AUTODESK, INC. (ADSK)
FISCAL THIRD QUARTER 2010 EARNINGS ANNOUNCEMENT
November 17, 2009
PREPARED REMARKS
Autodesk is posting a copy of these prepared remarks in combination with its press release to its investor website. These prepared remarks are offered to provide shareholders and analysts with additional time and detail for analyzing our results in advance of our quarterly conference call. As previously scheduled, the conference call will begin today, November 17, 2009 at 2:00 pm PST (5:00 pm EST) and will include only brief comments followed by questions and answers. These prepared remarks will not be read on the call.
To access the live broadcast of the question and answer session, please visit the Investor Relations section of Autodesk’s Website at www.autodesk.com/investor. A complete reconciliation between GAAP and non-GAAP results is provided in the tables following these prepared remarks.
3Q Fiscal 2010 Overview
Our business appears to be increasingly stable as evidenced by our sequentially flat total revenue and sequential increases in a number of important metrics. In addition, we continued to make progress in reducing our operating costs, which led to a significant sequential improvement in profitability.
| · | Revenue was $417 million, flat sequentially, and a decrease of 31 percent as compared to the third quarter of fiscal 2009. |
| · | Total spend (operating expenses plus cost of goods sold) decreased sequentially due largely to realizing the full benefit of the restructuring actions taken in previous quarters, as well as continued focus on increasing efficiency and further cost control. |
| · | GAAP diluted earnings per share were $0.13, compared to GAAP diluted earnings per share of $0.05 in the second quarter of fiscal 2010, and $0.45 in the third quarter of fiscal 2009. |
| · | Non-GAAP diluted earnings per share were $0.27, compared to non-GAAP diluted earnings per share of $0.24 in the second quarter of fiscal 2010, and non-GAAP diluted earnings per share of $0.56 in the third quarter of fiscal 2009. |
Not unexpectedly, results were mixed in our various geographies. However, global economic conditions in Autodesk’s core markets were increasingly stable relative to the conditions experienced in late calendar 2008, and the early part of calendar 2009.
In addition to posting flat sequential revenue and increased profitability, there were a number of other positive data points including a 4 percent sequential increase in revenue from new commercial seats. Growth in revenue from commercial new seats is an essential building block in growing our revenue base over the long term.
Once again our government business grew both sequentially and on a year-over-year basis as we experienced strong growth with U.S. federal agencies. While we are encouraged by the growth of sales into government organizations, we believe this is still largely based on our growing presence in this area and not yet related to U.S. government stimulus spending, which continues to be difficult to trace.
This quarter we were pleased to see sequential growth in our 2D horizontal products, AutoCAD and AutoCAD LT, which had been impacted more significantly than our other design solutions during this recession. In fact, revenue from Auto CAD and Auto CAD LT accounted for the majority of the growth in revenue from commercial new seats.
Revenue from our model-based 3D design solutions was flat sequentially. Sequential growth in our Civil 3D, Navisworks, Robot Structural Analysis and Moldflow products was offset by sequential declines in both the Inventor and Revit product families.
Emerging economies were a key component to our growth prior to the recession and we believe they will continue to be a key component to our revenue mix and future growth. Revenue from emerging economies posted a small sequential decrease in the third quarter after showing a sequential increase last quarter. Our design, manufacturing and engineering solutions are ideally suited to help these countries build out their infrastructures. Revenue from emerging economies experienced significant declines year-over-year.
On the expense side, we made further progress in creating efficiencies within our organization and reducing our overall expense structure. GAAP operating expenses declined 5 percent sequentially and 17 percent compared to the third quarter last year. Non-GAAP operating expenses declined 1 percent sequentially and 21 percent compared to the third quarter last year. The cost savings we have achieved in the first nine months of this fiscal year are significant. These reductions were made to better align our business and cost structure with the current operating environment. We will continue to look for opportunities to improve the progress we’ve made in this area while making essential investments in the future.
Consistent with normal seasonality, operating expenses are expected to increase sequentially in the fourth quarter. Regardless, we now believe we will exceed our plan of reducing pre-tax spend (operating expenses plus cost of goods sold) by $300 million in fiscal 2010, compared to fiscal 2009.
Autodesk’s financial position remains solid. The company’s cash and investments balance increased slightly and remains over $1 billion with no debt. In addition, during the third quarter, Autodesk repurchased 1.7 million shares of common stock.
