AUTODESK, INC. (ADSK)
FISCAL THIRD QUARTER 2011 EARNINGS ANNOUNCEMENT
November 18, 2010
PREPARED REMARKS
Autodesk is posting a copy of these prepared remarks and 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 18, 2010 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.
Third Quarter Fiscal 2011 Overview
Autodesk delivered strong revenue and profitability results in the third quarter. Each geography posted double-digit year-over-year revenue growth with particular strength in our international markets. We experienced strong year-over-year growth in many key areas including revenue from commercial new licenses, operating margin, earnings per share, and cash flow from operating activities.
| | ● | Revenue was $477 million, an increase of 14 percent, compared to the third quarter of fiscal 2010, and 1 percent sequentially. |
| | ● | GAAP operating margin was 15 percent, compared to 6 percent in the third quarter last year, and 17 percent in the second quarter of fiscal 2011. |
| | ● | Non-GAAP operating margin was 21 percent, compared to 18 percent in the third quarter last year, and 25 percent in the second quarter of fiscal 2011. |
| | ● | On a GAAP basis, diluted earnings per share were $0.23, compared to diluted earnings per share of $0.13 in the third quarter of fiscal 2010, and diluted earnings per share of $0.25 in the second quarter of fiscal 2011. |
| ● | On a non-GAAP basis, diluted earnings per share were $0.32, compared to non-GAAP diluted earnings per share of $0.26 in the third quarter of fiscal 2010, and non-GAAP diluted earnings per share of $0.36 in the second quarter of fiscal 2011. |
| | ● | Cash flow from operating activities was $114 million, an increase compared to $47 million in the third quarter of fiscal 2010, and $112 million in the second quarter of fiscal 2011. |
Revenue Analysis
| (in millions) | | | 3Q 2010 | | | | 4Q 2010 | | | | 1Q 2011 | | | | 2Q 2011 | | | | 3Q 2011 | |
| Total net revenue | | $ | 417 | | | $ | 456 | | | $ | 475 | | | $ | 473 | | | $ | 477 | |
| License and other revenue | | $ | 236 | | | $ | 270 | | | $ | 280 | | | $ | 281 | | | $ | 282 | |
| Maintenance revenue | | $ | 181 | | | $ | 186 | | | $ | 195 | | | $ | 192 | | | $ | 195 | |
Total net revenue for the third quarter was $477 million as reported, an increase of 14 percent compared to the third quarter of fiscal 2010, and 1 percent sequentially. On a constant currency basis, revenue for the third quarter increased 15 percent compared to the third quarter of fiscal 2010, and declined 1 percent sequentially.
License and other revenue was $282 million, an increase of 19 percent compared to the third quarter of fiscal 2010, and was flat sequentially.
Revenue from commercial new licenses increased 33 percent compared to the third quarter of fiscal 2010, and decreased 6 percent sequentially.
Maintenance revenue was $195 million, an increase of 8 percent compared to the third quarter of fiscal 2010, and 1 percent sequentially.
Maintenance billings increased 11 percent year-over-year, and decreased 1 percent sequentially due to typical seasonality.
Revenue by Geography
| Revenue by Geography (in millions) | | | 3Q 2010 | | | | 4Q 2010 | | | | 1Q 2011 | | | | 2Q 2011 | | | | 3Q 2011 | |
| EMEA | | $ | 159 | | | $ | 188 | | | $ | 199 | | | $ | 189 | | | $ | 183 | |
| Americas | | $ | 164 | | | $ | 168 | | | $ | 161 | | | $ | 168 | | | $ | 179 | |
| Asia Pacific | | $ | 94 | | | $ | 100 | | | $ | 115 | | | $ | 116 | | | $ | 115 | |
| | | | | | | | | | | | | | | | | | | | | |
| Emerging Economies | | $ | 62 | | | $ | 73 | | | $ | 68 | | | $ | 71 | | | $ | 76 | |
| Emerging as a percentage of Total Revenue | | | 15 | % | | | 16 | % | | | 14 | % | | | 15 | % | | | 16 | % |
Revenue in EMEA was $183 million, an increase of 15 percent compared to the third quarter of fiscal 2010 as reported and 19 percent on a constant currency basis. EMEA revenue decreased 3 percent sequentially as reported and 7 percent on a constant currency basis.
Revenue in the Americas was $179 million, an increase of 10 percent compared to the third quarter last year and 7 percent sequentially.
Revenue in Asia Pacific was $115 million, an increase of 22 percent compared to the third quarter of fiscal 2010 as reported and 19 percent on a constant currency basis. Revenue in Asia Pacific decreased 1 percent sequentially as reported and 2 percent on a constant currency basis.
