. We strive to increase our competitive separation by investing in research and development, allowing us to bring new products to market and create exciting new versions of existing products that offer compelling efficiencies for our customers. We also compete through investments in marketing and sales to more effectively reach new customers and better serve existing customers.
Our competitors include large, global, publicly traded companies; small, geographically focused firms; startup firms; and solutions produced in-house by their users. Our primary global competitors in the PSEB, AEC, and MFG segments include Adobe Systems Incorporated, ANSYS, Inc., AVEVA Group plc, Bentley Systems, Incorporated, Dassault Systèmes S.A. and its subsidiary Dassault Systèmes SolidWorks Corp., Environmental Systems Research Institute, Inc. (ESRI), Intergraph Corporation, a wholly owned subsidiary of Hexagon AB, MSC Software Corporation, Nemetschek AG, PTC, 3D Systems, Siemens PLM, and Trimble Navigation Limited.
Our M&E segment also competes with a wide range of different companies from large, global, publicly-traded companies to small private entities. Large organizations that produce products that compete in some or all of our markets include Adobe Systems Incorporated, Apple Inc., Avid Technology, Inc., SONY Corporation, and Technicolor, among others. The media and entertainment market is highly fragmented with complex interdependencies between many of the larger businesses. As a result, some of our competitors also own subsidiaries that are our customers or our partners in developing or bringing to market some of our solutions. In addition to traditional competitors in developed economies, we encounter new competitors in emerging economies.
The software industry has limited barriers to entry, and the availability of computing power with continually expanding performance at progressively lower prices contributes to the ease of market entry. The industry is presently undergoing a platform shift from the personal computer to cloud and mobile computing. This shift further lowers barriers to entry and poses a disruptive challenge to established software companies. The design software market is characterized by vigorous competition in each of the vertical markets in which we compete, both from existing competitors and by entry of new competitors with innovative technologies. Competition is increasingly enhanced by consolidation of companies with complementary products and technologies and the possibility that competitors in one vertical segment may enter other vertical segments that we serve. In addition, some of our competitors in certain markets have greater financial, technical, sales and marketing, and other resources than we do. Because of these and other factors, competitive conditions in these industries are likely to continue to intensify in the future. Increased competition could result in price reductions, reduced net revenue and profit margins, and loss of market share, any of which could harm our business. See Item 1A, “Risk Factors,” for further discussion of risks regarding competition.
We believe that our future results depend largely upon our ability to better serve customers by offering new products, including cloud and mobile computing products, whether by internal development or acquisition, and to continue to provide existing product offerings that compete favorably with respect to ease of use, reliability, performance, range of useful features, continuing product enhancements, reputation, price, and training.
INTELLECTUAL PROPERTY AND LICENSES
We maintain an active program to legally protect our investment in technology through intellectual property rights. We protect our intellectual property through a combination of patent, copyright, trademark and trade secret protections, confidentiality procedures, and contractual provisions. The nature and extent of legal protection associated with each such intellectual property right depends on, among other things, the type of intellectual property right and the given jurisdiction in which such right arises. We believe that our intellectual property rights are valuable and important to our business, including each of our segments.
Nonetheless, our intellectual property rights may not be successfully asserted in the future or may be invalidated, circumvented or challenged. In addition, the laws and enforcement of the laws of various foreign countries where our products are distributed do not protect our intellectual property rights to the same extent as U.S. laws. Enforcement of intellectual property rights against alleged infringers can sometimes lead to costly litigation and counterclaims. Our inability to protect our proprietary information could harm our business.
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From time to time, we receive claims alleging infringement of a third party’s intellectual property rights, including patents. Disputes involving our intellectual property rights or those of another party have in the past and may in the future lead to, among other things, costly litigation or product shipment delays, which could harm our business.
We retain ownership of software we develop. Desktop software is licensed to users pursuant to ‘click through’ or signed license agreements containing restrictions on duplication, disclosure, and transfer. Cloud software and associated services are provided to users pursuant to on-line or signed terms of service agreements containing restrictions on access and use.
We believe that because of the limitations of laws protecting our intellectual property and the rapid, ongoing technological changes in both the computer hardware and software industries, we must rely principally upon software engineering and marketing skills to continually maintain and enhance our competitive market position.
While we have recovered some revenue resulting from the unauthorized use of our software products, we are unable to measure the full extent to which piracy of our software products exists. We believe, however, that software piracy is and can be expected to be a persistent problem that negatively impacts our revenue and financial results. We believe that our transition from perpetual use software licenses to a subscription-based business model combined with the change from desktop to cloud-based computing will shift the incentives and means by which software is pirated.
In addition, through various licensing arrangements, we receive certain rights to intellectual property of others. We expect to maintain current licensing arrangements and to secure licensing arrangements in the future, as needed and to the extent available on reasonable terms and conditions, to support continued development and sales of our products and services. Some of these licensing arrangements require or may require royalty payments and other licensing fees. The amount of these payments and fees may depend on various factors, including but not limited to: the structure of royalty payments, offsetting considerations, if any, and the degree of use of the licensed technology.
See Item 1A, “Risk Factors,” for further discussion of risks related to protecting our intellectual property.
PRODUCTION AND SUPPLIERS
The production of our AEC, MFG, PSEB, and certain M&E software products and services involves duplication or hosting of software media. As we progress through our business model transition, the way that we deliver software has evolved. For certain cloud-based products, we use a combination of co-located hosting facilities as well as infrastructure-as-a-service providers like Amazon Web Services. For other products, we offer customers an electronic software download option for both initial product fulfillment as well as product updates for maintenance subscribers. Customers who choose electronic fulfillment receive the latest version of the software from our vendor’s secure servers. Customers may also obtain our software through media such as DVDs and USB flash drives available from multiple sources. The purchase of media and the transfer of the software programs onto media for distribution to customers are performed by us and by licensed subcontractors. Packaging materials are produced to our specifications by outside sources. Production is performed in leased facilities operated by independent third-party contractors. To date, we have not experienced any material difficulties or delays in the production of our software and documentation.
EMPLOYEES
As of January 31, 2016, we employed approximately 9,500 people. None of our employees in the United States are represented by a labor union. In certain foreign countries, our employees are represented by work councils. We have never experienced any work stoppages and believe our employee relations are good. Reliance upon employees in other countries entails various risks and changes in these foreign countries, such as government instability or regulation unfavorable to foreign-owned businesses, which could negatively impact our business in the future. In February 2016, we announced a restructuring plan that will result in the termination of approximately 10% of the Company’s workforce, or approximately 925 employees, in fiscal 2017. Through the restructuring, we seek to reduce expenses, streamline the organization, and reallocate resources to align more closely with the Company’s needs going forward.
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ACQUISITIONS
Over the past three years, we acquired new technology or supplemented our technology by purchasing businesses or technology related assets focused in specific markets or industries. For the fiscal years ended January 31, 2016, 2015, and 2014, we acquired a number of companies and technology related assets, some of which were accounted for as business combinations. The following were key acquisitions for fiscal years 2016, 2015, and 2014:
Date of closing | Company | Details | ||
November 2015 | netfabb GmbH ("netfabb") | The acquisition of netfabb GmbH (“netfabb”) provides Autodesk with software solutions that reduce production costs and increase efficiency in 3D printing and additive manufacturing. netfabb was integrated, and the related goodwill has been assigned to, Autodesk's PSEB reportable segment. | ||
June 2014 | Shotgun Software Inc. ("Shotgun") | The acquisition of Shotgun provides a cloud-based production management solution that enables digital studios to track, schedule, review, and collaborate on projects and images. Shotgun was integrated, and the related goodwill has been assigned to, Autodesk's M&E reportable segment. | ||
May 2014 | Within Technologies Limited ("Within”) | The acquisition of Within will accelerate Autodesk’s development of tools and technologies for advanced manufacturing, including 3D printing. Within was integrated into, and the related goodwill has been assigned to, Autodesk’s PSEB reportable segment. | ||
February 2014 | Delcam plc (“Delcam”) | The acquisition of Delcam provides Autodesk a range of design, manufacturing and inspection software that enables automated CADCAM solutions for a variety of industries, ranging from aerospace to toys and sports equipment. Delcam was integrated into, and the related goodwill has been assigned to, Autodesk's MFG reportable segment. | ||
November 2013 | Graitec SA (“Graitec”) | The acquisition of Graitec (including Graitec’s Advance Steel and Advance Concrete product lines, and associated employees) enhanced Autodesk’s offerings for structural engineering and expanded our portfolio of technology for BIM for structural fabrication and detailing. Graitec was integrated into Autodesk’s AEC segment. | ||
BACKLOG
We typically ship products shortly after receipt of an order, which is common in the software industry. Our backlog consists of current software license product orders which have not yet shipped. The category of current software license product orders which we have not yet shipped consists of orders from customers with approved credit status for currently available software products.
Backlog was $31.4 million at January 31, 2016 compared to $40.4 million at January 31, 2015. The actual amount of backlog at any particular time may not be a meaningful indicator of future business prospects as this amount is impacted by a number of factors not related to future trends or events such as the order fulfillment process, the method of software delivery or the linearity of our business within the fiscal period.
GLOSSARY OF TERMS
ARR (Annualized Recurring Revenue)—Represents the annualized value of our average monthly recurring revenue for the preceding three months. The “maintenance” captures ARR relating to traditional maintenance attached to perpetual licenses, including Delcam. The “new model” captures ARR relating to desktop, cloud services, enterprise, and Shotgun product offerings. Recurring revenue acquired with the acquisition of a business may cause variability in the comparison of this calculation.
ARPS (Annualized Revenue Per Subscription)—Is calculated by dividing our annualized recurring revenue by total subscriptions.
Billings—Amounts billed to customers during the current fiscal period net of any partner incentives, hedge gains or other discounts.
BIM (Building Information Modeling)—BIM describes a model-based technology linked with a database of project information, and is the process of generating and managing information throughout the life cycle of a building. BIM is used as a digital representation of the building process to facilitate exchange and interoperability of information in digital formats.
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Constant currency growth rates—We attempt to represent the changes in the underlying business operations by eliminating fluctuations caused by changes in foreign currency exchange rates as well as eliminating hedge gains or losses recorded within the current and comparative periods. Our constant currency methodology removes all hedging gains and losses from the calculation.
Flagship—Autodesk flagship products are our core design products. Flagship includes the following products: 3ds Max, AutoCAD, AutoCAD LT, AutoCAD vertical products (such as AutoCAD Architecture and Mechanical), Civil 3D, Inventor products (individual), Map 3D, Maya, and Revit products (individual).
License and Other revenue—License and other revenue consists of two components: product license revenue and other revenue. Product license revenue includes software license revenue from the sale of seat licenses, term-based licenses from our desktop subscription and enterprise offerings, and product revenue for Creative Finishing. Other revenue includes revenue from consulting, training, Autodesk Developers Network and Creative Finishing customer support, and is recognized over time, as the services are performed.
Maintenance—Our maintenance program 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 program, customers are eligible to receive unspecified upgrades when and if available, downloadable training courses and online support. We recognize maintenance revenue over the term of the agreements, generally between one and three years.
New and Adjacent—Autodesk new and adjacent products include Autodesk's new product offerings as well as products that are not included in flagship or suites. New and adjacent includes the following services and products: Autodesk Alias Design products, Autodesk 360 products, Autodesk Consulting, Autodesk Simulation, Autodesk Simulation Multiphysics, Autodesk Buzzsaw, Autodesk CF Design, Autodesk Constructware, Autodesk Consumer products, Autodesk Creative Finishing products, Delcam products, Autodesk Moldflow products, Autodesk Navisworks, Autodesk Scaleform, Autodesk Vault products, and all other products.
Product Innovation Platform—Represents a single connected ecosystem advancing the way products are designed, made, and used. The Autodesk Product Innovation Platform enables companies to take advantage of the rapid changes taking place in manufacturing.
Recurring Revenue—Represents the revenue for the period from our maintenance, desktop, cloud services and enterprise license offerings, including portions of revenue allocated to license & other revenue for those offerings. It excludes revenue from Autodesk Consulting Services, and subscription revenue related to education offerings, consumer product offerings, select Creative Finishing product offerings, Autodesk Buzzsaw, Autodesk Constructware, and third party products. Recurring revenue acquired with the acquisition of a business is captured and may cause variability in the comparison of this calculation.
Suites—Autodesk design suites are a combination of products that target a specific user objective (product design, building design, etc.) and support a set of workflows for that objective. Our current design and creation suites include: AutoCAD Design Suite, Autodesk Building Design Suite, Autodesk Entertainment Creation Suite, Autodesk Factory Design Suite, Autodesk Infrastructure Design Suite, Autodesk Plant Design Suite, and Autodesk Product Design Suite.
Subscription revenue—Autodesk subscription revenue consists of three components: (1) maintenance revenue from our software products; (2) maintenance revenue from our term-based desktop subscription and enterprise offerings; and (3) revenue from our cloud service offerings.
Total Subscriptions—Consists of subscriptions from our maintenance, desktop, cloud service and enterprise license offerings that are active and paid as of the quarter end date. For certain cloud-based and enterprise license offerings, subscriptions represent the monthly average activity reported within the last three months of the quarter end date. Total subscriptions do not include data from education offerings, consumer product offerings, select Creative Finishing product offerings, Autodesk Buzzsaw, Autodesk Constructware, and third party products. Subscriptions acquired with the acquisition of a business are captured once the data conforms to our subscription count methodology and when added, may cause variability in the comparison of this calculation. New model subscriptions consist of desktop, cloud service and enterprise license offerings, and subscriptions from Autodesk Shotgun product offerings. Maintenance subscriptions consist of maintenance subscriptions and subscriptions from Autodesk Delcam product offerings.
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ITEM 1A. | RISK FACTORS |
We operate in a rapidly changing environment that involves significant risks, a number of which are beyond our control. In addition to the other information contained in this Form 10-K, the following discussion highlights some of these risks and the possible impact of these factors on our business, financial condition, and future results of operations. If any of the following risks actually occur, our business, financial condition, or results of operations may be adversely impacted, causing the trading price of our common stock to decline. In addition, these risks and uncertainties may impact the “forward-looking” statements described elsewhere in this Form 10-K and in the documents incorporated herein by reference. They could affect our actual results of operations, causing them to differ materially from those expressed in “forward-looking” statements.
Global economic and political conditions may further impact our business, financial results and financial condition.
As our business has expanded globally, we have increasingly become subject to risks arising from adverse changes in global economic and political conditions. The past several years were characterized by weak global economic conditions, volatile credit markets, volatile exchange rates, relatively high unemployment, increased government deficit spending and debt levels, uncertainty about certain governments' abilities to repay such debt or to address certain fiscal issues, and volatility in many financial instrument markets. If economic growth in countries where we do business slows, such as in Japan or in emerging economies, or if such countries experience further economic recessions, customers may delay or reduce technology purchases. This could result in reductions in sales of our products and services, longer sales cycles and slower adoption of our technologies.
Over the past several years, many of our customers have experienced tighter credit, negative financial news and weaker financial performance of their businesses and have reduced their workforces, thereby reducing the number of licenses and the number of maintenance contracts they purchase from us. In addition, a number of our customers rely, directly and indirectly, on government spending. Current debt balances of many countries without proportionate increases in revenues have caused many countries to reduce spending and in some cases have forced those countries to restructure their debt in an effort to avoid defaulting under those obligations. This has not only impacted those countries but others that are holders of such debt and those assisting in such restructuring.
These actions may impact, and over the past several years have negatively impacted, our business, financial results and financial condition. Moreover, our financial performance may be negatively impacted by:
• | lack of credit available to and the insolvency of key channel partners, which may impair our distribution channels and cash flows; |
• | counterparty failures negatively impacting our treasury functions, including timely access to our cash reserves and third-party fulfillment of hedging transactions; |
• | counterparty failures negatively affecting our insured risks; |
• | inability of banks to honor our existing line of credit, which could increase our borrowing expenses or eliminate our ability to obtain short-term financing; and |
• | decreased borrowing and spending by our end users on small and large projects in the industries we serve, thereby reducing demand for our products. |
Uncertainty about current and future economic and political conditions on us, our customers and partners, makes it difficult for us to forecast operating results and to make decisions about future investments.
Further macro-economic degradation, a slower economic recovery in industries important to our business or adverse exchange rate movements, may adversely affect our business, financial results and financial condition.
If we fail to successfully manage our business model transition to cloud-based products and more flexible product licenses, our results of operations could be negatively impacted.
To address the industry transition from personal computer to cloud, mobile, and social computing, we have accelerated our move to the cloud and are offering more flexible product licenses. To support our transition, we discontinued licensing upgrades effective March 6, 2015, discontinued selling new perpetual licenses of most individual software products effective February 1, 2016, and plan to discontinue selling new perpetual licenses of suites effective
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August 1, 2016. As a result, we expect to derive an increasing portion of our revenues in the future from subscriptions. This subscription model prices and delivers our products in a way that differs from the historical perpetual pricing and delivery methods. These changes reflect a significant shift from perpetual license sales and distribution of our software in favor of providing our customers the right to access certain of our software in a hosted environment or use downloaded software for a specified subscription period. During our transition, revenue, billings, gross margin, operating margin, net income (loss), earnings (loss) per share, deferred revenue, and cash flow from operations will be impacted as more revenue is recognized ratably rather than up front and as new offerings bring a wider variety of price points.