While our markets have become increasingly stable over the past two quarters, reliable forecasting beyond one quarter remains challenging. While it is encouraging that some of the broader economic indicators are showing some improvement, the loss of jobs in our primary markets of architecture, construction and manufacturing continues to create a headwind for our business.
Revenue Analysis
| (in millions) | | | 3Q 2009 | | | | 4Q 2009 | | | | 1Q 2010 | | | | 2Q 2010 | | | | 3Q 2010 | |
| Total net revenue | | $ | 607 | | | $ | 490 | | | $ | 426 | | | $ | 415 | | | $ | 417 | |
| License and other revenue | | $ | 421 | | | $ | 310 | | | $ | 244 | | | $ | 231 | | | $ | 236 | |
| Maintenance revenue | | $ | 186 | | | $ | 180 | | | $ | 182 | | | $ | 184 | | | $ | 181 | |
Total net revenue for the third quarter was $417 million, a slight increase sequentially and a decrease of 31 percent as compared to the third quarter of fiscal 2009. At constant currency, revenue for the third quarter decreased 2 percent sequentially and decreased 31 percent as compared to the third quarter of fiscal 2009.
License and other revenue was $236 million, an increase of 2 percent sequentially, and a decrease of 44 percent compared to the third quarter last year.
Maintenance revenue was $181 million, a decrease of 2 percent sequentially, and 3 percent compared to the third quarter of last year. Maintenance billings declined 4 percent sequentially and 10 percent year-over-year. Our maintenance billings metric contains adjustments for a number of items resulting in what we believe is a clearer reflection of our maintenance billings and the underlying business trends. For the past four quarters, maintenance billings have been impacted by lower renewal rates as well as fewer new seats sold.
Encouragingly, maintenance renewal rates in the third quarter appear to have stabilized relative to the declines we experienced in the prior four quarters. This is also reflected in our installed base of commercial maintenance customers, which was approximately flat sequentially. Renewal rates had been impacted as customers have reduced their work forces resulting in fewer seats to renew.
Revenue by Geography
| Revenue by Geography (in millions) | | | 3Q 2009 | | | | 4Q 2009 | | | | 1Q 2010 | | | | 2Q 2010 | | | | 3Q 2010 | |
| Americas | | $ | 216 | | | $ | 172 | | | $ | 163 | | | $ | 159 | | | $ | 164 | |
| EMEA | | $ | 258 | | | $ | 219 | | | $ | 167 | | | $ | 157 | | | $ | 159 | |
| Asia Pacific | | $ | 133 | | | $ | 99 | | | $ | 96 | | | $ | 99 | | | $ | 94 | |
| Emerging Economies | | $ | 114 | | | $ | 80 | | | $ | 59 | | | $ | 63 | | | $ | 62 | |
| Emerging as a percentage of Total Revenue | | | 19 | % | | | 16 | % | | | 14 | % | | | 15 | % | | | 15 | % |
Revenue in the Americas increased 2 percent sequentially and declined 25 percent compared to the third quarter last year. Revenue in the U.S., Brazil and Mexico posted sequential increases while Canada declined sequentially.
EMEA revenue increased 1 percent sequentially as reported and decreased 3 percent sequentially at constant currency. EMEA revenue was led by growth in Northern Europe as well as emerging countries. EMEA revenue decreased 38 percent year-over-year as reported and 35 percent at constant currency.
Revenue from Asia Pacific decreased 4 percent sequentially as reported, and 7 percent at constant currency. Strong sequential growth in South Korea and India was offset by sequential declines in most other countries in APAC. Compared to the third quarter of last year, revenue from Asia Pacific decreased 29 percent as reported and 33 percent at constant currency.
Revenue from emerging economies decreased 2 percent sequentially as reported, and 46 percent compared to the third quarter of fiscal 2009. At constant currency, revenue from emerging economies decreased 3 percent sequentially and 45 percent compared to the third quarter of fiscal 2009. Similar to our overall results, performance of emerging economies was mixed in various geographies.
Revenue by Product Type
Revenue from our model-based 3D design solutions were $122 million, flat sequentially and a decline of 25 percent compared to third quarter last year. Sequential growth in our Civil 3D, Navisworks, Robot Structural Analysis and Moldflow products was offset by sequential declines in both the Inventor and Revit families.