Revenue from emerging economies was $76 million, an increase of 23 percent compared to the third quarter of fiscal 2010 as reported and 25 percent on a constant currency basis. Revenue from emerging economies increased 7 percent sequentially as reported and 4 percent on a constant currency basis.
Revenue by Product Type
| Model-based design products as a % of Total Revenue | | | 3Q 2010 | | | | 4Q 2010 | | | | 1Q 2011 | | | | 2Q 2011 | | | | 3Q 2011 | |
| | | | | | | | | | | | | | | | | | | | | |
| Model-Based Design Products Revenue % * | | | 29 | % | | | 30 | % | | | 29 | % | | | 30 | % | | | 30 | % |
* Inventor LT was added to the Model-based Design grouping in 3Q 2011. Historical figures have been revised to reflect the change.
Revenue from our model-based design products was $143 million, an increase of 17 percent compared to the third quarter last year, and 2 percent sequentially. Both Inventor and Revit families of products registered strong year-over-year growth.
Our horizontal design products, which consist primarily of AutoCAD and AutoCAD LT, grew 20 percent compared to the third quarter last year and decreased 3 percent sequentially. Revenue from vertical design products, such as AutoCAD Mechanical, increased 25 percent compared to the third quarter last year and 3 percent sequentially. Combined revenue from horizontal design products and vertical design products was $230 million, an increase of 21 percent compared to the third quarter last year and a decrease of 1 percent sequentially.
As we have discussed in recent quarters, we have increased our focus on delivering suites as a means to deliver added value and price performance to our customers. As such, we are introducing new classifications of our product categories in order to capture the revenue results of our evolving product portfolio. Beginning this quarter, Autodesk will provide revenue results in the following product type categories – “Flagship” products, “Suites,” and “New and Adjacent” products (see “Autodesk’s New Product Type Classification” later in this document for the makeup of these product classifications). After the fourth quarter of fiscal 2011, we will no longer report revenue metrics on model-based design, horizontal products, or vertical products.
Revenue from Flagship products was $285 million and increased 16% compared to the third quarter last year and declined 1 percent sequentially. Revenue from Suites was $107 million and increased 24% compared to the third quarter last year and 3% sequentially. Revenue from New and Adjacent products was $85 million and was flat compared to the third quarter last year and increased 4% sequentially. Historical data on these new categories will be provided next quarter.
Revenue by Business Segment
| Revenue by Segment (in millions) | | | 3Q 2010 | | | | 4Q 2010 | | | | 1Q 2011 | | | | 2Q 2011 | | | | 3Q 2011 | |
Platform Solutons and Emerging Business | | $ | 154 | | | $ | 165 | | | $ | 184 | | | $ | 177 | | | $ | 174 | |
Architecture, Engineering and Construction | | $ | 125 | | | $ | 137 | | | $ | 137 | | | $ | 133 | | | $ | 136 | |
| Manufacturing | | $ | 90 | | | $ | 108 | | | $ | 108 | | | $ | 113 | | | $ | 117 | |
| Media and Entertainment | | $ | 48 | | | $ | 46 | | | $ | 46 | | | $ | 50 | | | $ | 50 | |
Revenue from our Platform Solutions and Emerging Business segment was $174 million, an increase of 12 percent compared to the third quarter last year and a decrease of 2 percent sequentially. The year-over-year increase was driven by growth in our AutoCAD product while the sequential decline was driven by a decrease in our AutoCAD LT product.
Revenue from our Architecture, Engineering and Construction business segment was $136 million, an increase of 9 percent compared to the third quarter last year and 3 percent sequentially. Revenue from our Revit family of products increased 22 percent compared to the third quarter last year and decreased 1 percent sequentially.
Revenue from our Manufacturing business segment was $117 million, an increase of 30 percent compared to the third quarter last year and 4 percent sequentially. Revenue from our Inventor family of products increased 29 percent compared to the third quarter last year and 2 percent sequentially.
Revenue from our Media and Entertainment business segment was $50 million, an increase of 5 percent compared to the third quarter last year and 2 percent sequentially. Revenue from animation products decreased 2 percent compared to the third quarter last year and increased 3 percent sequentially. Revenue from Creative Finishing increased 21 percent compared to the third quarter last year and decreased 2 percent sequentially.