Our ability to achieve our financial objectives is subject to risks and uncertainties. The new offerings require a considerable investment of technical, financial, legal, and sales resources, and a scalable organization. Market acceptance of such offerings is affected by a variety of factors, including but not limited to: security, reliability, performance, current license terms, customer preference, social/community engagement, customer concerns with entrusting a third party to store and manage their data, public concerns regarding privacy and the enactment of restrictive laws or regulations. Whether our business model transition will prove successful and will accomplish our business and financial objectives is subject to numerous uncertainties, including but not limited to: customer demand, attach and renewal rates, channel acceptance, our ability to further develop and scale infrastructure, our ability to include functionality and usability in such offerings that address customer requirements, tax and accounting implications, pricing, and our costs. In addition, the metrics we use to gauge the status of our business model transition may evolve over the course of the transition as significant trends emerge. If we are unable to successfully establish these new offerings and navigate our business model transition in light of the foregoing risks and uncertainties, our results of operations could be negatively impacted.
Our strategy to develop and introduce new products and services exposes us to risks such as limited customer acceptance, costs related to product defects, and large expenditures, each of which may not result in additional net revenue or could result in decreased net revenue.
Rapid technological changes, as well as changes in customer requirements and preferences, characterize the software industry. Just as the transition from mainframes to personal computers transformed the industry 30 years ago, we believe our industry is undergoing a similar transition from the personal computer to cloud, mobile, and social computing. Customers are also reconsidering the manner in which they license software products, which requires us to constantly evaluate our business model and strategy. In response, we are focused on providing solutions to enable our customers to be more agile and collaborative on their projects. We are also developing consumer products for digital art, personal design and creativity, and home design. We devote significant resources to the development of new technologies. In addition, we frequently introduce new business models or methods that require a considerable investment of technical and financial resources such as our introduction of flexible license and service offerings. It is uncertain whether these strategies will prove successful or whether we will be able to develop the necessary infrastructure and business models more quickly than our competitors. We are making such investments through further development and enhancement of our existing products and services, as well as through acquisitions of new product lines. Such investments may not result in sufficient revenue generation to justify their costs and could result in decreased net revenue. If we are not able to meet customer requirements, either with respect to our software or hardware products or the manner in which we provide such products, or if we are not able to adapt our business model to meet our customers' requirements, our business, financial condition or results of operations may be adversely impacted.
In particular, a critical component of our growth strategy is to have customers of our AutoCAD and AutoCAD LT products expand their portfolios to include our other offerings and cloud-based services. We want customers using individual Autodesk products to expand their portfolio with our other offerings and cloud-based services, and we are taking steps to accelerate this migration. At times, sales of licenses of our AutoCAD and AutoCAD LT or individual Autodesk flagship products have decreased without a corresponding increase in suites product or cloud-based services revenue or without purchases of customer seats to our suites. Should this continue, our results of operations will be adversely affected. Also, adoption of our cloud and mobile computing offerings and changes in the delivery of our software and services to our customers, such as desktop subscription (formally referred to as rental) offerings, will change the way in which we recognize revenue relating to our software and services, with a potential negative impact on our financial performance. The accounting impact of these offerings and other business decisions are expected to result in an increase in the percentage of our ratable revenue, as well as recurring revenue, making for a more predictable business over time, while potentially reducing our upfront perpetual revenue stream.
Our executive management team must act quickly, continuously, and with vision, given the rapidly changing customer expectations and technology advancements inherent in the software industry, the extensive and complex efforts required to create useful and widely accepted products and the rapid evolution of cloud computing, mobile devices, new computing platforms, and other technologies, such as consumer products. Although we have articulated a strategy that we
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believe will fulfill these challenges, if we fail to execute properly on that strategy or adapt that strategy as market conditions evolve, we may fail to meet our customers' expectations, fail to compete with our competitors' products and technology, and lose the confidence of our channel partners and employees. This in turn could adversely affect our business and financial performance.
Our entry into 3D printing presents many of the risks described above concerning developing and introducing new products as well as new risks for us. The manufacturing and 3D printing markets are highly competitive and some of our competitors have superior experience and resources to us. We have limited experience designing, developing, and selling hardware products and no experience developing and selling printers. The market for 3D printing is nascent and may not develop as rapidly as we expect. Our sale of 3D printers could subject us to product and other liability that we do not currently face. If any of these risks materialize, it could adversely affect our business and financial performance as well as our reputation and brand.
Revenue from our offerings may be difficult to predict during our business model transition.
The discontinuance of our perpetual licenses for most individual software products on February 1, 2016 and for perpetual suites on August 1, 2016 will result in the loss of future up-front licensing revenue. This also will freeze growth of our maintenance subscription revenue because there will be no further opportunities to attach maintenance licensing once we cease the sale of suites licenses. We expect our maintenance subscription revenue to decline over time, but it may decline more quickly than anticipated due to low maintenance renewals. At the same time, our new model subscription revenue may not grow as rapidly as anticipated. Our new model subscription pricing allows customers to use our offerings at a lower initial cost when compared to the sale of a perpetual license. Although our new model subscriptions are designed to increase the number of customers who purchase offerings and create a recurring revenue stream that is more predictable over time, it creates risks related to the timing of revenue recognition and expected reductions in cash flows in the near term.
We may not be able to predict subscription renewal rates and their impact on our future revenue and operating results.
Our customers are not obligated to renew their subscriptions for our offerings, and they may elect not to renew. We cannot assure renewal rates, or the mix of subscriptions renewals. Customer renewal rates may decline or fluctuate due to a number of factors, including offering pricing, competitive offerings, customer satisfaction, and reductions in customer spending levels or customer activity due economic downturns or financial markets uncertainty. If our customers do not renew their subscriptions or if they renew on less favorable terms, our revenues may decline.
Actions that we are taking to restructure our business in alignment with our business model transition strategy may be costly and may not be as effective as anticipated.
During the first quarter of fiscal 2017, we commenced a company-wide restructuring plan to accelerate the Company’s move to the cloud and its transition to a subscription-based business model. Through the restructuring, we seek to reduce expenses, streamline the organization, and reallocate resources to align more closely with the Company’s needs going forward. As a result of these actions, we have incurred and will incur additional costs in the short term that have the effect of reducing our operating margins. If we are unable to realize the expected outcomes from the restructuring efforts, our business and operating results may be harmed.
Our software is highly complex and may contain undetected errors, defects or vulnerabilities, each of which could harm our business and financial performance.
The software products that we offer are complex, and despite extensive testing and quality control, may contain errors, defects or vulnerabilities. Some errors, defects and vulnerabilities in our software products may only be discovered after the product or service has been released. Any errors, defects or vulnerabilities could result in the need for corrective releases to our software products, damage to our reputation, loss of revenue, an increase in product returns or lack of market acceptance of our products, any of which would likely harm our business and financial performance.
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We are dependent on international revenue and operations, exposing us to significant regulatory, global economic, intellectual property, collections, currency exchange rate, taxation, political instability and other risks, which could adversely impact our financial results.
We are dependent on our international operations for a significant portion of our revenue. International net revenue represented 68% and 71% of our net revenue in fiscal 2016 and 2015, respectively. Our international revenue, including that from emerging economies, is subject to general economic and political conditions in foreign markets, including conditions in foreign markets resulting from economic and political conditions in the U.S. Our revenue is also impacted by the relative geographical and country mix of our revenue over time. At times, these factors adversely impact our international revenue, and consequently our business as a whole. Our dependency on international revenue makes us much more exposed to global economic and political trends, which can negatively impact our financial results, even if our results in the U.S. are strong for a particular period. Further, a significant portion of our earnings from our international operations may not be freely transferable to the U.S. due to remittance restrictions, adverse tax consequences or other factors. Our intent is that amounts related to foreign earnings permanently reinvested outside the U.S. will remain outside the U.S., and we will meet our U.S. liquidity needs through ongoing cash flows, external borrowings (such as our 2012 and 2015 Notes), or both. However, if, in the future, amounts held by foreign subsidiaries are needed to fund our operations in the U.S., or to service our external borrowings, the repatriation of such amounts to the U.S. could result in a significant incremental tax liability in the period in which the decision to repatriate occurs and payment of any such tax liability would reduce the cash available to fund our operations.
We anticipate that our international operations will continue to account for a significant portion of our net revenue, and, as we expand our international development, sales and marketing expertise, will provide significant support to our overall efforts in countries outside of the U.S. Risks inherent in our international operations include:
• | economic volatility; |
• | fluctuating currency exchange rates, including risks related to any hedging activities we undertake; |
• | unexpected changes in regulatory requirements and practices; |
• | delays resulting from difficulty in obtaining export licenses for certain technology; |
• | different purchase patterns as compared to the developed world; |
• | tariffs, quotas, and other trade barriers and restrictions; |
• | operating in locations with a higher incidence of corruption and fraudulent business practices, particularly in emerging economies; |
• | increasing enforcement by the U.S. under the Foreign Corrupt Practices Act, adoption of stricter anti-corruption laws in certain countries, including the United Kingdom; |
• | difficulties in staffing and managing foreign sales and development operations; |
• | local competition; |
• | longer collection cycles for accounts receivable; |
• | potential changes in tax laws, including possible U.S. and foreign tax law changes that, if enacted, could significantly impact how multinational companies are taxed; |
• | tax arrangements with foreign governments, including our ability to meet and renew the terms of those tax arrangements; |
• | laws regarding the management of and access to data and public networks; |
• | possible future limitations upon foreign owned businesses; |
• | increased financial accounting and reporting burdens and complexities; |
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• | inadequate local infrastructure; |
• | greater difficulty in protecting intellectual property; |
• | software piracy; and |
• | other factors beyond our control, including popular uprisings, terrorism, war, natural disasters, and diseases. |
Some of our business partners also have international operations and are subject to the risks described above. Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if our business partners are not able to successfully manage these risks.
Existing and increased competition and rapidly evolving technological changes may reduce our revenue and profits.
The software industry has limited barriers to entry, and the availability of computing devices with continually expanding performance at progressively lower prices contributes to the ease of market entry. The industry is presently undergoing a platform shift from the personal computer to cloud and mobile computing. This shift further lowers barriers to entry and poses a disruptive challenge to established software companies. The markets in which we compete are characterized by vigorous competition, both by entry of competitors with innovative technologies and by consolidation of companies with complementary products and technologies. In addition, some of our competitors in certain markets have greater financial, technical, sales and marketing, and other resources. Furthermore, a reduction in the number and availability of compatible third-party applications, or our inability to rapidly adapt to technological and customer preference changes, including those related to cloud computing, mobile devices, and new computing platforms, may adversely affect the sale of our products. Because of these and other factors, competitive conditions in the industry are likely to intensify in the future. Increased competition could result in price reductions, reduced net revenue and profit margins and loss of market share, any of which would likely harm our business.
We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows.
Because we conduct a substantial portion of our business outside the U.S. and we make certain business and resource decisions based on assumptions about foreign currency, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and economic conditions change, and they could have a material adverse impact on our financial results and cash flows.
We use derivative instruments to manage a portion of our cash flow exposure to fluctuations in foreign currency exchange rates. As part of our risk management strategy, we use foreign currency contracts to manage a portion of our exposures of underlying assets, liabilities, and other obligations, which exist as part of our ongoing business operations. These foreign currency instruments have maturities that extend for one to twelve months in the future, and provide us with some protection against currency exposures. However, our attempts to hedge against these risks may not be completely successful, resulting in an adverse impact on our financial results.
The fluctuations of currencies in which we conduct business can both increase and decrease our overall revenue and expenses for any given fiscal period. Although our foreign currency cash flow hedge program extends beyond the current quarter in order to reduce our exposure to foreign currency volatility, we do not attempt to completely mitigate this risk, and in any case, will incur transaction fees in adopting such hedging programs. Such volatility, even when it increases our revenues or decreases our expenses, impacts our ability to accurately predict our future results and earnings.
A breach of security in our products, services or computer systems may compromise the integrity of our products or services, harm our reputation, create additional liability and adversely impact our financial results.
We make significant efforts to maintain the security and integrity of our source code and computer systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. These threats include but are not limited to identity theft, unauthorized access, DNS attacks, wireless network attacks, viruses and worms, advanced persistent threat (APT), application centric attacks, peer-to-peer attacks, phishing, backdoor trojans and distributed denial of service (DDoS) attacks. Any of the foregoing could attack our products, services or computer systems. Despite significant efforts to create
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security barriers to such programs, it is virtually impossible for us to entirely eliminate this risk. Like all software, our software is vulnerable to cyber attacks. In the past, hackers have targeted our software, and they may do so in the future. The impact of cyber attacks could disrupt the proper functioning of our software products or services, cause errors in the output of our customers' work, allow unauthorized access to sensitive, proprietary or confidential information of ours or our customers, and other destructive outcomes. Moreover, as we continue to invest in new lines of consumer products and services we are exposed to increased security risks and the potential for unauthorized access to, or improper use of, the information of our consumer users. If any of the foregoing were to occur, our reputation may suffer, customers may stop buying our products or services, we could face lawsuits and potential liability, and our financial performance could be negatively impacted.
Changes in laws or regulations related to the Internet, local data storage or related to privacy and data security concerns may impact our business or expose us to increased liability.
The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication, and business applications. Federal, state, or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting data privacy and the transmission of certain types of content using the Internet. For example, the State of California has adopted legislation requiring operators of commercial websites and mobile applications that collect personal information from California residents to conspicuously post and comply with privacy policies that satisfy certain requirements. Several other U.S. states have adopted legislation requiring companies to protect the security of personal information that they collect from consumers over the Internet, and more states may adopt similar legislation in the future. Additionally, the Federal Trade Commission has used its authority under Section 5 of the Federal Trade Commission Act to bring actions against companies for failing to maintain adequate security for personal information collected from consumers over the Internet and for failing to comply with privacy-related representations made to Internet users. The U.S. Congress has at various times proposed federal legislation intended to protect the privacy of Internet users and the security of personal information collected from Internet users that would impose additional compliance burdens upon companies collecting personal information from Internet users, and the U.S. Congress may adopt such legislation in the future. The European Union also has adopted various directives regulating data privacy and security and the transmission of content using the Internet involving residents of the European Union, including those directives known as the Data Protection Directive, the E-Privacy Directive, and the Privacy and Electronic Communications Directive, and may adopt similar directives in the future. Other countries, including Canada and several Latin American and Asian countries, have constitutional protections for, or have adopted legislation protecting, individuals' personal information. Additionally, some federal, state, or foreign governmental bodies have established laws that seek to censor the transmission of certain types of content over the Internet or require that individuals be provided with the ability to permanently delete all electronic personal information, such as the German Multimedia Law of 1997 and the California “Eraser law” for minors. Additionally, some foreign governmental bodies (such as Russia and China) have established laws or have proposed laws that seek to require local data storage.
In addition, new laws and industry self-regulatory codes have been enacted and more are being considered that may affect our ability to reach current and prospective customers, to understand how our products and services are being used, to respond to customer requests allowed under the laws, and to implement our new business models effectively. These new laws and regulations would similarly affect our competitors as well as our customers.
Given the variety of global privacy and data protection regimes, it is possible we may find ourselves subject to inconsistent obligations. For instance, the USA Patriot Act is considered by some to be in conflict with certain directives of the European Union. Situations such as these require that we make prospective determinations regarding compliance with conflicting regulations. Increased enforcement of existing laws and regulations, as well as any laws, regulations or changes that may be adopted or implemented in the future, could limit the growth of the use of public cloud applications or communications generally, result in a decline in the use of the Internet and the viability of Internet-based applications, and require us to implement of additional technological safeguards.
In addition, in October 2015 the European Court of Justice issued a ruling immediately invalidating the U.S.-EU Safe Harbor Framework, which facilitated personal data transfers to the U.S. in compliance with applicable EU data protection laws. In February of 2016, The European Commission and the United States agreed on a new framework for transatlantic data flows: the EU-US Privacy Shield. Autodesk is currently awaiting additional guidance from European regulators on how the EU-US Privacy Shield will be implemented. We continue to comply with the previous Safe Harbor principles and rely on other legal mechanisms for data transfers.
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Increasing regulatory focus on privacy issues could impact our new business models and expose us to increased liability.
Governments, privacy advocates and class action attorneys are increasingly scrutinizing how companies collect, process, use, store, share or transmit personal data. Any perception of our practices or products as an invasion of privacy, whether or not consistent with current regulations and industry practices, may subject us to public criticism, class action lawsuits, reputational harm or claims by regulators, industry groups or other third parties, all of which could disrupt our business and expose us to increased liability.
We rely on third-parties to provide us with a number of operational services, including hosting and delivery and certain of our customer services and other operations and processing of data; any interruption or delay in service from these third parties, breaches of security or privacy could expose us to liability, harm our reputation and adversely impact our financial performance.
We rely on hosted computer services from third parties for services that we provide our customers and computer operations for our internal use. As we gather customer data and host certain customer data in third-party facilities, a security breach could compromise the integrity or availability or result in the theft of customer data. In addition, our operations could be negatively affected in the event of a security breach, and we could be subject to the loss or theft of confidential or proprietary information, including source code.
Unauthorized access to this data may be obtained through break-ins, breaches of our secure networks by unauthorized parties, employee theft or misuse, or other misconduct. We rely on a number of third party suppliers in the operation of our business for the provision of various services and materials that we use in the operation of our business and production of our products. We may from time to time rely on a single or limited number of suppliers, or upon suppliers in a single country, for these services or materials. The inability of such third parties to satisfy our requirements could disrupt our business operations or make it more difficult for us to implement our business strategy. If any of these situations were to occur, our reputation could be harmed, we could be subject to third party liability, including under data protection and privacy laws in certain jurisdictions, and our financial performance could be negatively impacted.
If we do not maintain good relationships with the members of our distribution channel, or achieve anticipated levels of sell-through, our ability to generate revenue will be adversely affected. If our distribution channel suffers financial losses, becomes financially unstable or insolvent, or is not provided the right mix of incentives to sell our products, our ability to generate revenue will be adversely affected.