Our 2D horizontal products grew 2 percent sequentially, and decreased 39 percent compared to the third quarter last year. 2D vertical products continued to show both a sequential and year-over-year decrease. Combined revenue from 2D horizontal and 2D vertical products was $189 million, a decrease of 1 percent sequentially and 37 percent compared to the third quarter of fiscal 2009.
Revenue by Business Segment
| Revenue by Segment (in millions) | | | 3Q 2009 | | | | 4Q 2009 | | | | 1Q 2010 | | | | 2Q 2010 | | | | 3Q 2010 | |
Platform Solutons and Emerging Business | | $ | 239 | | | $ | 172 | | | $ | 156 | | | $ | 150 | | | $ | 154 | |
Architecture, Engineering and Construction | | $ | 164 | | | $ | 146 | | | $ | 128 | | | $ | 123 | | | $ | 125 | |
| Manufacturing | | $ | 124 | | | $ | 115 | | | $ | 94 | | | $ | 95 | | | $ | 90 | |
| Media and Entertainment | | $ | 73 | | | $ | 53 | | | $ | 48 | | | $ | 47 | | | $ | 48 | |
| Other | | $ | 7 | | | $ | 4 | | | $ | - | | | $ | - | | | $ | - | |
Revenue from Platform Solutions increased 3 percent sequentially to $154 million. Platform Solutions decreased 36 percent compared to the third quarter last year.
Revenue from our AEC segment increased 2 percent sequentially to $125 million. Revenue from our AEC segment decreased 24 percent compared to the third quarter last year. Revenue from our Civil 3D family of products increased 8 percent sequentially and decreased 18 percent compared to the third quarter last year. Revenue from our Revit family of products decreased 2 percent sequentially and 31 percent compared to the third quarter last year.
Revenue from our Manufacturing segment was $90 million, a decrease of 6 percent sequentially, and 28 percent compared to the third quarter last year. Revenue from the Inventor family of products decreased 6 percent sequentially and 29 percent compared to the third quarter last year.
Revenue from our Media and Entertainment segment was $48 million, a 3 percent increase sequentially and a decrease of 34 percent compared to the third quarter last year. Revenue from animation products including 3dsMax and Maya increased 12 percent sequentially and decreased 20 percent compared to the third quarter last year. Revenue from Advanced Systems declined 15 percent sequentially and 54 percent compared to the third quarter last year. Going forward, we expect animation products to continue to grow as a part of the media and entertainment revenue mix.
Margins and EPS Review
| Gross Margin | | | 3Q 2009 | | | | 4Q 2009 | | | | 1Q 2010 | | | | 2Q 2010 | | | | 3Q 2010 | |
| Gross Margin - GAAP | | | 91 | % | | | 90 | % | | | 88 | % | | | 88 | % | | | 89 | % |
| Gross Margin - Non-GAAP | | | 93 | % | | | 92 | % | | | 90 | % | | | 90 | % | | | 92 | % |
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| Operating Expenses (in millions) | | | 3Q 2009 | | | | 4Q 2009 | | | | 1Q 2010 | | | | 2Q 2010 | | | | 3Q 2010 | |
| Operating Expenses - GAAP | | $ | 415 | | | $ | 575 | | | $ | 393 | | | $ | 362 | | | $ | 346 | |
| Operating Expenses - Non-GAAP | | $ | 385 | | | $ | 372 | | | $ | 327 | | | $ | 308 | | | $ | 305 | |
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| Earnings Per Share | | | 3Q 2009 | | | | 4Q 2009 | | | | 1Q 2010 | | | | 2Q 2010 | | | | 3Q 2010 | |
| Diluted Net Income (Loss) Per Share - GAAP | | $ | 0.45 | | | $ | (0.47 | ) | | $ | (0.14 | ) | | $ | 0.05 | | | $ | 0.13 | |
| Diluted Net Income Per Share - Non-GAAP | | $ | 0.56 | | | $ | 0.31 | | | $ | 0.18 | | | $ | 0.24 | | | $ | 0.27 | |
GAAP gross margin in the third quarter was 89 percent. Non-GAAP gross margin in the third quarter was 92 percent. The sequential margin improvement resulted primarily from normal seasonality in subscription fulfillments, decreased vendor costs, and a more favorable product mix.
GAAP operating margin increased 5 percentage points on a sequential basis to 6 percent, driven primarily by reduced restructuring costs. Non-GAAP operating margin, which excludes restructuring costs among other things, rose 2 percentage points on a sequential basis to 18 percent. GAAP and non-GAAP operating margins in the third quarter decreased compared to the third quarter last year primarily due to the year-over-year drop in revenue.