Margins and EPS Review
| Gross Margin | | | 3Q 2010 | | | | 4Q 2010 | | | | 1Q 2011 | | | | 2Q 2011 | | | | 3Q 2011 | |
| Gross Margin - GAAP | | | 89 | % | | | 90 | % | | | 89 | % | | | 90 | % | | | 90 | % |
| Gross Margin - Non-GAAP | | | 92 | % | | | 92 | % | | | 91 | % | | | 92 | % | | | 92 | % |
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| Operating Expenses (in millions) | | | 3Q 2010 | | | | 4Q 2010 | | | | 1Q 2011 | | | | 2Q 2011 | | | | 3Q 2011 | |
| Operating Expenses - GAAP | | $ | 346 | | | $ | 356 | | | $ | 373 | | | $ | 345 | | | $ | 359 | |
| Operating Expenses - Non-GAAP | | $ | 305 | | | $ | 331 | | | $ | 336 | | | $ | 317 | | | $ | 337 | |
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| Operating Margin | | | 3Q 2010 | | | | 4Q 2010 | | | | 1Q 2011 | | | | 2Q 2011 | | | | 3Q 2011 | |
| Operating Margin - GAAP | | | 6 | % | | | 12 | % | | | 11 | % | | | 17 | % | | | 15 | % |
| Operating Margin - Non-GAAP | | | 18 | % | | | 20 | % | | | 20 | % | | | 25 | % | | | 21 | % |
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| Earnings Per Share | | | 3Q 2010 | | | | 4Q 2010 | | | | 1Q 2011 | | | | 2Q 2011 | | | | 3Q 2011 | |
| Diluted Net Income Per Share - GAAP | | $ | 0.13 | | | $ | 0.21 | | | $ | 0.16 | | | $ | 0.25 | | | $ | 0.23 | |
| Diluted Net Income Per Share - Non-GAAP | | $ | 0.27 | | | $ | 0.30 | | | $ | 0.29 | | | $ | 0.36 | | | $ | 0.32 | |
GAAP gross margin in the third quarter was 90 percent. Non-GAAP gross margin in the third quarter was 92 percent.
GAAP operating margin was 15 percent, compared to 6 percent in the third quarter last year. The improvement was driven primarily by increased revenue, reduced stock-based compensation expenses, and the absence of restructuring charges. GAAP operating margin decreased 2 percentage points sequentially from 17 percent in the second quarter of fiscal 2011 primarily due to higher operating expenses.
Non-GAAP operating margin was 21 percent compared to 18 percent in the third quarter last year driven by higher revenue. Non-GAAP operating margin decreased 4 percentage points on a sequential basis from 25 percent in the second quarter of fiscal 2011 driven primarily by higher spend.
GAAP total spend (GAAP cost of revenue plus GAAP operating expenses) increased 4 percent year-over-year and sequentially. Non-GAAP total spend (non-GAAP cost of revenue plus non-GAAP operating expenses) increased 11 percent year-over-year and 6 percent sequentially. The year-over-year increase in both GAAP and non-GAAP total spend is primarily related to performance incentives, such as commissions; commission accelerators; the reinstatement of other employee performance based incentives that had been reduced as part of the cost reduction measures taken last year; the lack of an employee furlough week; and the mix of professional employees. GAAP total spend was also impacted by lower stock-based compensation expense and the absence of restructuring charges.
The sequential increase in both GAAP and non-GAAP total spend is primarily related to the lack of an employee furlough week in the third quarter, additional headcount, and companywide performance incentives based on higher company performance. GAAP total spend also benefited from the absence of restructuring charges in the current quarter.
The third quarter effective tax rate was 25 percent for our GAAP results and 27 percent for our non-GAAP results.
Earnings per diluted share for the third quarter were $0.23 GAAP and $0.32 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 2010 | | | | 4Q 2010 | | | | 1Q 2011 | | | | 2Q 2011 | | | | 3Q 2011 | |
| FX Impact on Total Net Revenue | | $ | (16 | ) | | $ | 9 | | | $ | 21 | | | $ | 5 | | | $ | (4 | ) |
| FX Impact on Operating Expenses | | $ | 2 | | | $ | (10 | ) | | $ | (11 | ) | | $ | 0 | | | $ | (1 | ) |
| FX Impact on Operating Income | | $ | (14 | ) | | $ | (1 | ) | | $ | 10 | | | $ | 5 | | | $ | (5 | ) |
Foreign currency impact includes the change in foreign currency and the foreign currency impact to revenue from our hedging program.
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 was $1 million unfavorable on expenses.
Compared to the second quarter of fiscal 2011, the foreign currency impact was $8 million favorable on revenue and $6 million unfavorable on expenses.