We sell our software products both directly to end-users and through a network of distributors and resellers. For fiscal 2016 and fiscal 2015, approximately 79% and 83% of our revenue was derived from indirect channel sales through distributors and resellers and we expect that the majority of our revenue will continue to be derived from indirect channel sales in the future. Our ability to effectively distribute our products depends in part upon the financial and business condition of our distributor and reseller network. Computer software distributors and resellers typically are not highly capitalized, have previously experienced difficulties during times of economic contraction and experienced difficulties during the past several years. We have processes to ensure that we assess the creditworthiness of distributors and resellers prior to our sales to them. In the past we have taken steps to support them, and may take additional steps in the future, such as extending credit terms and providing temporary discounts. These steps, if taken, could harm our financial results. If our distributors and resellers were to become insolvent, they would not be able to maintain their business and sales, or provide customer support services, which would negatively impact our business and revenue.
We rely significantly upon major distributors and resellers in both the U.S. and international regions, including the distributor Tech Data Corporation and its global affiliates (“Tech Data”). Tech Data accounted for 25% of our total net revenue for both fiscal 2016 and 2015, respectively. Although we believe that we are not substantially dependent on Tech Data, if Tech Data were to experience a significant disruption with its business or if our relationship with Tech Data were to significantly deteriorate, it is possible that our ability to sell to end users would be, at least temporarily, negatively impacted. This could in turn negatively impact our financial results.
Over time, we have modified and will continue to modify aspects of our relationship with our distributors and resellers, such as their incentive programs, pricing to them and our distribution model to motivate and reward them for aligning their businesses with our strategy and business objectives. Changes in these relationships and underlying programs could negatively impact their business and harm our business. In addition, the loss of or a significant reduction in business with those distributors or resellers or the failure to achieve anticipated levels of sell-through with any one of our major international distributors or large resellers could harm our business. In particular, if one or more of such
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distributors or resellers were unable to meet their obligations with respect to accounts payable to us, we could be forced to write off such accounts and may be required to delay the recognition of revenue on future sales to these customers. These events could have a material adverse effect on our financial results.
A significant portion of our revenue is generated through maintenance revenue; decreases in maintenance renewal rates would negatively impact our future revenue and financial results.
Our maintenance customers have no obligation to attach maintenance to their initial license or renew their maintenance contract after the expiration of their initial maintenance period, which is typically one year. The discontinuance of our perpetual licenses for most individual software products on February 1, 2016 and for perpetual suites on August 1, 2016 will result in the loss of future maintenance attach opportunities and freeze maintenance growth. Once we discontinue new perpetual suites we expect customers' renewal rates will decline or fluctuate over time as a result of a number of factors, including the overall global economy, the health of their businesses, and the perceived value of the maintenance program. If our customers do not renew their maintenance contract for our products, our maintenance revenue will decline and our financial results will suffer.
We recognize maintenance revenue ratably over the term of the maintenance contracts, which is predominantly one year, but may also range up to five years. Decreases in maintenance billings will negatively impact future maintenance revenue, however future maintenance revenue will also be impacted by other factors such as the amount, timing and mix of contract terms of future billings.
Our financial results fluctuate within each quarter and from quarter to quarter making our future revenue and financial results difficult to predict.
Our quarterly financial results have fluctuated in the past and will continue to do so in the future. These fluctuations could cause our stock price to change significantly or experience declines. We also provide investors with quarterly and annual financial forward-looking guidance that could prove to be inaccurate as a result of these fluctuations. In addition to the other factors described in this Part I, Item 1A, some of the factors that could cause our financial results to fluctuate include:
• | general market, economic, business, and political conditions in particular geographies, including Europe, APAC, and emerging economies; |
• | failure to produce sufficient revenue, billings or subscription growth, and profitability; |
• | failure to achieve anticipated levels of customer acceptance to our business model transition, including the impact of the end of upgrades and perpetual licenses; |
• | weak or negative growth in one or more of the industries we serve, including AEC, manufacturing, and digital media and entertainment markets; |
• | restructuring or other accounting charges and unexpected costs or other operating expenses; |
• | changes in revenue recognition or other accounting guidelines employed by us and/or established by the Financial Accounting Standards Board or other rule-making bodies; |
• | fluctuations in foreign currency exchange rates and the effectiveness of our hedging activity; |
• | failure to achieve and maintain cost reductions and productivity increases; |
• | dependence on and the timing of large transactions; |
• | changes in product mix, pricing pressure or changes in product pricing; |
• | changes in billings linearity; |
• | the ability of governments around the world to adopt fiscal policies, meet their financial and debt obligations, and to finance infrastructure projects; |
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• | lower growth or contraction of our maintenance program; |
• | failure to expand our AutoCAD and AutoCAD LT customer base to related design products and services; |
• | our inability to rapidly adapt to technological and customer preference changes, including those related to cloud computing, mobile devices, new computing platforms, and 3D printing; |
• | the timing of the introduction of new products by us or our competitors; |
• | the success of new business or sales initiatives and increasing our portfolio of product suites; |
• | the financial and business condition of our reseller and distribution channels; |
• | failure to accurately predict the impact of acquired businesses or to identify and realize the anticipated benefits of acquisitions, and successfully integrate such acquired businesses and technologies; |
• | perceived or actual technical or other problems with a product or combination of products; |
• | unexpected or negative outcomes of matters and expenses relating to litigation or regulatory inquiries; |
• | increases in cloud services-related expenses; |
• | security breaches and potential financial penalties to customers and government entities; |
• | timing of additional investments in the development of our platform or deployment of our services; |
• | timing of product releases and retirements; |
• | changes in tax laws or regulations, tax arrangements with foreign governments or accounting rules, such as increased use of fair value measures; |
• | changes in sales compensation practices; |
• | failure to effectively implement our copyright legalization programs, especially in developing countries; |
• | failure to achieve sufficient sell-through in our channels for new or existing products; |
• | renegotiation or termination of royalty or intellectual property arrangements; |
• | interruptions or terminations in the business of our consultants or third-party developers; |
• | the timing and degree of expected investments in growth and efficiency opportunities; |
• | failure to achieve continued success in technology advancements; |
• | catastrophic events or natural disasters; |
• | regulatory compliance costs; |
• | potential goodwill impairment charges related to prior acquisitions; |
• | failure to appropriately estimate the scope of services under consulting arrangements; and |
• | adjustments arising from ongoing or future tax examinations. |
We have also experienced fluctuations in financial results in interim periods in certain geographic regions due to seasonality or regional economic or political conditions. In particular, our financial results in Europe during our third quarter are usually affected by a slower summer period, and our Asia Pacific operations typically experience seasonal slowing in our third and fourth quarters.
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Our operating expenses are based in part on our expectations for future revenue and are relatively fixed in the short term. Accordingly, any revenue shortfall below expectations has had, and in the future could have, an immediate and significant adverse effect on our profitability. Greater than anticipated expenses or a failure to maintain rigorous cost controls would also negatively affect profitability.
Our business could suffer as a result of risks, costs, charges and integration risks associated with strategic acquisitions and investments.
We regularly acquire or invest in businesses, software products and technologies that are complementary to our business through acquisitions, strategic alliances or equity or debt investments. The risks associated with such acquisitions include, among others, the difficulty of assimilating products, operations and personnel, inheriting liabilities such as intellectual property infringement claims, the failure to realize anticipated revenue and cost projections, the requirement to test and assimilate the internal control processes of the acquired business in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, and the diversion of management's time and attention. For example, we face risks relating to our fiscal 2017 integration of our Delcam subsidiaries, which previously operated autonomously.
In addition, such acquisitions and investments involve other risks such as:
• | the inability to retain customers, key employees, vendors, distributors, business partners, and other entities associated with the acquired business; |
• | the potential that due diligence of the acquired business or product does not identify significant problems; |
• | exposure to litigation or other claims in connection with, or inheritance of claims or litigation risk as a result of, an acquisition, including but not limited to, claims from terminated employees, customers, or other third parties; |
• | the potential for incompatible business cultures; |
• | significant higher than anticipated transaction or integration-related costs; |
• | potential additional exposure to fluctuations in currency exchange rates; and |
• | the potential impact on relationships with existing customers, vendors, and distributors as business partners as a result of acquiring another business. |
We may not be successful in overcoming such risks, and such acquisitions and investments may negatively impact our business. In addition, such acquisitions and investments have in the past and may in the future contribute to potential fluctuations in our quarterly financial results. These fluctuations could arise from transaction-related costs and charges associated with eliminating redundant expenses or write-offs of impaired assets recorded in connection with acquisitions and investments. These costs or charges could negatively impact our financial results for a given period, cause quarter to quarter variability in our financial results or negatively impact our financial results for several future periods.
Because we derive a substantial portion of our net revenue from a small number of products, including our AutoCAD-based software products and suites, if these products are not successful, our revenue will be adversely affected.
We derive a substantial portion of our net revenue from sales of licenses of a limited number of our products, including AutoCAD software, products based on AutoCAD, which include our suites that serve specific markets and products that are interoperable with AutoCAD. Any factor adversely affecting sales of these products, including the product release cycle, market acceptance, product competition, performance and reliability, reputation, price competition, economic and market conditions and the availability of third-party applications, would likely harm our financial results. During fiscal 2016 and 2015, combined revenue from our AutoCAD and AutoCAD LT products, not including suites having AutoCAD or AutoCAD LT as a component, represented 24% and 28% of our total net revenue, respectively.
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If we are not able to adequately protect our proprietary rights, our business could be harmed.
We rely on a combination of patent, copyright and trademark laws, trade secret protections, confidentiality procedures and contractual provisions to protect our proprietary rights. Despite such efforts to protect our proprietary rights, unauthorized parties from time to time have copied aspects of our software products or have obtained and used information that we regard as proprietary. Policing unauthorized use of our software products is time-consuming and costly. We are unable to measure the extent to which piracy of our software products exists and we expect that software piracy will remain a persistent problem, particularly in emerging economies. Furthermore, our means of protecting our proprietary rights may not be adequate.
Additionally, we actively protect the secrecy of our confidential information and trade secrets, including our source code. If unauthorized disclosure of our source code occurs, we could potentially lose future trade secret protection for that source code. The loss of future trade secret protection could make it easier for third-parties to compete with our products by copying functionality, which could adversely affect our financial performance and our reputation. We also seek to protect our confidential information and trade secrets through the use of non-disclosure agreements with our customers, contractors, vendors and partners. However, it is possible that our confidential information and trade secrets may be disclosed or published without our authorization. If this were to occur, it may be difficult and/or costly for us to enforce our rights, and our financial performance and reputation could be negatively impacted.
We may face intellectual property infringement claims that could be costly to defend and result in the loss of significant rights.
As more software patents are granted worldwide, the number of products and competitors in our industry segments grows and the functionality of products in different industry segments overlaps, we expect that software product developers will be increasingly subject to infringement claims. Infringement or misappropriation claims have in the past been, and may in the future be, asserted against us, and any such assertions could harm our business. Additionally, certain patent holders without products have become more aggressive in threatening and pursuing litigation in attempts to obtain fees for licensing the right to use patents. Any such claims or threats, whether with or without merit, have been and could in the future be time-consuming to defend, result in costly litigation and diversion of resources, cause product shipment delays or require us to enter into royalty or licensing agreements. In addition, such royalty or license agreements, if required, may not be available on acceptable terms, if at all, which would likely harm our business.
From time to time we realign or introduce new business and sales initiatives; if we fail to successfully execute and manage these initiatives, our results of operations could be negatively impacted.
As part of our effort to accommodate our customers' needs and demands and the rapid evolution of technology, we from time to time evolve our business and sales initiatives such as realigning our development and marketing organizations, and expanding our portfolio of suites and our offering of software as a service, and realigning our internal resources in an effort to improve efficiency. We may take such actions without clear indications that they will prove successful, and at times, we have been met with short-term challenges in the execution of such initiatives. Market acceptance of any new business or sales initiative is dependent on our ability to match our customers' needs at the right time and price. Often we have limited prior experience and operating history in these new areas of emphasis. If any of our assumptions about expenses, revenue or revenue recognition principles from these initiatives proves incorrect, or our attempts to improve efficiency are not successful, our actual results may vary materially from those anticipated, and our financial results will be negatively impacted.
If we fail to remediate the material weakness identified in our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 or are unable to implement and maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial and operating reporting may be adversely affected and could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
In connection with the preparation of our Condensed Consolidated Financial Statements for the fiscal quarter ended October 31, 2015, our management concluded that a material weakness exists in our internal control over financial reporting related to our controls over the technical review of our reconciliation of our deferred tax accounts and the effective tax rate. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
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Management initiated remediation plans including the following:
• | enhancing our technical accounting review for complex income tax considerations; |
• | enhancing our income tax controls to include specific activities to ensure proper classification of deferred taxes; |
• | supplementing our accounting and tax professionals with the engagement of an internationally recognized accounting firm to assist us in the technical review regarding the application of tax rules around deferred tax assets and liabilities; and |
• | assessed and reorganized the structure of our tax function to enhance the level of documentation, technical oversight and review |
There can be no assurance that our remedial measures will be sufficient to address the material weakness or that our internal control over financial reporting will not be subject to additional material weaknesses in the future. If the remedial measures that we take are insufficient to address our material weakness or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our Condensed Consolidated Financial Statements may contain material misstatements, and we could be required to restate our financial results. Additionally, we may encounter problems or delays in implementing any changes necessary for management to make a favorable assessment of our internal control over financial reporting. If we cannot favorably assess the effectiveness of our internal control over financial reporting, investors could lose confidence in our financial reports and the price of our common stock could decline.
Net revenue, billings, earnings or subscriptions shortfalls or the volatility of the market generally may cause the market price of our stock to decline.
The market price for our common stock has experienced significant fluctuations and may continue to fluctuate significantly. The market price for our common stock may be affected by a number of factors, including the other factors described in this Part I, Item 1A and the following:
• | shortfalls in our expected financial results, including net revenue, billings, earnings, subscriptions, or other key performance metrics; |
• | results and future projections related to our business model transition, including the impact of the end of upgrades and perpetual licenses; |
• | quarterly variations in our or our competitors' results of operations; |
• | general socio-economic, political or market conditions; |
• | changes in estimates of future results or recommendations or confusion on the part of analysts and investors about the short-term and long-term impact to our business resulting from our business model transition; |
• | uncertainty about certain governments' abilities to repay debt or effect fiscal policy; |
• | the announcement of new products or product enhancements by us or our competitors; |
• | unusual events such as significant acquisitions, divestitures, regulatory actions, and litigation; |
• | changes in laws, rules, or regulations applicable to our business; |
• | outstanding debt service obligations; and |
• | other factors, including factors unrelated to our operating performance, such as instability affecting the economy or the operating performance of our competitors. |
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Significant changes in the price of our common stock could expose us to costly and time-consuming litigation. Historically, after periods of volatility in the market price of a company's securities, a company becomes more susceptible to securities class action litigation. This type of litigation is often expensive and diverts management's attention and resources.
Our business could be adversely affected if we are unable to attract and retain key personnel.
Our success and ability to invest and grow depend largely on our ability to attract and retain highly skilled technical, professional, managerial, sales, and marketing personnel. Historically, competition for these key personnel has been intense. The loss of services of any of our key personnel (including key personnel joining our company through acquisitions), the inability to retain and attract qualified personnel in the future, or delays in hiring required personnel, particularly engineering and sales personnel, could make it difficult to meet key objectives, such as timely and effective product introductions and financial goals.
Our investment portfolio consists of a variety of investment vehicles in a number of countries that are subject to interest rate trends, market volatility, and other economic factors. If general economic conditions decline, this could cause the credit ratings of our investments to deteriorate, illiquidity in the financial marketplace, and we may experience a decline in interest income, and an inability to sell our investments, leading to impairment in the value of our investments.
It is our policy to invest our cash, cash equivalents and marketable securities in highly liquid instruments with, and in the custody of, financial institutions with high credit ratings and to limit the amounts invested with any one institution, type of security and issuer. However, we are subject to general economic conditions, interest rate trends and volatility in the financial marketplace that can affect the income that we receive from our investments, the net realizable value of our investments (including our cash, cash equivalents and marketable securities) and our ability to sell them. In the U.S., for example, the yields on our portfolio securities are very low due to general economic conditions. Any one of these factors could reduce our investment income, or result in material charges, which in turn could impact our overall net income (loss) and earnings (loss) per share.
From time to time we make direct investments in privately held companies. Privately held company investments are considered inherently risky. The technologies and products these companies have under development are typically in the early stages and may never materialize, which could result in a loss of all or a substantial part of our initial investment in these companies. The evaluation of privately held companies is based on information that we request from these companies, which is not subject to the same disclosure regulations as U.S. publicly traded companies, and as such, the basis for these evaluations is subject to the timing and accuracy of the data received from these companies.
A loss on any of our investments may cause us to record an other-than-temporary impairment charge. The effect of this charge could impact our overall net income (loss) and earnings (loss) per share. In any of these scenarios, our liquidity may be negatively impacted, which in turn may prohibit us from making investments in our business, taking advantage of opportunities and potentially meeting our financial obligations as they come due.
We are subject to legal proceedings and regulatory inquiries, and we may be named in additional legal proceedings or become involved in regulatory inquiries in the future, all of which are costly, distracting to our core business and could result in an unfavorable outcome, or a material adverse effect on our business, financial condition, results of operations, cash flows or the trading prices for our securities.