During the current quarter, we determined that the way in which our third-party software application accounted for estimated forfeitures in our stock-based compensation calculations was incorrect. As a result, fiscal third quarter 2010 GAAP results include a one-time adjustment to increase stock-based compensation expense by $7.9 million net of tax, or approximately $0.03 per diluted share. This is a cumulative adjustment from prior periods. For the nine month period ended October 31, 2009 the cumulative adjustment from prior periods was $6.8 million net of tax or $0.03 per diluted share.
The effective tax rate for our third quarter was 8 percent for our GAAP results and includes one-time tax benefits for statute closures, stock option exercises, and the tax impact of the stock-based compensation adjustment discussed above. The third quarter effective tax rate for our non-GAAP results was 23 percent and includes a one-time tax benefit for statute closures.
Earnings per diluted share for the third quarter were $0.13 GAAP and $0.27 non-GAAP.
A complete reconciliation between GAAP and non-GAAP results is provided in the tables following these prepared remarks.
Foreign Exchange Impact
Favorable (Unfavorable) Impact of U.S. Dollar Translation Relative to Foreign Currencies Compared to Comparable Prior Year Period (in millions) | | | 3Q 2009 | | | | 4Q 2009 | | | | 1Q 2010 | | | | 2Q 2010 | | | | 3Q 2010 | |
| FX Impact on Total Net Revenue | | $ | 18 | | | $ | (19 | ) | | $ | (31 | ) | | $ | (24 | ) | | $ | (4 | ) |
| FX Impact on Operating Expenses | | $ | (3 | ) | | $ | 17 | | | $ | 22 | | | $ | 14 | | | $ | 2 | |
| FX Impact on Operating Income (Loss) | | $ | 15 | | | $ | (2 | ) | | $ | (9 | ) | | $ | (10 | ) | | $ | (2 | ) |
Compared to the second quarter, the foreign currency impact was $10 million favorable on revenue and $5 million unfavorable on expenses.
Compared to the third quarter of last year, the impact of foreign currency exchange rates in the third quarter was $4 million unfavorable on revenue and $2 million favorable on expenses.
Balance Sheet Items and Cash Review
| Financial Statistics (in millions) | | | 3Q 2009 | | | | 4Q 2009 | | | | 1Q 2010 | | | | 2Q 2010 | | | | 3Q 2010 | |
| Total Cash and Marketable Securities | | $ | 941 | | | $ | 989 | | | $ | 966 | | | $ | 1,029 | | | $ | 1,054 | |
| Days Sales Outstanding | | | 44 | | | | 59 | | | | 49 | | | | 49 | | | | 47 | |
| Capital Expenditures | | $ | 19 | | | $ | 19 | | | $ | 14 | | | $ | 11 | | | $ | 6 | |
| Cash Flow from Operating Activities | | $ | 107 | | | $ | 86 | | | $ | 27 | | | $ | 47 | | | $ | 47 | |
| Depreciation and Amortization | | $ | 25 | | | $ | 27 | | | $ | 27 | | | $ | 28 | | | $ | 29 | |
| Deferred Revenue | | $ | 499 | | | $ | 552 | | | $ | 534 | | | $ | 502 | | | $ | 470 | |
Total cash and investments at the end of the third quarter was over $1 billion.
During the third quarter Autodesk used approximately $39 million to repurchase approximately 1.7 million shares of common stock.
Cash flow from operating activities during the third quarter was $47 million, flat sequentially and significantly lower than the third quarter last year.
Shippable backlog at the end of the third quarter decreased by $4 million sequentially to $12 million.
Deferred revenue was $470 million, a 6 percent decrease both sequentially and compared to the third quarter last year. The decrease is primarily due to the reduction in maintenance billings.
Total backlog at the end of the third quarter, including deferred revenue and shippable backlog orders was $482 million, a decrease of $23 million compared to the third quarter of last year.
Channel inventory at the end of the third quarter declined sequentially in weeks and in dollars. At the end of the third quarter, channel inventory was slightly under three weeks and remains healthy.
DSO was 47 days in the third quarter.
Business Outlook
Our guidance is based on our current expectations and the information we have available today, including currency exchange rates.