Balance Sheet Items and Cash Review
| Financial Statistics (in millions) | | | 3Q 2010 | | | | 4Q 2010 | | | | 1Q 2011 | | | | 2Q 2011 | | | | 3Q 2011 | |
| Total Cash and Marketable Securities | | $ | 1,054 | | | $ | 1,126 | | | $ | 1,239 | | | $ | 1,271 | | | $ | 1,337 | |
| Days Sales Outstanding | | | 47 | | | | 55 | | | | 42 | | | | 44 | | | | 46 | |
| Capital Expenditures | | $ | 6 | | | $ | 9 | | | $ | 6 | | | $ | 5 | | | $ | 7 | |
| Cash Flow from Operating Activities | | $ | 47 | | | $ | 126 | | | $ | 139 | | | $ | 112 | | | $ | 114 | |
| Depreciation and Amortization | | $ | 29 | | | $ | 27 | | | $ | 27 | | | $ | 26 | | | $ | 27 | |
| Deferred Revenue | | $ | 470 | | | $ | 517 | | | $ | 544 | | | $ | 526 | | | $ | 507 | |
Total cash and investments at the end of the third quarter was more than $1.3 billion.
During the third quarter Autodesk used $75 million to repurchase 2.5 million shares of common stock at an average price of $29.93 per share. Year-to-date, Autodesk has used $204 million to repurchase 7 million shares of common stock at an average repurchase price of $29.14 per share.
Cash flow from operating activities during the third quarter was $114 million, an increase of 143 percent compared to the third quarter last year and 2 percent sequentially.
Shippable backlog at the end of the third quarter was $16 million, an increase of $4 million compared to the third quarter last year and a decrease of $5 million sequentially.
Deferred revenue was $507 million, an increase of 8 percent compared to the third quarter last year and a decrease of 4 percent sequentially. The year-over-year increase is primarily due to increased maintenance billings. The sequential decrease is primarily related to seasonally flat subscription billings.
Total backlog at the end of the third quarter, including deferred revenue and shippable backlog orders was $523 million, an increase of $41 million compared to the third quarter of last year and a decrease of $25 million sequentially.
At the end of the third quarter, channel inventory was below three weeks and well within our normal range.
Days sales outstanding was 46 days, a decrease of 1 day compared to the third quarter last year and an increase of 2 days sequentially. The sequential increase is primarily a result of a shift in billings linearity within the quarter.
Business Outlook
Our guidance is based on our current expectations and the information we have available today, including currency exchange rates.
Full Year Fiscal 2011
| FY11 Guidance Metrics | FY11 (ending January 31, 2011) |
| Revenue (in billions) | $1.924 to $1.944 |
| EPS - GAAP | $0.83 to $0.86 |
| EPS - Non-GAAP | $1.27 to $1.30 |
Net revenue for fiscal 2011 is expected to increase between 12 and 13 percent compared to fiscal 2010. GAAP earnings per diluted share are expected to increase more than 230 percent. Non-GAAP earnings per diluted share are expected to increase between 28 and 31 percent. Autodesk anticipates GAAP operating margin for fiscal 2011 to increase between 950 and 990 basis points for full year fiscal 2011 compared to fiscal 2010. Non-GAAP operating margin is expected to increase between 430 and 460 basis points for full year fiscal 2011 compared to fiscal 2010.
For fiscal 2011, non-GAAP operating margin excludes stock-based compensation expense, amortization of acquisition related intangibles, and restructuring charges. Non-GAAP earnings per diluted share for fiscal 2011 exclude $0.24 related to stock-based compensation expense, $0.17 for amortization of acquisition related intangibles, and $0.03 related to restructuring charges, net of tax.
Twelve months ago business visibility and the global economic outlook were fairly unclear. Autodesk’s original assumptions for revenue, billings, EPS, and operating margin growth for fiscal 2011 were well below our current projections. As a result of our stronger than expected revenue, billings, EPS, and operating margin results for fiscal 2011, performance based compensation expenses including sales commissions, commission accelerators, and employee bonuses for the year will be higher than originally anticipated, particularly in the fourth quarter.
Fourth Quarter Fiscal 2011
| 4Q FY11 Guidance Metrics | 4Q FY11 (ending January 31, 2011) |
| Revenue (in millions) | $500 to $520 |
| EPS - GAAP | $0.19 to $0.22 |
| EPS - Non-GAAP | $0.30 to $0.33 |
As noted above, fourth quarter operating expenses will include greater than originally expected performance based compensation primarily as a result of the significantly better than projected net revenue, billings, and operating margin projections for the full year fiscal 2011. Non-GAAP earnings per diluted share for the fourth quarter of fiscal 2011 exclude $0.06 related to stock-based compensation expense, and $0.05 for amortization of acquisition related intangibles, net of tax.