We are involved in legal proceedings and receive inquiries from regulatory agencies. As the global economy has changed and our business has evolved, we have seen an increase in litigation activity and regulatory inquiries. Like many other high technology companies, the number and frequency of inquiries from U.S. and foreign regulatory agencies we have received regarding our business and our business practices, and the business practices of others in our industry, have increased in recent years. In the event that we are involved in significant disputes or are the subject of a formal action by a regulatory agency, we could be exposed to costly and time consuming legal proceedings that could result in any number of outcomes. Any claims or regulatory actions initiated by or against us, whether successful or not, could result in expensive costs of defense, costly damage awards, injunctive relief, increased costs of business, fines or orders to change certain business practices, significant dedication of management time, diversion of significant operational resources, or otherwise harm our business. In any of these cases, our financial results, results of operations, cash flows or the trading prices for our securities could be negatively impacted.
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Changes in existing financial accounting standards or practices, or taxation rules or practices may adversely affect our results of operations.
Changes in existing accounting or taxation rules or practices, new accounting pronouncements or taxation rules, or varying interpretations of current accounting pronouncements or taxation practice could have a significant adverse effect on our results of operations or the manner in which we conduct our business. Further, such changes could potentially affect our reporting of transactions completed before such changes are effective.
For example, the U.S.-based Financial Accounting Standards Board (“FASB”) is currently working together with the International Accounting Standards Board (“IASB”) on several projects to further align accounting principles and facilitate more comparable financial reporting between companies who are required to follow U.S. Generally Accepted Accounting Principles (“GAAP”) under SEC regulations and those who are required to follow International Financial Reporting Standards ("IFRS") outside of the U.S. These efforts by the FASB and IASB may result in different accounting principles under GAAP that may result in materially different financial results for us in areas including, but not limited to principles for recognizing revenue and lease accounting.
It is not clear if or when these potential changes in accounting principles may become effective, whether we have the proper systems and controls in place to accommodate such changes and the impact that any such changes may have on our consolidated financial position, results of operations and cash flows. In addition, as we evolve and change our business and sales models, we are currently unable to determine how these potential changes may impact our new models, particularly in the area of revenue recognition.
We are investing in resources to update and improve our information technology systems. Should our investments not succeed, or if delays or other issues with new or existing internal technology systems disrupt our operations, our business model transition could be compromised and our business could be harmed.
We rely on our network and data center infrastructure, technology systems and our websites for our development, marketing, operational, support, sales, accounting and financial reporting activities. We continually invest resources to update and improve these systems and environments in order to meet the growing and evolving requirements of our business and customers. In particular, our transition to cloud-based products and a subscription only business model requires considerable investment in the development of technologies, and back office systems for technical, financial, compliance and sales resources to enable a scalable organization.
Such improvements are often complex, costly and time consuming. In addition, such improvements can be challenging to integrate with our existing technology systems, or uncover problems with our existing technology systems. Unsuccessful implementation of hardware or software updates and improvements could result in disruption in our business operations, loss of revenue, errors in our accounting and financial reporting or damage to our reputation and compromise our business model transition.
In preparing our financial statements we make certain assumptions, judgments and estimates that affect amounts reported in our consolidated financial statements, which, if not accurate, may significantly impact our financial results.
We make assumptions, judgments and estimates for a number of items, including the fair value of financial instruments, goodwill, long-lived assets and other intangible assets, the realizability of deferred tax assets and the fair value of stock awards. We also make assumptions, judgments and estimates in determining the accruals for employee related liabilities including commissions, bonuses, and sabbaticals; and in determining the accruals for uncertain tax positions, partner incentive programs, product returns reserves, allowances for doubtful accounts, asset retirement obligations and legal contingencies. These assumptions, judgments and estimates are drawn from historical experience and various other factors that we believe are reasonable under the circumstances as of the date of the consolidated financial statements. Actual results could differ materially from our estimates, and such differences could significantly impact our financial results.
Our financial results could be negatively impacted if our tax positions are overturned by tax authorities.
We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Our effective tax rate is primarily based on our expected geographic mix of earnings, statutory rates, intercompany transfer pricing, and enacted tax rules. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions on a worldwide basis. We believe our tax positions, including intercompany transfer pricing policies, are
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consistent with the tax laws in the jurisdictions in which we conduct our business. It is possible that these positions may be overturned by jurisdictional tax authorities and may have a significant impact on our effective tax rate.
We rely on third party technologies and if we are unable to use or integrate these technologies, our product and service development may be delayed and our financial results negatively impacted.
We rely on certain software that we license from third parties, including software that is integrated with internally developed software and used in our products to perform key functions. These third-party software licenses may not continue to be available on commercially reasonable terms, and the software may not be appropriately supported, maintained or enhanced by the licensors. The loss of licenses to, or inability to support, maintain and enhance any such software could result in increased costs, or in delays or reductions in product shipments until equivalent software can be developed, identified, licensed and integrated, which would likely harm our business.
Disruptions with licensing relationships and third party developers could adversely impact our business.
We license certain key technologies from third parties. Licenses may be restricted in the term or the use of such technology in ways that negatively affect our business. Similarly, we may not be able to obtain or renew license agreements for key technology on favorable terms, if at all, and any failure to do so could harm our business.
Our business strategy has historically depended in part on our relationships with third-party developers who provide products that expand the functionality of our design software. Some developers may elect to support other products or may experience disruption in product development and delivery cycles or financial pressure during periods of economic downturn. In particular markets, such disruptions have in the past, and would likely in the future, negatively impact these third-party developers and end users, which could harm our business.
Additionally, technology created by outsourced product development, whether outsourced to third parties or developed externally and transferred to us through business or technology acquisitions, have certain additional risks such as effective integration into existing products, adequate transfer of technology know-how and ownership and protection of transferred intellectual property.
As a result of our strategy of partnering with other companies for product development, our product delivery schedules could be adversely affected if we experience difficulties with our product development partners.
We partner with certain independent firms and contractors to perform some of our product development activities. We believe our partnering strategy allows us to, among other things, achieve efficiencies in developing new products and maintaining and enhancing existing product offerings. Our partnering strategy creates a dependency on such independent developers. Independent developers, including those who currently develop products for us in the U.S. and throughout the world, may not be able or willing to provide development support to us in the future. In addition, use of development resources through consulting relationships, particularly in non-U.S. jurisdictions with developing legal systems, may be adversely impacted by, and expose us to risks relating to, evolving employment, export and intellectual property laws. These risks could, among other things, expose our intellectual property to misappropriation and result in disruptions to product delivery schedules.
Our business may be significantly disrupted upon the occurrence of a catastrophic event.
Our business is highly automated and relies extensively on the availability of our network and data center infrastructure, our internal technology systems and our websites. We also rely on hosted computer services from third parties for services that we provide to our customers and computer operations for our internal use. The failure of our systems or hosted computer services due to a catastrophic event, such as an earthquake, fire, flood, tsunami, weather event, telecommunications failure, power failure, cyber attack or war, could adversely impact our business, financial results and financial condition. We have developed disaster recovery plans and maintain backup systems in order to reduce the potential impact of a catastrophic event, however there can be no assurance that these plans and systems would enable us to return to normal business operations. In addition, any such event could negatively impact a country or region in which we sell our products. This could in turn decrease that country's or region's demand for our products, thereby negatively impacting our financial results.
2016 Form 10-K 30
If we were required to record an impairment charge related to the value of our long-lived assets, or an additional valuation allowance against our deferred tax assets, our results of operations would be adversely affected.
Our long-lived assets are tested for impairment if indicators of impairment exist. If impairment testing shows that the carrying value of our long-lived assets exceeds their estimated fair values, we would be required to record a non-cash impairment charge, which would decrease the carrying value of our long-lived assets, as the case may be, and our results of operations would be adversely affected. Our deferred tax assets include net operating loss and tax credit carryforwards that can be used to offset taxable income and reduce income taxes payable in future periods. Each quarter, we assess the need for a valuation allowance, considering both positive and negative evidence to determine whether all or a portion of the deferred tax assets are not more likely than not to be realized and determined during our second quarter of fiscal 2016 that our U.S. deferred tax assets were no longer more likely than not to be realized. Changes in the amount of the valuation allowance could result in a material noncash expense or benefit in the period in which the valuation allowance is adjusted and our results of operations could be materially affected. We will continue to perform these tests and any future adjustments may have a material effect on our financial condition and results of operations.
We issued $1.5 billion aggregate principal amount of unsecured notes in debt offerings and have an existing $400.0 million revolving credit facility, and expect to incur other debt in the future, which may adversely affect our financial condition and future financial results.
In December 2012, we issued 1.95% notes due December 15, 2017 in an aggregate principal amount of $400.0 million and 3.6% notes due December 15, 2022 in an aggregate principal amount of $350.0 million. In June 2015, we issued 3.125% notes due June 15, 2020 in an aggregate principal amount of $450.0 million and 4.375% notes due June 15, 2025 in an aggregate principal amount of $300.0 million. As the debt matures, we will have to expend significant resources to either repay or refinance these notes. If we decide to refinance the notes, we may be required to do so on different or less favorable terms or we may be unable to refinance the notes at all, both of which may adversely affect our financial condition.
We also have a $400.0 million revolving credit facility. As of January 31, 2016, we had no outstanding borrowings on the line of credit. Although we have no current plans to borrow under this credit facility, we may use the proceeds of any future borrowing for general corporate purposes, or for future acquisitions or expansion of our business. Our existing and future levels of indebtedness may adversely affect our financial condition and future financial results by, among other things:
• | increasing our vulnerability to adverse changes in general economic, industry and competitive conditions; |
• | requiring the dedication of a greater than expected portion of our expected cash from operations to service our indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and acquisitions; and |
• | limiting our flexibility in planning for, or reacting to, changes in our business and our industry. |
We are required to comply with the covenants set forth in our unsecured notes and revolving credit facility. Our ability to comply with these covenants may be affected by events beyond our control. If we breach any of the covenants and do not obtain a waiver from the note holders or lenders, then, subject to applicable cure periods, any outstanding indebtedness may be declared immediately due and payable. In addition, changes by any rating agency to our credit rating may negatively impact the value and liquidity of our securities. Under certain circumstances, if our credit ratings are downgraded or other negative action is taken, the interest rate payable by us under our revolving credit facility could increase. Downgrades in our credit ratings could also restrict our ability to obtain additional financing in the future and could affect the terms of any such financing.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None
2016 Form 10-K 31
ITEM 2. | PROPERTIES |
We lease 2,043,000 square feet of office space in 143 locations in the United States and internationally through our foreign subsidiaries. In addition, we own 107,000 square feet of office space in six locations internationally through our foreign subsidiaries. Our executive offices and corporate headquarters are located in leased office space in San Rafael, California. Our San Rafael facilities consist of 220,000 square feet under leases that have expiration dates ranging from December 2017 to December 2019. We and our foreign subsidiaries lease additional space in various locations throughout the world for local sales, product development, and technical support personnel. In February 2016, we announced a restructuring plan that will result in the consolidation of certain leased facilities.
All facilities are in good condition. Our facilities, excluding those in restructuring, are operating at capacities averaging 82% occupancy worldwide as of January 31, 2016. We believe that our existing facilities and offices are adequate to meet our requirements for the foreseeable future. See Note 8, “Commitments and Contingencies,” in the Notes to Consolidated Financial Statements for more information about our lease commitments.
ITEM 3. | LEGAL PROCEEDINGS |
We are involved in a variety of claims, suits, investigations, and proceedings in the normal course of business activities including claims of alleged infringement of intellectual property rights, commercial, employment, piracy prosecution, business practices, and other matters. In our opinion, resolution of pending matters is not expected to have a material adverse impact on our consolidated results of operations, cash flows, or financial position. Given the unpredictable nature of legal proceedings, there is a reasonable possibility that an unfavorable resolution of one or more such proceedings could in the future materially affect our results of operations, cash flows, or financial position in a particular period, however, based on the information known by us as of the date of this filing and the rules and regulations applicable to the preparation of our financial statements, any such amount is either immaterial or it is not possible to provide an estimated amount of any such potential loss.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
2016 Form 10-K 32
PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on the NASDAQ Global Select Market under the symbol ADSK. The following table lists the intraday high and low sales prices for each quarter in the last two fiscal years.
High | Low | ||||||
Fiscal 2016 | |||||||
First Quarter | $ | 65.00 | $ | 53.02 | |||
Second Quarter | 59.42 | 49.50 | |||||
Third Quarter | 55.82 | 42.06 | |||||
Fourth Quarter | 65.78 | 45.04 | |||||
Fiscal 2015 | |||||||
First Quarter | $ | 58.68 | $ | 44.76 | |||
Second Quarter | 57.59 | 46.09 | |||||
Third Quarter | 58.75 | 48.38 | |||||
Fourth Quarter | 63.00 | 53.89 | |||||
Dividends
We did not declare any cash or stock dividends in either fiscal 2016 or fiscal 2015. We anticipate that, for the foreseeable future, we will not pay any cash or stock dividends.
Stockholders
As of January 31, 2016, the number of common stockholders of record was 458. Because many of our shares of common stock are held by brokers or other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by the record holders.
Issuer Purchases of Equity Securities
Autodesk's stock repurchase program is largely to help offset the dilution from the issuance of stock under our employee stock plans and for such other purposes as may be in the interests of Autodesk and its stockholders, and has the effect of returning excess cash generated from our business to stockholders. The number of shares acquired and the timing of the purchases are based on several factors, including general market and economic conditions, the number of employee stock option exercises and restricted stock unit issuances, the trading price of Autodesk common stock, cash on hand and available in the United States, cash requirements for acquisitions, and Company defined trading windows.During the three and twelve months ended January 31, 2016, we repurchased 1.6 million and 8.5 million shares, respectively, of our common stock. At January 31, 2016, 6.3 million shares remained available for repurchase under the repurchase program approved by the Board of Directors. This program does not have a fixed expiration date. See Note 9, “Stockholders' Equity,” in the Notes to Consolidated Financial Statements for further discussion.
2016 Form 10-K 33
The following table provides information about the repurchase of common stock in open-market transactions during the quarter ended January 31, 2016:
(Shares in millions) | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(2) | ||||||||
November 1- November 30 | 0.2 | $ | 62.95 | 0.2 | 7.7 | |||||||
December 1 - December 31 | 1.3 | 62.16 | 1.3 | 6.4 | ||||||||
January 1 - January 31 | 0.1 | 59.84 | 0.1 | 6.3 | ||||||||
Total | 1.6 | $ | 62.16 | 1.6 | ||||||||
____________________
(1) | Represents shares purchased in open-market transactions under the stock repurchase program approved by the Board of Directors. |
(2) | These amounts correspond to the plan approved by the Board of Directors in June 2012 that authorizes the repurchase of 30.0 million shares. The plan does not have a fixed expiration date. |
Sales of Unregistered Securities
There were no sales of unregistered securities during the three months ended January 31, 2016.
2016 Form 10-K 34
Company Stock Performance
The following graph shows a five-year comparison of cumulative total return (equal to dividends plus stock appreciation) for our Common Stock, the Standard & Poor’s 500 Stock Index, and the Dow Jones U.S. Software Index. The following graph and related information will not be deemed to be “soliciting material” or to be “filed” with the SEC, nor will such information be incorporated by reference into any filing pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate it by reference into such filing.
Comparison of Five Year Cumulative Total Stockholder Return (1)
___________________
(1) | Assumes $100 invested on January 31, 2011, in Autodesk’s stock, the Standard & Poor’s 500 Stock Index, and the Dow Jones U.S. Software Index, with reinvestment of all dividends. Total stockholder returns for prior periods are not an indication of future investment returns. |
2016 Form 10-K 35
ITEM 6. | SELECTED FINANCIAL DATA |
The following selected consolidated financial data is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below. The financial data for the fiscal years ended January 31, 2016 and 2015 are derived from, and are qualified by reference to, the audited consolidated financial statements that are included in this Form 10-K. The Consolidated Statement of Operations and the Consolidated Statement of Cash Flows data for the year ended January 31, 2014 are derived from, and are qualified by reference to, the audited consolidated financial statements that are included in this Form 10-K. The Consolidated Balance Sheet data for the fiscal year ended January 31, 2014 and the remaining financial data for the fiscal years ended January 31, 2013 and 2012 are derived from audited, consolidated financial statements which are not included in this Form 10-K.