Fourth Quarter Fiscal 2010
| 4Q FY10 Guidance Metrics | | 4Q FY10 (ending January 31, 2010) | |
| Revenue (in millions) | | | $420 to $440 | |
| EPS - GAAP | | | $0.07 to $0.12 | |
| EPS - Non-GAAP | | | $0.19 to $0.24 | |
Non-GAAP earnings per diluted share exclude $0.06 related to stock-based compensation expense and $0.06 for amortization of acquisition related intangibles.
Full Year Fiscal 2010
| FY10 Guidance Metrics | | FY10 (ending January 31, 2010) | |
| Revenue (in billions) | | | $1.68 to $1.70 | |
| EPS - GAAP | | | $0.11 to $0.16 | |
| EPS - Non-GAAP | | | $0.88 to $0.93 | |
Non-GAAP earnings per diluted share exclude $0.29 related to stock-based compensation expense, $0.18 for the amortization of acquisition related intangibles, $0.15 for restructuring charges, $0.06 related to goodwill impairment, and $0.09 related to the establishment of a valuation allowance on deferred tax assets.
In addition, the company anticipates total GAAP pre-tax spend (operating expenses plus cost of goods sold) for fiscal 2010 to range between $1.65 billion and $1.66 billion, which is lower than fiscal 2009 by between $407 and $417 million. The company anticipates total non-GAAP pre-tax spend (operating expenses plus cost of goods sold) for fiscal 2010 to range between $1.42 billion and $1.43 billion, which is lower than fiscal 2009 by between $300 and $310 million. Total non-GAAP pre-tax spend excludes approximately $95 million of stock-based compensation expense, $60 million of amortization of acquisition related intangibles, $50 million of restructuring charges and $20 million of goodwill impairment charges, which are included in total GAAP pre-tax spend.
First Quarter Fiscal 2011 and Full Year Fiscal 2011
Autodesk is not providing specific revenue or EPS guidance for fiscal 2011 at this time. However, in the first quarter of fiscal 2011, GAAP operating margin is expected to increase year-over-year as the company recorded significant impairment charges in the first quarter of fiscal 2010 that it does not anticipate recording in fiscal 2011. Non-GAAP operating margin in the first quarter of fiscal 2011 is anticipated to be flat to slightly down compared to the first quarter of fiscal 2010, as a result of normal seasonality and the return of some costs that were suppressed in the first quarter of fiscal 2010.
GAAP operating margin for the full year fiscal 2011 is expected to increase more significantly as the company recorded significant impairment charges in the first quarter of fiscal 2010 that it does not anticipate recording in fiscal 2011. Autodesk anticipates modest improvement in non-GAAP operating margin for full year fiscal 2011 compared to fiscal 2010.
Non-GAAP operating margin excludes stock-based compensation expense, amortization of acquisition related intangibles, restructuring charges and goodwill impairments.
Safe Harbor Statement
These prepared remarks contain forward-looking statements that involve risks and uncertainties, including statements in the paragraphs under “Business Outlook”, statements regarding anticipated market, economic and revenue trends, cost savings, timing of certain charges, revenue performance (including by geography and product), market position and other statements regarding our expected strategies, performance and results. Other factors that could cause actual results to differ materially include the following: general market, economic and business conditions, our performance in particular geographies, including emerging economies, the financial and business condition of our reseller and distribution channels, fluctuation in foreign currency exchange rates, failure to achieve and maintain planned cost reductions and productivity increases, slowing momentum in maintenance revenues, failure to achieve sufficient sell-through in our channels for new or existing products, pricing pressure, failure to achieve continued migration from 2D products to 3D products, difficulties encountered in integrating new or acquired businesses and technologies, the inability to identify and realize the anticipated benefits of acquisitions, unexpected fluctuations in our tax rate, the timing and degree of expected investments in growth opportunities, changes in the timing of product releases and retirements, failure of key new applications to achieve anticipated levels of customer acceptance, failure to achieve continued success in technology advancements, interruptions or terminations in the business of Autodesk consultants, and any unanticipated accounting charges.
Further information on potential factors that could affect the financial results of Autodesk are included in Autodesk’s reports on Form 10-K for the year ended January 31, 2009 and Forms 10-Q for the quarters ended April 30, 2009 and July 31, 2009, which are on file with the U.S. Securities and Exchange Commission. Autodesk does not assume any obligation to update the forward-looking statements provided to reflect events that occur or circumstances that exist after the date on which they were made.
© 2009 Autodesk, Inc. All rights reserved.
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