A portion of the projected euro and yen denominated revenue for our fourth quarter fiscal 2011 has been hedged, which should help reduce the impact of currency fluctuations on our fourth quarter results. However, over an extended period of time currency fluctuations will increasingly impact our results.
Fourth quarter outlook assumes an effective tax rate of 25 percent for our GAAP results and an effective tax rate of 27 percent for our non-GAAP results. The effective tax rates for both GAAP and non-GAAP results exclude any benefit from the federal research and development tax credit that expired at the end of 2009.
Full Year Fiscal 2012
While business visibility is better than it was 12 months ago, projecting five quarters in advance remains difficult. Autodesk’s fiscal 2012 guidance assumes a continuation of the current economic environment and stable foreign exchange currency rates.
Net revenue for fiscal 2012 is expected to increase by approximately 10 percent compared to fiscal 2011. GAAP operating margin for the full year fiscal 2012 is expected to increase as the company recorded restructuring charges in fiscal 2011 that it does not anticipate recording in fiscal 2012. However, Autodesk is not able to provide targets for GAAP operating margins at this time because of the difficulty of estimating certain items that are excluded from non-GAAP that affect operating margin, such as stock-based compensation expense and amortization of acquisition related intangibles charges. Autodesk anticipates non-GAAP operating margin to increase by approximately 200 basis points for the full year fiscal 2012 compared to fiscal 2011. Autodesk is not providing specific EP S guidance for fiscal 2012 at this time.
Non-GAAP operating margin excludes stock-based compensation expense and amortization of acquisition related intangibles.
Autodesk’s Foreign Currency Hedging Program
Given the recent foreign exchange volatility, we would like to provide a brief summary of how we handle foreign currency exchange hedging. A few points to call out include:
| | ● | Autodesk does not conduct foreign currency exchange hedging for speculative purposes. The purpose of our hedging program is to limit our risk of loss on foreign denominated cash flows and to partially reduce variability that would otherwise impact our financial results from currency fluctuations. |
| | ● | We utilize cash flow hedges on revenue and certain operating expenses in major currencies. We hedge our net exposures using a four quarter rolling layered hedge. The closer to the current time period, the more we are hedged. |
| | ● | The major currencies we hedge include the euro, yen, pound sterling, Canadian dollar, and Swiss franc. The euro is the primary exposure for the company. |
| | ● | When we report results on a constant currency basis, we attempts to report the changes in the underlying business operations by eliminating fluctuations caused by changes in foreign currency exchange rates and hedge gains or losses recorded within the current period. |
Autodesk’s New Product Type Classification
The following represents Autodesk’s current view for product categorization. Autodesk will periodically make changes to this list. This is not a complete list.
Flagship includes the following products:
| | ● | AutoCAD vertical products such as AutoCAD Mechanical and AutoCAD Architecture |
| | ● | Inventor products (standalone) |
| | ● | Revit products (standalone) |
Suites include the following products classes:
| | ● | Educational/academic suites |
| | ● | Entertainment Creation Suites |
New and Adjacent includes the following services and products:
| | ● | Creative Finishing products |
Safe Harbor Statement
These prepared remarks contain forward-looking statements that involve risks and uncertainties, including statements in the paragraphs under “Business Outlook” above, statements regarding anticipated market, economic, maintenance billings, and revenue trends, cost savings, operational and efficiency investments, revenue performance (including by geography and product), margin improvement, market and product positions and other statements regarding our expected strategies, performance and results. There are a significant number of factors that could cause actual results to differ materially from statements made in these remarks, including: general market, economic and business conditions, our performance in particular geographies, including emerging economies, the financial and business c ondition of our reseller and distribution channels, fluctuation in foreign currency exchange rates, the success of our foreign currency hedging program, failure to maintain 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 successfully expand adoption of our horizontal design products, our vertical design products and model-based design products, failure to successfully incorporate sales of products suites into our overall sales strategy, 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 and efficiency opportunities, changes in the timing of product releases and retirements, failure of key new applications to achieve anticipated levels of customer a cceptance, failure to achieve continued success in technology advancements, interruptions or terminations in the business of Autodesk consultants, the expense or impact of legal or regulatory proceedings, and any unanticipated accounting charges.
Further information on potential factors that could affect the financial results of Autodesk are included in Autodesk’s report on Form 10-K for the year ended January 31, 2010 and Form 10-Q for the quarters ended April 30, 2010 and July 31, 2010, 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.
© 2010 Autodesk, Inc. All rights reserved.
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