Fiscal year ended January 31, | |||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
(In millions, except per share data) | |||||||||||||||||||
For the Fiscal Year: | |||||||||||||||||||
Net revenue | $ | 2,504.1 | $ | 2,512.2 | $ | 2,273.9 | $ | 2,312.2 | $ | 2,215.6 | |||||||||
Income from operations | 1.3 | 120.7 | 284.8 | 305.9 | 355.6 | ||||||||||||||
Net (loss) income | (330.5 | ) | 81.8 | 228.8 | 247.4 | 285.3 | |||||||||||||
Cash flow from operations | 414.0 | 708.1 | 563.5 | 559.1 | 573.5 | ||||||||||||||
Common Stock Data: | |||||||||||||||||||
Basic net (loss) income per share | $ | (1.46 | ) | $ | 0.36 | $ | 1.02 | $ | 1.09 | $ | 1.25 | ||||||||
Diluted net (loss) income per share | (1.46 | ) | 0.35 | 1.00 | 1.07 | 1.22 | |||||||||||||
Dividends paid per share | — | — | — | — | — | ||||||||||||||
At Year End: | |||||||||||||||||||
Total assets (1) | $ | 5,515.3 | $ | 4,909.7 | $ | 4,589.9 | $ | 4,302.4 | $ | 3,227.8 | |||||||||
Long-term liabilities | 2,304.7 | 1,294.5 | 1,262.0 | 1,221.5 | 390.8 | ||||||||||||||
Stockholders’ equity | 1,619.6 | 2,219.2 | 2,261.5 | 2,043.2 | 1,882.9 | ||||||||||||||
_______________
(1) | Effective in the second quarter of fiscal 2016, Autodesk elected to retrospectively adopt ASU 2015-03, regarding Subtopic 835-30 “Interest - Imputation of Interest". The adoption resulted in the reclassification of debt issuance costs from other assets to a reduction of long term notes payable, net for the prior periods presented. |
2016 Form 10-K 36
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The discussion in our MD&A and elsewhere in this Form 10-K contains trend analyses and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are any statements that look to future events and consist of, among other things, our business strategies, including those discussed in “Strategy” and “Overview of Fiscal 2015” and “Business Outlook” below, anticipated future net revenue, future GAAP and non-GAAP net (loss) income per share, operating margin, operating expenses, billings, annualized recurring revenue, annualized revenue per subscription, other future financial results (by product type and geography) and subscriptions, the effectiveness of our efforts to successfully manage transitions to new business models and markets, our expectations regarding the continued transition of our business model, our ability to increase our subscription base, expected market trends, including the growth of cloud, mobile, and social computing, the effect of unemployment and availability of credit, our expectations for our restructuring, the effects of mixed global economic conditions, the effects of revenue recognition, our backlog, expected trends in certain financial metrics, including expenses, the impact of acquisitions and investment activities, expectations regarding our cash needs, the effects of fluctuations in exchange rates and our hedging activities on our financial results, our ability to successfully expand adoption of our products, our ability to gain market acceptance of new businesses and sales initiatives, our ability to successfully increase sales of product suites as part of our overall sales strategy, the impact of economic volatility and geopolitical activities in certain countries, particularly emerging economy countries, and the effects of potential non-cash charges on our financial results and the resulting effect on our financial results. In addition, forward-looking statements also consist of statements involving expectations regarding product capability and acceptance, continuation of our stock repurchase program, remediations to our controls environment, statements regarding our liquidity and short-term and long-term cash requirements, as well as statements involving trend analyses and statements including such words as “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” and similar expressions or the negative of these terms or other comparable terminology. These forward-looking statements speak only as of the date of this Annual Report on Form 10-K and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth above in Item 1A, “Risk Factors,” and in our other reports filed with the U.S. Securities and Exchange Commission. We assume no obligation to update the forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made, except as required by law.
Strategy
Autodesk’s vision is to help people imagine, design, and create a better world. We do this by developing software and services for the world’s designers, architects, engineers, digital artists, professionals, and non-professionals alike—the people who imagine, design, and create the world's products, buildings, infrastructure, films, and games. Autodesk serves professional customers in three primary markets: architecture, engineering, and construction; manufacturing; and digital media and entertainment.
Our goal is to provide our customers with the world’s most innovative, and engaging design software and services. Our product and services portfolio allows our customers to digitally visualize, simulate, and analyze their projects, helping them to better understand the consequences of their design decisions; save time, money, and resources; and become more innovative.
Autodesk was founded during the platform transition from mainframes and engineering workstations to personal computers. We developed and sustained a compelling value proposition based upon desktop software for the personal computer. Just as the transition from mainframes to personal computers transformed the industry over 30 years ago, we believe our industry is undergoing a similar transition from the personal computer to cloud, mobile, and social computing. To address this transition we have accelerated our move to the cloud and mobile devices and are offering more flexible licensing. For example, Autodesk BIM 360, PLM 360, Fusion 360, and AutoCAD360 Pro, some of our cloud based offerings, provide tools, including mobile and social capabilities, to help streamline design, collaboration, and data management processes. We believe that customer adoption of these new offerings will continue to grow as customers across a range of industries begin to take advantage of the scalable computing power and flexibility provided through these new services.
Our strategy is to lead the industries we serve to cloud based technologies and business models. This entails both a technological shift and a business model shift. We now have term-based license offerings, including desktop subscriptions, for certain products and flexible enterprise offerings. These offerings are designed to give our customers even more flexibility with how they use our products and service offerings and to address new types of customers such as project-based users and small businesses. As part of this transition, we discontinued licensing upgrades effective March 6, 2015, discontinued selling new
2016 Form 10-K 37
perpetual licenses of most individual software products effective February 1, 2016, and plan to discontinue selling new perpetual licenses of suites effective August 1, 2016.
With the discontinuation of the sale of most perpetual licenses, we are accelerating our transition away from selling a hybrid of perpetual licenses and term-based offerings toward a single subscription model. During the transition, billings, revenue, gross margin, operating margin, earnings (loss) per share, deferred revenue, and cash flow from operations will be impacted as more revenue is recognized ratably rather than up front and as new offerings bring a wider variety of price points.
As we progress through the business model transition, billings and reported revenue will become less relevant to measure the success of the business as perpetual license sales are discontinued in favor of subscription offerings, which have considerably lower up-front prices. Annualized recurring revenue ("ARR") and subscription additions will better reflect business momentum and provide additional transparency into the transition. To further analyze progress, we will also disaggregate our growth in these metrics between the original maintenance subscription model ("maintenance") and the new desktop, cloud and mobile, and enterprise flexible license agreements ("new model"). We expect maintenance subscriptions to peak as perpetual license sales end this year, and we expect them to decline slowly over time.
Another key element of our strategy is increasing our global penetration. Emerging economies, such as Brazil, Russia, India, and China, represent a construction and manufacturing opportunity. Emerging economies face many of the challenges that our design technology can help address, including infrastructure build-out and innovative design and manufacturing. However, conducting business in these countries presents significant challenges, including economic volatility, geopolitical risk, local competition, limited intellectual property protection, poorly developed business infrastructure, scarcity of talent, software piracy, and different purchase patterns as compared to the developed world. We believe that our move to the new model increases the number of potential markets for Autodesk. By connecting all of the participants in the process of designing and making things, we can sell new offerings into the construction and manufacturing spaces. In fiscal 2016, revenue from emerging economies decreased 4% as compared to fiscal 2015 and represented 15% of our total net revenue for both fiscal 2016 and fiscal 2015, respectively.
Today, complex challenges such as globalization, urbanization, and sustainable design are driving our customers to new levels of performance and competitiveness, and we are committed to helping them address those challenges and take advantage of new opportunities. To achieve these goals, we are capitalizing on two of our strongest competitive advantages: our ability to bring advanced technology to mainstream markets, and the breadth and depth of our product portfolio.
We bring powerful new design capabilities to volume markets. Our products are designed to be easy-to-learn and use, and to provide customers with a low cost of deployment, a low total cost of access to our software offerings, and a rapid return on investment. In addition, our software architecture allows for extensibility and integration with other products. The breadth of our technology and product line gives us a unique competitive advantage because it allows our customers to address a wide variety of problems in ways that transcend industry and disciplinary boundaries. This is particularly important in helping our customers address the complex challenges mentioned above. We also believe that our technological leadership and global brand recognition have positioned us well for long-term growth and industry leadership.
In addition to the competitive advantages afforded by our technology, our large global network of distributors, resellers, third-party developers, customers, educational institutions, educators, and students is a key competitive advantage. This network of partners and relationships provides us with a broad and deep reach into volume markets around the world. Our distributor and reseller network is extensive and provides our customers with the resources to purchase, deploy, learn, and support our products quickly and easily. We have a significant number of registered third-party developers who create products that work well with our products and extend them for a variety of specialized applications.
Autodesk is committed to helping fuel a lifelong passion for design in students of all ages. We offer free educational licenses of Autodesk software worldwide to students, educators, and educational institutions. In fiscal 2016, we initiated Project Ignite, a free and open learning platform delivering a unique package of technology, learning content, and services created specifically for the classroom. The Project Ignite learning platform additionally offers classroom bundles, which include hardware such as 3D printers and electronics kits along with professional development and training services to help educators. Through Autodesk Design Academy, we provide secondary and postsecondary school markets hundreds of standards-aligned class projects to support design-based disciplines in Science, Technology, Engineering, Digital Arts, and Math (STEAM) while using Autodesk's professional-grade 3D design, engineering and entertainment software used in industry. Beginning in the second quarter of fiscal 2016, we have also made Autodesk Design Academy curricula available on iTunes U. Our intention is to make Autodesk software ubiquitous and the design software of choice for those poised to become the next generation of professional users.
2016 Form 10-K 38
Our strategy includes improving our product functionality and expanding our product offerings through internal development as well as through the acquisition of products, technology, and businesses. Acquisitions often increase the speed at which we can deliver product functionality to our customers; however, they entail cost and integration challenges and may, in certain instances, negatively impact our operating margins. We continually review these trade-offs in making decisions regarding acquisitions. We currently anticipate that we will continue to acquire products, technology, and businesses as compelling opportunities become available.
Our strategy depends upon a number of assumptions to successfully make the transition toward new cloud and mobile platforms, including the related technology and business model shifts; making our technology available to mainstream markets; leveraging our large global network of distributors, resellers, third-party developers, customers, educational institutions, and students; improving the performance and functionality of our products; and adequately protecting our intellectual property. If the outcome of any of these assumptions differs from our expectations, we may not be able to implement our strategy, which could potentially adversely affect our business. For further discussion regarding these and related risks see Part I, Item 1A, “Risk Factors.”
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles. In preparing our Consolidated Financial Statements, we make assumptions, judgments, and estimates that can have a significant impact on amounts reported in our Consolidated Financial Statements. We base our assumptions, judgments, and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments, and estimates. Our significant accounting policies are described in Note 1, “Business and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements. We believe that of all our significant accounting policies, the following policies involve a higher degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection is probable. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.
For multiple element arrangements containing only software and software-related elements, we allocate the sales price among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on our vendor-specific objective evidence (“VSOE”) of fair value. VSOE is the price charged when an element is sold separately or a price set by management with the relevant authority. If we do not have VSOE of an undelivered software license, we defer revenue recognition on the entire sales arrangement until all elements for which we do not have VSOE are delivered. If we do not have VSOE for undelivered maintenance or services, the revenue for the arrangement is recognized over the longest contractual service period in the arrangement. We are required to exercise judgment in determining whether VSOE exists for each undelivered element based on whether our pricing for these elements is sufficiently consistent.
For multiple elements arrangements involving non-software elements, including cloud subscription services, our revenue recognition policy is based upon the accounting guidance contained in ASC 605, Revenue Recognition. For these arrangements, we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the non-software elements. We then further allocate consideration within the software group to the respective elements within that group using the residual method as described above. We exercise judgment and use estimates in connection with the determination of the amount of revenue to be recognized in each accounting period.
We allocate the total arrangement consideration among the various elements based on a selling price hierarchy. The selling price for a deliverable is based on its VSOE if available, third-party evidence ("TPE") if VSOE is not available, or the best estimated selling price ("BESP") if neither VSOE nor TPE is available. BESP represents the price at which Autodesk would transact for the deliverable if it were sold regularly on a standalone basis. To establish BESP for those elements for which neither VSOE nor TPE are available, we perform a quantitative analysis of pricing data points for historical standalone transactions involving such elements for a twelve-month period. As part of this analysis, we monitor and evaluate the BESP against actual pricing to ensure that it continues to represent a reasonable estimate of the standalone selling price, considering several other external and internal factors including, but not limited to, pricing and discounting practices, contractually stated prices, the geographies in which we offer our products and services, and the type of customer (i.e. distributor, value-added
2016 Form 10-K 39
reseller, and direct end user, among others). We analyze BESP at least annually or on a more frequent basis if a significant change in our business necessitates a more timely analysis or if we experience significant variances in our selling prices.
In situations when we have multiple contracts with a single counterparty, we use the guidance in ASC 985-605 to evaluate both the form and the substance of the arrangements to determine if they should be combined and accounted for as one arrangement or as separate arrangements.
Our assessment of the likelihood of collection is also a critical factor in determining the timing of revenue recognition. If we do not believe that collection is probable, the revenue will be deferred until the earlier of when collection is deemed probable or payment is received.
Our indirect channel model includes both a two-tiered distribution structure, where distributors sell to resellers, and a one-tiered structure where Autodesk sells directly to resellers. Our product license revenue from distributors and resellers are generally recognized at the time title to our product passes to the distributor, in a two-tiered structure, or reseller, in a one-tiered structure, provided all other criteria for revenue recognition are met. This policy is predicated on our ability to estimate sales returns, among other criteria. We are also required to evaluate whether our distributors and resellers have the ability to honor their commitment to make fixed or determinable payments, regardless of whether they collect payment from their customers. Our policy also presumes that we have no significant performance obligations in connection with the sale of our product licenses by our distributors and resellers to their customers. If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.
As part of the indirect channel model, we have a partner incentive program that uses quarterly attainment of monetary rewards to motivate distributors and resellers to achieve mutually agreed upon business goals in a specified time period. A portion of these incentives reduce license and other revenue in the current period. The remainder, which relates to incentives on our Subscription Program, is recorded as a reduction to deferred revenue in the period the subscription transaction is billed and subsequently recognized as a reduction to subscription revenue over the contract period. These incentive balances do not require significant assumptions or judgments. The reserves associated with the partner incentive program are treated on the balance sheet as either contra account receivable (when due to distributors and direct resellers) or accounts payable (when due to indirect resellers).
Marketable Securities. As described in Note 2, “Financial Instruments,” in the Notes to the Consolidated Financial Statements, our investments in marketable securities are measured at the end of each reporting period and reported at fair value. Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In determining the fair value of our investments we are sometimes required to use various alternative valuation techniques. Inputs to valuation techniques are either observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs have created the following fair value hierarchy:
• | Level 1 - Quoted prices for identical instruments in active markets; |
• | Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and |
• | Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
This hierarchy requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value. This is generally true for our cash and cash equivalents and the majority of our marketable securities, which we consider to be Level 1 assets and Level 2 assets. However, determining the fair value of marketable securities when observable inputs are not available (Level 3) requires significant judgment. For example, we use probability weighted discounted cash flow models, in which some of the inputs are unobservable in the market, to estimate the fair value of our convertible debt securities. These assumptions are inherently subjective and involve significant management judgment. Whenever possible, we use observable market data and rely on unobservable inputs only when observable market data is not available, when determining fair value.
2016 Form 10-K 40
All of Autodesk’s marketable securities are subject to a periodic impairment review. We recognize an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary. Autodesk considers various factors in determining whether to recognize an impairment charge, including the length of time and extent to which the fair value has been less than Autodesk’s cost basis, the financial condition and near-term prospects of the investee, and Autodesk’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market value.
Business Combinations. We allocate the fair value of the consideration transferred to the assets and liabilities acquired, as well as to in-process research and development based on their estimated fair values at the acquisition date. Any residual purchase price is recorded as goodwill. The purchase price allocation requires us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets and deferred revenue obligations.
Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates used in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
• | future expected cash flows from sales, maintenance agreements, and acquired developed technologies; |
• | the acquired company’s trade name and customer relationships as well as assumptions about the period of time the acquired trade name and customer relationships will continue to be used in the combined company’s product portfolio; |
• | expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; and |
• | discount rates used to determine the present value of estimated future cash flows. |
These estimates are inherently uncertain and unpredictable, and if different estimates were used the purchase price for the acquisition could be allocated to the acquired assets and liabilities differently from the allocation that we have made. In addition, unanticipated events and circumstances may occur which may affect the accuracy or validity of such estimates, and if such events occur we may be required to record a charge against the value ascribed to an acquired asset or an increase in the amounts recorded for assumed liabilities.
Goodwill. When we acquire a business, a portion of the consideration transferred is typically allocated to acquired technology and other identifiable intangible assets, such as customer relationships and developed technology. The excess of the consideration transferred over the net of the acquisition-date fair value of identifiable assets acquired and liabilities assumed is recorded as goodwill. The amounts allocated to acquired technology and other intangible assets represent our estimates of their fair values at the acquisition date. We amortize the acquired technology and other intangible assets with finite lives over their estimated useful lives. The estimation of acquisition-date fair values of intangible assets and their useful lives requires us to make assumptions and judgments, including but not limited to an evaluation of macroeconomic conditions as they relate to our business, industry and market trends, projections of future cash flows, and appropriate discount rates.
We test goodwill for impairment annually in our fourth fiscal quarter or sooner should events or changes in circumstances indicate potential impairment. An optional assessment of qualitative factors of impairment (“optional assessment”) can be performed prior to necessitating a two-step quantitative impairment test. Should the optional assessment be performed for any given fiscal year, qualitative factors to consider include cost factors; financial performance; legal, regulatory, contractual, political, business, or other factors; entity specific factors; industry and market considerations, macroeconomic conditions, and other relevant events and factors affecting the reporting unit. If, after assessing the totality of events or circumstances, it is more likely than not that the fair value of the reporting unit is greater than its carrying value, then performing the two-step impairment test is unnecessary.
Under the two-step quantitative impairment test, we use discounted cash flow models that include assumptions regarding projected cash flows. Variances in these assumptions could have a significant impact on our conclusion as to whether goodwill is impaired, or the amount of any impairment charge. Impairment charges, if any, result from instances where the fair values of net assets associated with goodwill are less than their carrying values. As changes in business conditions and our assumptions occur, we may be required to record impairment charges.
2016 Form 10-K 41
For our annual impairment assessment in fiscal 2016, we utilized the optional assessment for the following reporting units: Platform Solutions and Emerging Business (“PSEB”), Manufacturing ("MFG"), Architecture, Engineering, and Construction ("AEC"), and Media and Entertainment (“M&E”). Based on a review of the qualitative factors described above, we determined that it was more likely than not that the fair value of each of the reporting units exceeded the carrying value. As a result, we concluded that performing the two-step impairment test was not necessary, and therefore the goodwill of our PSEB, MFG, AEC, and M&E reporting units were not impaired during the fiscal year ended January 31, 2016.
For the Delcam reporting unit, we deemed the two-step impairment test was necessary and used a discounted cash flow model which included assumptions regarding projected cash flows. Based on this testing, we estimated fair value was 16% in excess of the carrying value for Delcam, and therefore the goodwill was not impaired during the fiscal year ended January 31, 2016.
Estimating the fair value of the reporting units requires the use of estimates and significant judgments regarding future cash flows that are based on a number of factors including actual operating results, forecasted billings, revenue, and spend targets, discount rate assumptions, and long-term growth rate assumptions. The estimates and judgments described above could adversely change in future periods and we cannot provide absolute assurance that all of the targets will be achieved, which could lead to future impairment charges.
Realizability of Long-Lived Assets. We assess the realizability of our long-lived assets and related intangible assets, other than goodwill, annually during the fourth fiscal quarter, or sooner should events or changes in circumstances indicate the carrying values of such assets may not be recoverable. We consider the following factors important in determining when to perform an impairment review: significant under-performance of a business or product line relative to budget; shifts in business strategies which affect the continued uses of the assets; significant negative industry or economic trends; and the results of past impairment reviews. When such events or changes in circumstances occur, we assess recoverability of these assets.
We assess recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If impairment indicators were present based on our undiscounted cash flow models, which include assumptions regarding projected cash flows, we would perform a discounted cash flow analysis to assess impairments on long-lived assets. Variances in these assumptions could have a significant impact on our conclusion as to whether an asset is impaired or the amount of any impairment charge. Impairment charges, if any, result in situations where any fair values of these assets are less than their carrying values.
In addition to our recoverability assessments, we routinely review the remaining estimated useful lives of our long-lived assets. Any reduction in the useful life assumption will result in increased depreciation and amortization expense in the quarter when such determinations are made, as well as in subsequent quarters.
We will continue to evaluate the values of our long-lived assets in accordance with applicable accounting rules. As changes in business conditions and our assumptions occur, we may be required to record impairment charges.
Income Taxes. We account for income taxes under the asset and liability approach. Under this method, deferred tax assets, including those related to tax loss carryforwards and credits, and deferred tax liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We recognize the tax benefit for an uncertain tax position when it meets a more likely than not threshold. We recognize potential accrued interest and penalties related to unrecognized tax benefits as income tax expense.
A valuation allowance is recorded to reduce deferred tax assets when management cannot conclude that it is more likely than not that the net deferred tax asset will be recovered. The valuation allowance is determined by assessing both positive and negative evidence to determine whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. Significant judgment is required in determining whether the valuation allowance should be recorded against deferred tax assets. In assessing the need for valuation allowance, we consider all available evidence including past operating results and estimates of future taxable income. Beginning in the second quarter of fiscal 2016, we considered recent cumulative losses in the United States arising from the Company’s business model transition as a significant source of negative evidence. Considering this negative evidence and the absence of sufficient positive objective evidence that we would generate sufficient taxable income in our United States tax jurisdiction to realize the deferred tax assets, we determined that is was not more likely than not that the Company would realize US federal and state deferred tax assets and recorded a valuation allowance on our federal and state deferred tax assets. As we continually strive to optimize our overall business model, tax planning strategies may become feasible and prudent whereby management may determine that it is more
2016 Form 10-K 42
likely than not that the federal and state deferred tax assets will be realized; therefore, we will continue to evaluate the realizability of our net deferred tax assets each quarter, both in the US and in foreign jurisdictions, based on all available evidence, both positive and negative.
Stock-Based Compensation. We measure stock-based compensation cost at the grant date fair value of the award, and recognize expense ratably over the requisite service period, which is generally the vesting period. We estimate the fair value of certain stock-based payment awards (including grants of employee stock purchases related to the employee stock purchase plan) using either the Black-Scholes-Merton option-pricing model or a binomial-lattice model (e.g., Monte Carlo simulation model). To determine the grant-date fair value of our stock-based payment awards, we use a Black-Scholes model or the quoted stock price on the date of grant, unless the awards are subject to market conditions, in which case we use the Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved. These variables include our expected stock price volatility over the expected term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate for the expected term of the award, and expected dividends. The variables used in these models are reviewed on a quarterly basis and adjusted, as needed. Share-based compensation cost for restricted stock is measured on the closing fair market value of our common stock on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense in our Consolidated Statements of Operations.
Legal Contingencies. As described in Part I, Item 3, “Legal Proceedings” and Part II, Item 8, Note 8, “Commitments and Contingencies,” in the Notes to Consolidated Financial Statements, we are periodically involved in various legal claims and proceedings. We routinely review the status of each significant matter and assess our potential financial exposure. If the potential loss from any matter is considered probable and the amount can be reasonably estimated, we record a liability for the estimated loss. Because of inherent uncertainties related to these legal matters, we base our loss accruals on the best information available at the time. As additional information becomes available, we reassess our potential liability and may revise our estimates. Such revisions could have a material impact on future quarterly or annual results of operations.
Recently Issued Accounting Standards
See Part II, Item 8, Note 1, “Business and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition.
Overview of Fiscal 2016
Fiscal Year Ended January 31, 2016 | As a % of Net Revenue | Fiscal Year Ended January 31, 2015 | As a % of Net Revenue | ||||||||||
(in millions) | |||||||||||||
Net Revenue | $ | 2,504.1 | 100 | % | $ | 2,512.2 | 100 | % | |||||
Cost of revenue | 370.7 | 15 | % | 342.1 | 14 | % | |||||||
Gross Profit | 2,133.4 | 85 | % | 2,170.1 | 86 | % | |||||||
Operating expenses | 2,132.1 | 85 | % | 2,049.4 | 82 | % | |||||||
Income from Operations | $ | 1.3 | — | % | $ | 120.7 | 5 | % | |||||
We are undergoing a business model transition in which we will discontinue selling new perpetual licenses in favor of subscriptions and flexible license arrangements. During the transition, billings, revenue, gross margin, operating margin, EPS, deferred revenue, and cash flow from operations will be impacted as more revenue is recognized ratably rather than up front and as new offerings bring a wider variety of price points. In order to help better understand our financial performance during and after the transition, we have introduced several new metrics including recurring revenue, total subscriptions, ARR, and annualized revenue per subscription ("ARPS"). ARR and ARPS are performance metrics and should be viewed independently of revenue, deferred revenue, and net billings as ARR and ARPS are not intended to be combined with any of these items.
During fiscal 2016, net revenue decreased slightly as compared to the prior fiscal year, gross profit decreased 2%, and income from operations decreased 99%. Contributing to the year over year decrease in income from operations during fiscal 2016 was an increase in both operating expenses and cost of revenue and a decrease in license and other revenue, partially offset by an increase in subscription revenue. Areas of revenue growth year-over-year included increases in our AEC segment,
2016 Form 10-K 43
highlighted by an increase in our flexible enterprise offerings, our MFG segment, fueled by growth in Delcam and AutoCAD Mechanical, and the Americas geographic area. We also experienced growth in our total subscriptions and billings during fiscal 2016, as compared to fiscal 2015, primarily due to strong maintenance renewals and growth in new offerings such as desktop subscriptions and enterprise offerings. Offsetting these areas of growth were year-over-year revenue declines in our PSEB segment, many of our major products, particularly AutoCAD LT, and the EMEA and APAC geographic areas.
Income from operations for fiscal 2016 was negatively impacted by increased spend primarily from higher employee-related and cloud-related costs, as well as increased spending on other key initiatives.
The reasons for these changes are discussed below under the heading “Results from Operations.”
Revenue Analysis
Revenue from flagship products represented 45% and 48% of total net revenue during fiscal 2016 and fiscal 2015, respectively. Revenue from flagship products decreased by 5% as compared to the prior fiscal year. Revenue from suites represented 37% and 36% of total net revenue for fiscal 2016 and fiscal 2015, respectively, and remained flat compared to the prior fiscal year. Revenue from new and adjacent products represented 18% and 16% of total net revenue during fiscal 2016 and fiscal 2015, respectively. Revenue from new and adjacent products increased by 12% as compared to fiscal 2015.
We rely significantly upon major distributors and resellers in both the U.S. and international regions, including Tech Data Corporation and its global affiliates (collectively, “Tech Data”). Tech Data accounted for 25% of our consolidated net revenue during both fiscal 2016 and 2015, respectively. We believe our business is not substantially dependent on Tech Data. Our customers through Tech Data are the resellers and end users who purchase our software licenses and services. Should any of the agreements between Tech Data and us be terminated for any reason, we believe the resellers and end users who currently purchase our products through Tech Data would be able to continue to do so under substantially the same terms from one of our many other distributors without substantial disruption to our revenue.
Operating Margin Analysis
Income from operations decreased 99% in fiscal 2016 due to an $82.7 million or 4% increase in our operating expenses and a $28.6 million or 8% increase in cost of revenue, as compared to fiscal 2015. Our operating margin decreased to 0% for fiscal 2016 from 5% for fiscal 2015. The increase in cost of revenue was driven by employee related expenses as a result of increased employee headcount and product support costs. Also contributing to the increase in cost of revenue was an increase in cloud and hosting related costs in support of our business model transition. The increase in operating expenses between fiscal 2016 and 2015 was driven by higher employee related costs due to increased headcount and an increase in IT costs. Also impacting the increase in operating expenses during fiscal 2016 as compared to fiscal 2015 was an increase stock based compensation expense as a result of higher fair market value of awards granted.
Further discussion regarding the cost of revenue and operating expense activities are discussed below under the heading “Results of Operations.”
Business Model Transition Metrics
Recurring revenue represents the revenue for the period from our maintenance, desktop, cloud services and enterprise license offerings, including portions of revenue allocated to license & other revenue for those offerings. It excludes revenue from Autodesk Consulting Services, and subscription revenue related to education offerings, consumer product offerings, select Creative Finishing product offerings, Autodesk Buzzsaw, Autodesk Constructware, and third party products. Recurring revenue acquired with the acquisition of a business is captured and may cause variability in the comparison of this calculation. Recurring revenue is a statistical measure rather than a non-GAAP measure and is not meant as a substitute for net revenues.
During fiscal 2016, recurring revenue was 54% of total net revenue as compared to 46% of total net revenue for fiscal 2015.
2016 Form 10-K 44
The following table outlines our subscriptions, ARR and ARPS metrics as of fiscal years ended January 31, 2016 and January 31, 2015:
Balance at | (Decrease)/Increase compared to prior fiscal year | |||||||||||||
(in thousands) | January 31, 2016 | January 31, 2015 | % | |||||||||||
Maintenance Subscriptions | 2,151.0 | 2,013.3 | 137.7 | 7 | % | |||||||||
New Model Subscriptions | 427.2 | 220.4 | 206.8 | 94 | % | |||||||||
Total Subscriptions | 2,578.2 | 2,233.7 | 344.5 | 15 | % | |||||||||
(in millions) | ||||||||||||||
Maintenance ARR | $ | 1,121.4 | $ | 1,103.8 | $ | 17.6 | 2 | % | ||||||
New Model ARR | 255.0 | 151.6 | 103.4 | 68 | % | |||||||||
Total ARR | $ | 1,376.4 | $ | 1,255.4 | $ | 121.0 | 10 | % | ||||||
(ARR divided by Subscriptions) | ||||||||||||||
Maintenance ARPS | $ | 521 | $ | 548 | $ | (27 | ) | (5 | )% | |||||
New Model ARPS | 597 | 688 | (91 | ) | (13 | )% | ||||||||
Total ARPS | $ | 534 | $ | 562 | $ | (28 | ) | (5 | )% | |||||
Year-over-year maintenance subscriptions increased 7% as of January 31, 2016 as compared to the same period in the prior fiscal year. Year-over-year new model subscriptions increased 94% as of January 31, 2016 as compared to the same period in the prior fiscal year, primarily due to 292% growth in Desktop subscriptions over the corresponding period. Also contributing to the overall subscription growth was an increase in maintenance renewal rates.
Total Subscriptions ARR increased 10% as of January 31, 2016 as compared to the same period in the prior fiscal year primarily due to a 68% increase in New Model ARR driven by desktop license subscriptions and our flexible enterprise offerings. Also contributing to the increase was growth in Maintenance ARR, which increased 2% as compared to the same period in the prior fiscal year.
The 5% decrease in total ARPS was primarily due to growth in lower-priced subscription offerings causing total subscriptions growth to exceed total subscriptions ARR growth.
Foreign Currency Analysis
We generate a significant amount of our revenue in the U.S., Japan, Germany, France, and the United Kingdom. Total net revenue for fiscal 2016 was flat on an as reported basis compared to the prior fiscal year, and was negatively impacted by foreign exchange rate changes during fiscal 2016. Had applicable exchange rates from fiscal 2015 been in effect during fiscal 2016 and had we excluded foreign exchange hedge gains and losses from both fiscal 2015 and 2016 (“on a constant currency basis”), net revenue would have increased 4% compared to the prior fiscal year.
Our total spend, defined as cost of revenue plus operating expenses, during fiscal 2016 increased 5% on an as reported basis as compared to the prior fiscal year. Had applicable exchange rates from fiscal 2015 been in effect during fiscal 2016 and had we excluded foreign exchange hedge gains and losses from both fiscal 2015 and 2016, total spend would have increased 9% on a constant currency basis compared to the prior fiscal year.
Changes in the value of the U.S. dollar may have a significant effect on net revenue, total spend, and income from operations in future periods. We use foreign currency contracts to reduce the exchange rate effect on a portion of the net revenue and spend of certain anticipated transactions but do not attempt to completely mitigate the impact of fluctuations of such foreign currency against the U.S. dollar.
2016 Form 10-K 45
Balance Sheet and Cash Flow Items
At January 31, 2016, we had $2.8 billion in cash and marketable securities. This amount includes the aggregate net proceeds of $742.0 million, after deducting the underwriting discounts and related offering expenses, from our June 2015 registered underwritten public offering of $450.0 million aggregate principal amount of 3.125% notes due June 15, 2020 and $300.0 million aggregate principal amount of 4.375% notes due June 15, 2025. We completed fiscal 2016 with higher deferred revenue and accounts receivable balances as compared to the prior fiscal year. Our deferred revenue balance at January 31, 2016 included $1.1 billion of deferred subscription revenue primarily related to customer maintenance contracts, which will be recognized as revenue ratably over the life of the contracts. The term of our maintenance contracts is typically between one and three years. Our cash flow from operations decreased 42% to $414.0 million as of January 31, 2016 from $708.1 million at January 31, 2015. We repurchased 8.5 million shares of our common stock for $458.0 million during fiscal 2016. Comparatively, we repurchased 6.9 million shares of our common stock for $372.4 million during fiscal 2015. Further discussion regarding the balance sheet and cash flow activities are discussed below under the heading “Liquidity and Capital Resources.”
Business Outlook
Autodesk is undergoing a business model transition in which the company will discontinue selling new perpetual licenses in favor of subscriptions and flexible license arrangements. During the transition, billings, revenue, gross margin, operating margin, EPS, deferred revenue, and cash flow from operations will be impacted as more revenue is recognized ratably rather than up front and as new offerings bring a wider variety of price points. Over time, we expect our business model transition to expand our customer base by eliminating higher up-front licensing costs and provide more flexibility in how customers gain access to and pay for our products. In the future, we expect this business model transition will increase our long-term revenue growth rate by increasing total subscriptions, ARR, and customer value over time.
In February 2016 we commenced a restructuring plan to reduce headcount by approximately 10% and to consolidate certain facilities around the world in order to accelerate the Company’s move to the cloud and its transition to a subscription-based business model. Through the restructuring, we seek to reduce expenses, streamline the organization, and reallocate resources to align more closely with the Company’s needs going forward. See further discussion of our restructuring plan in Note 17, “Subsequent Events” of the Notes to Consolidated Financial Statements. As a result of these actions, we have incurred and will incur additional costs in the short term that negatively impact our net income and cash flows from operating activities and have the effect of reducing our operating margins.
_______________
Q1 FY17 Guidance Metrics | Q1 FY17 (ending April 30, 2016) |
Revenue (in millions) | $500 - $520 |
EPS GAAP | ($0.98) - ($0.89) |
EPS Non-GAAP (1) | ($0.17) - ($0.12) |
(1) Non-GAAP earnings per diluted share exclude $0.28 related to restructuring expense, $0.27 related to stock-based compensation expense, between $0.18 and $0.14 of GAAP-only tax charges, and $0.10 for the amortization of acquisition related intangibles, offset by $0.02 for gains on strategic investments.
2016 Form 10-K 46
FY17 Guidance Metrics | FY17 (ending January 31, 2017) |
Revenue (in millions) (1) | $1,950 - $2,050 |
GAAP Spend (cost of revenue plus operating expenses) | 3% - 4% |
Non-GAAP Spend (cost of revenue plus operating expenses) (2) | (1%) - flat |
EPS GAAP | ($3.32) - ($2.91) |
EPS Non-GAAP (3) | ($0.85) - ($0.60) |
Net Subscription Additions | 475,000 - 525,000 |
_______________
(1) Excluding the impact of foreign currency rates and hedge gains/losses revenue guidance would be $2.0 - $2.1 billion.
(2) Non-GAAP spend excludes $234 million related to stock-based compensation expense, $88 million related to restructuring expense, and $67 million for the amortization of acquisition related intangibles.
(3) Non-GAAP earnings per diluted share excludes $1.05 related to stock-based compensation expense, between $0.75 and $0.59 of GAAP-only tax charges, $0.39 related to restructuring expense, and $0.30 for the amortization of acquisition related intangibles, offset by $0.02 for gains on strategic investments.
We remain diligent about managing our spend while making essential investments to drive growth.
Results of Operations
Fiscal Year Ended January 31, 2016 | Increase (decrease) compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | Increase (decrease) compared to prior fiscal year | Fiscal Year Ended January 31, 2014 | |||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Net Revenue: | |||||||||||||||||||||||||
License and other | $ | 1,226.9 | $ | (114.5 | ) | (9 | )% | $ | 1,341.4 | $ | 86.5 | 7 | % | $ | 1,254.9 | ||||||||||
Subscription | 1,277.2 | 106.4 | 9 | % | 1,170.8 | 151.8 | 15 | % | 1,019.0 | ||||||||||||||||
$ | 2,504.1 | $ | (8.1 | ) | — | % | $ | 2,512.2 | $ | 238.3 | 10 | % | $ | 2,273.9 | |||||||||||
Net Revenue by Geographic Area: | |||||||||||||||||||||||||
Americas | $ | 972.8 | $ | 74.8 | 8 | % | $ | 898.0 | $ | 79.1 | 10 | % | $ | 818.9 | |||||||||||
Europe, Middle East, and Africa | 934.6 | (45.4 | ) | (5 | )% | 980.0 | 128.2 | 15 | % | 851.8 | |||||||||||||||
Asia Pacific | 596.7 | (37.5 | ) | (6 | )% | 634.2 | 31.0 | 5 | % | 603.2 | |||||||||||||||
$ | 2,504.1 | $ | (8.1 | ) | — | % | $ | 2,512.2 | $ | 238.3 | 10 | % | $ | 2,273.9 | |||||||||||
Net Revenue by Operating Segment: | |||||||||||||||||||||||||
Architecture, Engineering, and Construction | $ | 949.1 | $ | 76.5 | 9 | % | $ | 872.6 | $ | 142.0 | 19 | % | $ | 730.6 | |||||||||||
Manufacturing | 724.6 | 49.0 | 7 | % | 675.6 | 96.2 | 17 | % | 579.4 | ||||||||||||||||
Platform Solutions and Emerging Business | 670.4 | (126.3 | ) | (16 | )% | 796.7 | 7.5 | 1 | % | 789.2 | |||||||||||||||
Media and Entertainment | 160.0 | (7.3 | ) | (4 | )% | 167.3 | (7.4 | ) | (4 | )% | 174.7 | ||||||||||||||
$ | 2,504.1 | $ | (8.1 | ) | — | % | $ | 2,512.2 | $ | 238.3 | 10 | % | $ | 2,273.9 | |||||||||||
Fiscal 2016 Net Revenue Compared to Fiscal 2015 Net Revenue
License and Other Revenue
License and other revenue consists of two components: (1) all forms of product license revenue and (2) other revenue. Product license revenue includes software license revenue from the sale of perpetual licenses, term-based licenses from our desktop subscription and enterprise offerings, and product revenue for Creative Finishing. Other revenue includes revenue from consulting, training, Autodesk Developers Network, and Creative Finishing customer support, and is recognized as the services are performed.
2016 Form 10-K 47
Total License and other revenue decreased 9% during fiscal 2016 as compared to fiscal 2015. This decrease was primarily due to an 11% decrease in product license revenue as compared to the same period in the prior fiscal year. The decrease in product license revenue was primarily due to a 14% decrease in revenue from our flagship products and a 12% decrease in our suites revenue. Product license revenue, as a percentage of license and other revenue, was 88% and 89% for fiscal 2016 and fiscal 2015, respectively.
During fiscal 2016, the 11% decrease in product license revenue was due to an 18% decrease in the average net revenue per seat while the number of seats sold increased by 7% compared to the prior fiscal year. Starting in the first quarter of fiscal 2017, and in connection with the discontinuation of sales of individual perpetual licenses, we will stop reporting changes in revenue attributable to average net revenue per seat and number of seats sold. We are replacing these disclosures with disclosure regarding changes in ARPS disclosed within Overview above. ARPS is more relevant to determine whether changes in net revenues are attributable to increases in price or volume.
During fiscal 2016, total other revenue represented 12% of license and other revenue, and 6% of total net revenue. Other revenue increased by 12% during fiscal 2016 as compared to fiscal 2015. This increase is primarily due to an 11% increase in revenue from consulting and a 38% increase in revenue from our consumer product offerings, partially offset by a decrease in revenue from our education products as a result of our strategic transition to offer free educational licenses of Autodesk software to students, educators, and institutions.
Backlog related to current software license product orders that had not shipped at the end of the fiscal year decreased by $9.0 million from $40.4 million at January 31, 2015 to $31.4 million at January 31, 2016. Backlog from current software license product orders that we have not yet shipped consists of orders for currently available licensed software products from customers with approved credit status.
Subscription Revenue
Our Subscription revenue consists of three components: (1) maintenance revenue from our software products; (2) maintenance revenue from our term-based desktop subscription and enterprise offerings; and (3) revenue from our cloud service offerings. Our maintenance program provides our customers of software products with a cost effective and predictable budgetary option to obtain the productivity benefits of our new releases and enhancements when and if released during the term of their contracts. Under our maintenance program, customers are eligible to receive unspecified upgrades when and if available, downloadable training courses, and online support. We recognize maintenance revenue ratably over the term of the maintenance agreement, which is generally between one and three years. Revenue for our cloud service offerings is recognized ratably over the contract term commencing with the date our service is made available to customers and all other revenue recognition criteria have been satisfied.
Subscription revenue increased 9% during fiscal 2016 as compared to fiscal 2015 primarily due to a 9% increase in commercial maintenance revenue. The 9% increase in commercial maintenance revenue was due to a 12% increase from commercial enrollment during the corresponding maintenance contract term, offset by a 3% decrease from net revenue per maintenance seat. Commercial maintenance revenue represented 96% of Subscription revenue for both fiscal 2016 and fiscal 2015, respectively. Starting in the first quarter of fiscal 2017, and in connection with the discontinuation of sales of individual perpetual licenses, we will stop reporting changes in revenue attributable to average net revenue per seat and number of seats sold. We are replacing these disclosures with disclosure regarding changes in ARPS disclosed within Overview above. ARPS is more relevant to determine whether changes in net revenues are attributable to increases in price or volume.
Changes in Subscription revenue lag changes in net billings for subscription contracts because we recognize the revenue from those contracts ratably over their contract terms. Net subscription billings increased 16% during fiscal 2016 as compared to the prior fiscal year primarily due to an increase in multi-year maintenance subscription billings.
Our deferred subscription revenue balance at January 31, 2016 and January 31, 2015 was $1.1 billion and $0.9 billion, respectively, and primarily related to customer maintenance agreements, which will be recognized as revenue ratably over the term of the maintenance agreement.
2016 Form 10-K 48
Net Revenue by Geographic Area
Net revenue in the Americas geography increased by 8% as reported and 9% on a constant currency basis during fiscal 2016, as compared to the prior fiscal year, primarily due to a 20% increase in our new and adjacent product revenue and an 8% increase in our suites revenue in this geography during fiscal 2016 as compared to fiscal 2015. The increase in this geography was led by the U.S.
Net revenue in the EMEA geography decreased by 5% on an as reported basis and increased 3% on a constant currency basis during fiscal 2016 as compared to the prior fiscal year. This decrease was primarily due to a 7% decrease in our flagship products and a 5% decrease in our suites revenue in this geography during fiscal 2016 as compared to fiscal 2015. The decrease in our revenue in this geography was led by Germany and Russia, partially offset by an increase in revenue from Ireland.
Net revenue in the APAC geography decreased 6% on an as reported basis and 1% on a constant currency basis, during fiscal 2016 as compared to the prior fiscal year, primarily due to a 10% decrease in our flagship products, partially offset by an 8% increase in our new and adjacent product revenue in this geography. The decrease in revenue in this geography during fiscal 2016 was led by Japan, partially offset by an increase in revenue from China.
Net revenue in emerging economies decreased 4% on an as reported basis and 2% on a constant currency basis, during fiscal 2016 as compared to the prior fiscal year, primarily due to decreases in revenue from Russia and Brazil, partially offset by an increase in revenue from China. Revenue from emerging economies represented 15% of total net revenue for both fiscal 2016 and 2015, respectively.
International net revenue represented 68% and 71% of our total net revenue for fiscal 2016 and 2015, respectively. We believe that international revenue will continue to comprise a majority of our total net revenue. Unfavorable economic conditions in the countries that contribute a significant portion of our net revenue, including in emerging economies, may have an adverse effect on our business in those countries and our overall financial performance. Changes in the value of the U.S. dollar relative to other currencies have significantly affected, and could continue to significantly affect, our financial results for a given period even though we hedge a portion of our current and projected revenue. Additionally, weak global economic conditions that have been characterized by restructuring of sovereign debt, high unemployment, and volatility in the financial markets may impact our future financial results.
Net Revenue by Operating Segment
We have four reportable segments: AEC, MFG, PSEB, and M&E. We have no material inter-segment revenue.
Net revenue for AEC increased by 9% during fiscal 2016 as compared to the prior fiscal year primarily due to an 8% increase in revenue from our AEC suites, which was primarily driven by Autodesk Building Design Suite and Autodesk Infrastructure Design Suite.
Net revenue for MFG increased by 7% during fiscal 2016 as compared to the prior fiscal year primarily due to a 78% increase in revenue from our Delcam products as a result of including 12 months of Delcam operating results during fiscal 2016, compared to 10 months during fiscal 2015. Also contributing to the increase in net revenue for MFG during fiscal 2016 was a 12% increase in revenue from our flagship product AutoCAD Mechanical.
Net revenue for PSEB decreased by 16% during fiscal 2016 as compared to the prior fiscal year primarily due to a 26% decrease in revenue from our flagship product AutoCAD LT. Revenue from AutoCAD decreased by 4% in fiscal 2016 as compared to fiscal 2015.
Net revenue for M&E decreased by 4% during fiscal 2016 as compared to the prior fiscal year, primarily due to a 21% decrease in revenue from Creative Finishing, partially offset by a 1% increase in revenue from Animation. The decline in Creative Finishing was marked by a decrease in revenue from Creative Finishing hardware products and by a general decrease in the M&E industry end-market demand. The slight increase in Animation revenue was primarily due to a 168% increase in our Shotgun product offering as a result of including a full year of Shotgun operating results in fiscal 2016 as compared to six months during fiscal 2015, and a 7% increase in our Maya flagship product offerings, partially offset by a 46% decrease in our Middleware product offerings. M&E revenue is impacted by a general decrease in the M&E industry end-market demand, the planned inclusion of our M&E products in other Autodesk industry suites, and the business model transition as customers are opting for desktop subscription and flexible enterprise offerings. At the beginning of the fourth quarter of fiscal 2016, we exited
2016 Form 10-K 49
the Creative Finishing hardware business. This was an immaterial portion of our overall business and comes with substantially lower margins, so we expect that exiting this business will improve our margins within M&E over time.
Fiscal 2015 Net Revenue Compared to Fiscal 2014 Net Revenue
License and Other Revenue
Total License and other revenue increased 7% during fiscal 2015 as compared to fiscal 2014. This increase was primarily due to a 7% increase in product license revenue as compared to the same period in the prior fiscal year. The increase in product license revenue was primarily due to an 8% increase in suites revenue and an increase of 4% in revenue from our flagship products.
During fiscal 2015, the 7% increase in product license revenue was due to a 7% increase in the average net revenue per seat while the number of seats sold remained flat compared to the prior fiscal year. Product license revenue, as a percentage of License and other revenue, was 89% for both fiscal 2015 and fiscal 2014.
During fiscal 2015, total other revenue represented 11% of license and other revenue, and 6% of total net revenue. Other revenue increased by 7% during fiscal 2015 as compared to fiscal 2014. This increase is primarily due to a 17% increase in revenue from consulting, partially offset by a 65% decrease in revenue from our education products as a result of our strategic transition to offer free educational licenses of Autodesk software to students, educators, and institutions.
Backlog related to current software license product orders that had not shipped at the end of the fiscal year increased by $20.7 million from $19.7 million at January 31, 2014 to $40.4 million at January 31, 2015. Backlog from current software license product orders that we have not yet shipped consists of orders for currently available licensed software products from customers with approved credit status.
Subscription Revenue
Subscription revenue increased 15% during fiscal 2015 as compared to fiscal 2014 primarily due to a 15% increase in commercial maintenance revenue. The 15% increase in commercial maintenance revenue was due to a 9% increase from net revenue per maintenance seat and a 6% increase from commercial enrollment during the corresponding maintenance contract term. Commercial maintenance revenue represented 96% and 95% of Subscription revenue for fiscal 2015 and fiscal 2014, respectively.
Changes in Subscription revenue lag changes in net billings for subscription contracts because we recognize the revenue from those contracts ratably over their contract terms. Net subscription billings increased 22% during fiscal 2015 as compared to the prior fiscal year primarily due to an increase in maintenance subscription billings.
Our deferred subscription revenue balance at January 31, 2015 and January 31, 2014 was $936.8 million and $789.3 million, respectively, and primarily related to customer maintenance agreements, which will be recognized as revenue ratably over the term of the maintenance agreement.
Net Revenue by Geographic Area
Net revenue in the Americas geography increased by 10% as reported and on a constant currency basis during fiscal 2015, as compared to the prior fiscal year. This increase was primarily due to a 16% increase in our suites revenue and an 18% increase in our new and adjacent product revenue in this geography during fiscal 2015 as compared to fiscal 2014. The increase in this geography was led by the U.S.
Net revenue in the EMEA geography increased by 15% on an as reported basis and 13% on a constant currency basis during fiscal 2015 as compared to the prior fiscal year. This increase was primarily due to a 24% increase in our suites products and a 45% increase in our new and adjacent product revenue in this geography during fiscal 2015 as compared to fiscal 2014. The increase in our revenue in this geography was led by Germany and France.
Net revenue in the APAC geography increased 5% on an as reported basis and 11% on a constant currency basis, during fiscal 2015 as compared to the prior fiscal year, primarily due to a 4% increase in our flagship products and a 5% increase in our suites products in this geography. Our revenue in this geography during fiscal 2015 benefited from increases in revenue from South Korea and India, partially offset by a decrease in revenue from Japan.
2016 Form 10-K 50
Net revenue in emerging economies increased 14% on an as reported basis and 13% on a constant currency basis, during fiscal 2015 as compared to the prior fiscal year, primarily due to increases in revenue from India and Mexico. Revenue from emerging economies represented 15% of total net revenue for both fiscal 2015 and 2014.
International net revenue represented 71% and 70% of our total net revenue for fiscal 2015 and 2014, respectively. We believe that international revenue will continue to comprise a majority of our total net revenue.
Net Revenue by Operating Segment
Net revenue for AEC increased by 19% during fiscal 2015 as compared to the prior fiscal year primarily due to a 31% increase in revenue from our AEC suites, which was primarily driven by Autodesk Building Design Suite and Autodesk Infrastructure Design Suite.
Net revenue for PSEB increased by 1% during fiscal 2015 as compared to the prior fiscal year primarily due to a 3% increase in revenue from our flagship product AutoCAD LT. Revenue from AutoCAD remained flat in fiscal 2015 as compared to fiscal 2014.
Net revenue for MFG increased by 17% during fiscal 2015 as compared to the prior fiscal year primarily due to the acquisition of Delcam plc ("Delcam"). Also contributing to the increase in net revenue for MFG was a 9% increase in revenue from our MFG suites, which was primarily driven by the Autodesk Product Design Suite, as compared to fiscal 2014.
Net revenue for M&E decreased by 4% during fiscal 2015 as compared to the prior fiscal year, primarily due to an 11% decrease in revenue from Creative Finishing and a 2% decrease in revenue from Animation. The decline in Creative Finishing was marked by a general decrease in the M&E industry end-market demand, partially offset by a 33% increase in sales of our Creative Finishing hardware products. The decrease in Animation revenue was primarily due to a 20% decrease in revenue from our M&E suites, which was driven by our Autodesk Entertainment Creation Suite, partially offset by a 5% increase in our flagship product 3ds Max.
Cost of Revenue and Operating Expenses
Cost of Revenue
Fiscal Year Ended January 31, 2016 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2014 | |||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Cost of revenue: | |||||||||||||||||||||||||
License and other | $ | 214.6 | $ | 6.1 | 3 | % | $ | 208.5 | $ | 29.8 | 17 | % | $ | 178.7 | |||||||||||
Subscription | 156.1 | 22.5 | 17 | % | 133.6 | 38.0 | 40 | % | 95.6 | ||||||||||||||||
$ | 370.7 | $ | 28.6 | 8 | % | $ | 342.1 | $ | 67.8 | 25 | % | $ | 274.3 | ||||||||||||
As a percentage of net revenue | 15 | % | 14 | % | 12 | % | |||||||||||||||||||
Cost of license and other revenue includes labor costs associated with product setup and fulfillment and costs of consulting and training services contracts and collaborative project management services contracts. Cost of license and other revenue also includes stock-based compensation expense, direct material and overhead charges, amortization of developed technology, allocated IT and facilities costs, professional services fees and royalties. Direct material and overhead charges include the cost of hardware sold (mainly PC-based workstations for Creative Finishing in the M&E segment), and costs associated with electronic and physical fulfillment.
Cost of license and other revenue increased 3% during fiscal 2016 as compared to fiscal 2015, primarily due to an increase in hardware related costs from our consumer related products, an increase in allocated IT costs, and employee related costs for product support and fulfillment driven by an increase in headcount, partially offset by a decrease in amortization of developed technology. Cost of license and other revenue increased 17% during fiscal 2015, as compared to fiscal 2014,
2016 Form 10-K 51
primarily from the acquisition of Delcam and consulting support costs associated with an increased headcount and increased professional fees related to the building out of the consulting services offered within customer contracts.
Cost of subscription revenue includes the labor costs of providing product support to our maintenance and cloud subscription customers, including rent and occupancy, shipping and handling costs, professional services fees related to operating our network infrastructure, depreciation expense and operating lease payments associated with computer equipment, data center costs, salaries, related expenses of network operations, and allocated IT and facilities costs.
Cost of subscription revenue increased 17% during fiscal 2016 as compared to fiscal 2015 primarily due to an increase in cloud and hosting related costs in support of our business model transition, and an increase in employee related costs driven by increased employee headcount and product support costs. Cost of subscription revenue increased 40% during fiscal 2015 as compared to fiscal 2014 primarily due to higher employee related costs as a result of increased premium support headcount as well as an increase in cloud services related expenses.
Cost of revenue, at least over the near term, is affected by the volume and mix of product sales, mix of physical versus electronic fulfillment, fluctuations in consulting costs, amortization of purchased technology, new customer support offerings, royalty rates for licensed technology embedded in our products, and employee stock-based compensation expense.
We expect cost of revenue to decrease in absolute dollars and increase as a percentage of net revenue during fiscal 2017, as compared to fiscal 2016.
Marketing and Sales
Fiscal Year Ended January 31, 2016 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2014 | |||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Marketing and sales | $ | 1,015.5 | $ | 17.5 | 2 | % | $ | 998.0 | $ | 155.4 | 18 | % | $ | 842.6 | |||||||||||
As a percentage of net revenue | 41 | % | 40 | % | 37 | % | |||||||||||||||||||
Marketing and sales expenses include salaries, bonuses, benefits, and stock-based compensation expense for our marketing and sales employees, the expense of travel, entertainment and training for such personnel, the costs of programs aimed at increasing revenue, such as advertising, trade shows and expositions, and various sales and promotional programs. Marketing and sales expenses also include labor costs associated with sales and order processing, sales and dealer commissions, rent and occupancy, payment processing fees, the cost of supplies and equipment, and allocated IT and facilities costs.
Marketing and sales expenses increased 2% during fiscal 2016, as compared to fiscal 2015, primarily due to an increase in stock based compensation expense as a result of higher fair market value of awards granted, an increase in salaries predominantly driven by increased headcount, and an increase in IT costs allocated to marketing and sales. Partially offsetting the increase in expense was a decrease in sales commission expense.
Marketing and sales expenses increased 18% during fiscal 2015, as compared to fiscal 2014, primarily due to higher employee-related costs from salaries, commissions, and bonuses as well as advertising and promotional expenses.
We expect marketing and sales expense to decrease in absolute dollars and increase as a percentage of net revenue in fiscal 2017 as compared to fiscal 2016.
2016 Form 10-K 52
Research and Development
Fiscal Year Ended January 31, 2016 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2014 | |||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Research and development | $ | 790.0 | $ | 64.8 | 9 | % | $ | 725.2 | $ | 114.1 | 19 | % | $ | 611.1 | |||||||||||
As a percentage of net revenue | 32 | % | 29 | % | 27 | % | |||||||||||||||||||
Research and development expenses, which are expensed as incurred, consist primarily of salaries, bonuses, benefits, and stock-based compensation expense for research and development employees, and the expense of travel, entertainment and training for such personnel, rent and occupancy, professional services such as fees paid to software development firms and independent contractors, and allocated IT and facilities costs.
Research and development expenses increased 9% during fiscal 2016, as compared to fiscal 2015, primarily due to an increase in employee-related costs from salaries and fringe benefits predominantly driven by increased headcount, an increase in IT costs allocated to research and development, and an increase in stock based compensation expense due to higher fair market value of awards granted.
Research and development expenses increased 19% during fiscal 2015, as compared to fiscal 2014, primarily due to an increase in employee-related costs from salaries and bonuses and an increase in professional fees.
We expect research and development expense to increase in absolute dollars and as a percentage of net revenue during fiscal 2017, as compared to fiscal 2016.
General and Administrative
For comparability, the balances at January 31, 2015 and January 31, 2014, including the table, were adjusted to align to current year presentation, and therefore the discussion has been updated accordingly.
Fiscal Year Ended January 31, 2016 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2014 | |||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
General and administrative | $ | 293.4 | $ | 10.1 | 4 | % | $ | 283.3 | $ | 71.5 | 34 | % | $ | 211.8 | |||||||||||
As a percentage of net revenue | 12 | % | 11 | % | 9 | % | |||||||||||||||||||
General and administrative expenses include salaries, bonuses, benefits and stock-based compensation expense for our finance, human resources and legal employees, as well as professional fees for legal and accounting services, certain foreign business taxes, gains and losses on our operating expense cash flow hedges, expense of travel, entertainment and training, expense of communication and the cost of supplies and equipment.
General and administrative expenses increased 4% from fiscal 2015 to fiscal 2016 primarily due to an increase in employee-related costs from salaries predominantly driven by increased headcount. Partially offsetting the increase in expense was a decrease in certain foreign business taxes.
General and administrative expenses increased 34% from fiscal 2014 to fiscal 2015, primarily due to an increase in employee-related costs from salaries and bonuses and an increase in professional fees.
We expect general and administrative expense to increase in absolute dollars and as a percentage of net revenue during fiscal 2017, as compared to fiscal 2016.
2016 Form 10-K 53
Amortization of Purchased Intangibles
Fiscal Year Ended January 31, 2016 | Decrease compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2014 | |||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Amortization of purchased intangibles | $ | 33.2 | $ | (6.6 | ) | (17 | )% | $ | 39.8 | $ | 3.3 | 9 | % | $ | 36.5 | ||||||||||
As a percentage of net revenue | 1 | % | 2 | % | 2 | % | |||||||||||||||||||
Amortization of purchased intangibles decreased 17% from fiscal 2015 to fiscal 2016, primarily related to the accumulated effects associated with amortization expense of intangible assets purchased over time, including $59.1 million in assets purchased in fiscal 2016 as compared to $164.1 million purchased in fiscal 2015.
Amortization of purchased intangibles increased 9% from fiscal 2014 to fiscal 2015, primarily related to the accumulated effects associated with amortization expense of intangible assets purchased over time, including $164.1 million in assets purchased in fiscal 2015 as compared to $40.3 million purchased in fiscal 2014.
We expect amortization of purchased intangibles expense to decrease in absolute dollars and remain flat as a percentage of net revenue during fiscal 2017, as compared to fiscal 2016.
Restructuring Charges, Net
Fiscal Year Ended January 31, 2016 | Decrease compared to prior fiscal year | Fiscal Year Ended January 31, 2015 | Decrease compared to prior fiscal year | Fiscal Year Ended January 31, 2014 | |||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Restructuring charges, net | $ | — | $ | (3.1 | ) | (100 | )% | $ | 3.1 | $ | (9.7 | ) | (76 | )% | $ | 12.8 | |||||||||
As a percentage of net revenue | — | % | — | % | 1 | % | |||||||||||||||||||
During fiscal 2016, Autodesk recorded no restructuring charges. We have substantially completed the actions authorized under the previous restructuring plans. See Note 15, “Restructuring Reserves” in Notes to Consolidated Financial Statements for further discussion regarding the previous restructuring plans.
On February 2, 2016, our Board of Directors approved a world-wide restructuring plan that includes a reduction in force that will result in the termination of approximately 10% of the Company’s workforce, or approximately 925 employees, and the consolidation of certain leased facilities. See Note 17, "Subsequent Events (Unaudited)," for further discussion regarding the anticipated amount and timing of the expenditures related to this action.
Interest and Other Expense, Net
The following table sets forth the components of interest and other expense, net:
Fiscal Year Ended January 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(in millions) | |||||||||||
Interest and investment expense, net | $ | (33.9 | ) | $ | (13.2 | ) | $ | (9.8 | ) | ||
(Loss) gain on foreign currency | — | (3.9 | ) | 4.0 | |||||||
Gain (loss) on strategic investments | 3.8 | (23.3 | ) | (1.8 | ) | ||||||
Other income | 8.5 | 2.7 | 2.7 | ||||||||
Interest and other expense, net | $ | (21.6 | ) | $ | (37.7 | ) | $ | (4.9 | ) | ||
2016 Form 10-K 54
Interest and other expense, net, decreased $16.1 million during fiscal 2016, as compared to fiscal 2015, The decrease is primarily related to non-recurring settlement gains on certain of our privately-held strategic investments and mark-to-mark gains recognized on the derivative portion on certain of our other privately-held strategic investments during the current fiscal year. Comparatively, we incurred non-recurring impairment losses on certain of our privately-held strategic investments in the same periods in the prior fiscal year. This decrease was offset by an increase in interest expense resulting from the June 2015 issuance of $450.0 million aggregate principal amount of 3.125% senior notes due June 15, 2020 and $300.0 million aggregate principal amount of 4.375% senior notes due June 15, 2025.
Interest and other expense, net, increased $32.8 million during fiscal 2015, as compared to fiscal 2014, primarily due to an increase in losses on our privately held strategic investments. The increase in the loss on strategic investments during fiscal 2016 as compared to fiscal 2015 is primarily due to other-than-temporary impairments on two of our privately held strategic investments and losses on the derivative portion of our strategic investments that are marked-to-market each period.
Provision for Income Taxes
We account for income taxes and the related accounts under the liability method. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted rates expected to be in effect during the year in which the basis differences reverse.
Income tax expense was $310.2 million and $1.2 million for fiscal 2016 and 2015, respectively, relative to a pre-tax loss of $20.3 million and pre-tax income of $83.0 million, respectively, for the same periods. Tax expense for fiscal 2016 consists primarily of foreign taxes and changes to valuation allowances, including a $230.8 million valuation allowance against the Company's U.S. federal and remaining state deferred tax assets recorded in the second quarter of fiscal 2016. We regularly assess the need for a valuation allowance against our deferred tax assets. In making that assessment, we consider both positive and negative evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, we considered recent cumulative losses in the United States arising from the Company's business model transition as a significant piece of negative evidence and determined that it was more likely than not that the federal and state deferred tax assets would not be realized.
Income tax expense was $1.2 million and $51.1 million for fiscal 2015 and 2014, respectively, relative to pre-tax income of $83.0 million and $279.9 million, respectively, for the same periods. Our effective tax rate was 1% and 18% during fiscal 2015 and 2014, respectively. Our effective tax rate decreased seventeen percentage points from fiscal 2014 to fiscal 2015 due to an increase in tax benefits from foreign earnings taxed at different rates in fiscal 2015 compared to fiscal 2014, and increased benefit from research credits, offset in part by lower tax benefits from stock-based compensation.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 enacted on December 18, 2015 extended and made permanent the federal R&D tax credit. As a result, our income tax provision for Fiscal 2016 includes a tax benefit of $9.4 million which was offset by the valuation allowance against our U.S. deferred tax assets.
Our future effective annual tax rate may be materially impacted by the amount of benefits and charges from tax amounts associated with our foreign earnings that are taxed at rates different from the federal statutory rate, changes in valuation allowances, level of profit before tax, accounting for uncertain tax positions, business combinations, closure of statute of limitations or settlement of tax audits, and changes in tax laws including possible U.S. tax law changes that, if enacted, could significantly impact how U.S. multinational companies are taxed on foreign subsidiary earnings. A significant amount of our earnings is generated by our Europe and Asia Pacific subsidiaries. Our future effective tax rates may be adversely affected to the extent earnings are lower than anticipated in countries where we have lower statutory tax rates or we repatriate certain foreign earnings on which U.S. taxes have not previously been provided.
At January 31, 2016, we had non-current foreign net deferred tax assets of $9.2 million which management believes are more likely than not to be realized in future years.
For additional information regarding our income tax provision and reconciliation of our effective rate to the federal statutory rate of 35%, see Note 4, “Income Taxes,” in the Notes to Consolidated Financial Statements.
2016 Form 10-K 55
Other Financial Information
In addition to our results determined under U.S. generally accepted accounting principles (“GAAP”) discussed above, we believe the following non-GAAP measures are useful to investors in evaluating our operating performance. For the fiscal years ended January 31, 2016, 2015, and 2014, our gross profit, gross margin, income from operations, operating margin, net (loss) income, and diluted net (loss) income per share on a GAAP and non-GAAP basis were as follows (in millions except for year-over-year change in total net revenue and billings, year-over-year change in net subscription revenue and billings, gross margin, operating margin, and per share data):
Fiscal Year Ended January 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(Unaudited) | |||||||||||
Year-over-year change in total net revenue | — | % | 10 | % | (2 | )% | |||||
Year-over-year change in total net billings (1) | 5 | % | 18 | % | (4 | )% | |||||
Year-over-year change in net subscription revenue | 9 | % | 15 | % | 7 | % | |||||
Year-over-year change in net subscription billings (1) | 16 | % | 22 | % | (1 | )% | |||||
Gross profit | $ | 2,133.4 | $ | 2,170.1 | $ | 1,999.6 | |||||
Non-GAAP gross profit | $ | 2,194.2 | $ | 2,232.2 | $ | 2,049.8 | |||||
Gross margin | 85 | % | 86 | % | 88 | % | |||||
Non-GAAP gross margin | 88 | % | 89 | % | 90 | % | |||||
Income from operations | $ | 1.3 | $ | 120.7 | $ | 284.8 | |||||
Non-GAAP income from operations | $ | 280.7 | $ | 382.4 | $ | 510.5 | |||||
Operating margin | — | % | 5 | % | 13 | % | |||||
Non-GAAP operating margin | 11 | % | 15 | % | 22 | % | |||||
Net (loss) income | $ | (330.5 | ) | $ | 81.8 | $ | 228.8 | ||||
Non-GAAP net income | $ | 194.1 | $ | 272.3 | $ | 385.6 | |||||
Diluted net (loss) income per share (2) | $ | (1.46 | ) | $ | 0.35 | $ | 1.00 | ||||
Non-GAAP diluted income per share (2) | $ | 0.84 | $ | 1.17 | $ | 1.68 | |||||
GAAP diluted shares used in per share calculation | 226.0 | 227.1 | 224.0 | ||||||||
Non-GAAP diluted weighted average shares used in per share calculation | 230.7 | 232.4 | 229.6 | ||||||||
_______________
(1) | Prior period was adjusted to conform with current period's presentation to include the effects from hedging on billings. |
(2) | Net (loss) income per share were computed independently for each of the periods presented; therefore the sum of the net (loss) income per share amount for the quarters may not equal the total for the year. |
For our internal budgeting and resource allocation process and as a means to evaluate period-to-period comparisons, we use non-GAAP measures to supplement our consolidated financial statements presented on a GAAP basis. These non-GAAP measures do not include certain items that may have a material impact upon our reported financial results. We also use non-GAAP measures in making operating decisions because we believe those measures provide meaningful supplemental information regarding our earning potential and performance for management by excluding certain expenses and charges that may not be indicative of our core business operating results. For the reasons set forth below, we believe these non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business. This allows investors and others to better understand and evaluate our operating results and future prospects in the same manner as management, compare financial results across accounting periods and to those of peer companies and to better understand the long-term performance of our core business. We also use some of these measures for purposes of determining company-wide incentive compensation.
There are limitations in using non-GAAP financial measures because non-GAAP financial measures are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. The non-GAAP financial measures included above are limited in value because they exclude certain items that may have a material impact upon our reported financial results. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which charges are excluded from the non-GAAP financial measures. We compensate for these limitations by
2016 Form 10-K 56
analyzing current and future results on a GAAP basis as well as a non-GAAP basis and also by providing GAAP measures in our public disclosures. The presentation of non-GAAP financial information is meant to be considered in addition to, not as a substitute for or in isolation from, the directly comparable financial measures prepared in accordance with GAAP. We urge investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.
2016 Form 10-K 57
Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures
(In millions except for year-over-year changes, gross margin, operating margin, and per share data):
Fiscal Year Ended January 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
(Unaudited) | |||||||||||
Year-over-year change in total net revenue | — | % | 10 | % | (2 | )% | |||||
Change in deferred revenue | 4 | % | 8 | % | (2 | )% | |||||
Change in hedge gain applicable to billings (1) | 1 | % | — | % | — | % | |||||
Change in acquisition related deferred revenue and other | — | % | — | % | — | % | |||||
Year-over-year change in total net billings | 5 | % | 18 | % | (4 | )% | |||||
Year-over-year change in net subscription revenue | 9 | % | 15 | % | 7 | % | |||||
Change in deferred subscription revenue | 5 | % | 10 | % | (7 | )% | |||||
Change in hedge gain applicable to subscription billings (1) | 1 | % | — | % | — | % | |||||
Change in acquisition related deferred subscription revenue and other | 1 | % | (3 | )% | (1 | )% | |||||
Year-over-year change in net subscription billings (1) | 16 | % | 22 | % | (1 | )% | |||||
Gross profit | $ | 2,133.4 | $ | 2,170.1 | $ | 1,999.6 | |||||
Stock-based compensation expense | 11.8 | 8.9 | 6.0 | ||||||||
Amortization of developed technologies | 49.0 | 53.2 | 44.2 | ||||||||
Non-GAAP gross profit | $ | 2,194.2 | $ | 2,232.2 | $ | 2,049.8 | |||||
Gross margin | 85 | % | 86 | % | 88 | % | |||||
Stock-based compensation expense | 1 | % | 1 | % | — | % | |||||
Amortization of developed technologies | 2 | % | 2 | % | 2 | % | |||||
Non-GAAP gross margin | 88 | % | 89 | % | 90 | % | |||||
Income from operations | $ | 1.3 | $ | 120.7 | $ | 284.8 | |||||
Stock-based compensation expense | 197.2 | 165.6 | 132.2 | ||||||||
Amortization of developed technologies | 49.0 | 53.2 | 44.2 | ||||||||