The discussion in our MD&A and elsewhere in this Form 10-Q 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 the Nine Months EndedOctober 31, 2019 and 2018" below; future revenue, operating expenses, recurring revenue, annualized recurring revenue, cash flow, net revenue retention rate and other future financial results (by product type and geography); the effectiveness of our efforts to successfully manage transitions to new industries; our ability to increase our subscription base; expected market trends, including the growth of cloud and mobile computing; the availability of credit; the effect of unemployment; the effects of global economic conditions; the effects of revenue recognition; the effects of recently issued accounting standards; expected trends in certain financial metrics, including expenses; 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 business and sales initiatives; the impact of past acquisitions, including our integration efforts; the impact of economic volatility and geopolitical activities in certain countries, particularly emerging economy countries; the timing and amount of purchases under our stock buy-back plan; and the effects of potential non-cash charges on our financial results and the resulting effect on our financial results. In addition, forward-looking statements also consist of statements involving expectations regarding product capability and acceptance, 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 Quarterly Report on Form 10-Q 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 Part II, Item 1A, "Risk Factors," and in our other reports filed with theU.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.
Note: A glossary of terms used in this Form 10-Q appears at the end of this Item 2.
Strategy
Autodesk makes software for people who make things. If you have ever driven a high-performance car, admired a towering skyscraper, used a smartphone, or watched a great film, chances are you have experienced what millions of Autodesk customers are doing with our software. Autodesk gives you the power to make anything. Our strategy is to build enduring relationships with customers, delivering innovative technology that provides valuable automation and insight into their design and make process. To drive execution of our strategy, we are focused on three strategic priorities: delivering on the promise of subscription, digitizing the company, and reimagining construction, manufacturing, and production. Autodesk was founded during the platform transition from mainframe computers and engineering workstations to personal computers. We developed and sustained a compelling value proposition based upon desktop software for the personal computer. Just as the transition from mainframes to personal computers transformed the industry over 30 years ago, the software industry has undergone a transition from developing and selling perpetual licenses and on-premises products to subscriptions and cloud-enabled technologies.
To address this shift, Autodesk made a strategic decision to shift its business model from selling perpetual licenses and maintenance plans to selling subscriptions.
Today, we offer subscriptions for individual products and Industry Collections, flexible enterprise business agreements ("EBAs"), and cloud service offerings (collectively referred to as "subscription plan"). Subscription plans are designed to give our customers more flexibility with how they use our offerings and to attract a broader range of customers, such as project-based users and small businesses. Our product subscriptions currently represent a hybrid of desktop software and cloud functionality, which provides a device-independent, collaborative design workflow for designers and their stakeholders. For example, our cloud offerings, including BIM 360, Shotgun, Fusion 360, and AutoCAD web and mobile, provide tools to streamline design, collaboration, building manufacturing and data management processes. We believe that customer adoption of these new offerings will 33 --------------------------------------------------------------------------------
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.
Industry Collections provide our customers with increased access to a broader selection of Autodesk solutions and services that exceeds those previously available in suites - simplifying the customers' ability to get access to a complete set of tools for their industry.
We discontinued the sale of new perpetual commercial licenses of most individual software products in 2016. Additionally, inJune 2017 , we commenced a three-year program to incentivize maintenance plan customers to move to subscription plan offerings, maintenance-to-subscription ("M2S"), while at the same time increasing maintenance plan pricing over time for customers that remain on maintenance plans. Since launching the program, a substantial majority of maintenance plan customers have converted to subscription plan offerings. To support our strategic priority of re-imagining construction, in fiscal 2019, we strengthened the foundation of our construction solutions with both organic and inorganic investments. In addition to investing in our BIM 360 portfolio, we acquiredAssemble Systems, Inc. ("Assemble Systems") for quantity take off functionality,PlanGrid, Inc. ("PlanGrid") for document-centric workflows and field execution, andBuildingConnected, Inc. ("BuildingConnected") for bidding and estimation processes. The broadened product portfolio will help us expand our presence with general and sub-contractors, trades people, and building owners.
As part of our manufacturing strategy, we continue to attract both global manufacturing leaders and disruptive startups with our generative design and our Fusion 360 technology enhancements.
We sell our products and services globally, through a combination of indirect and direct channels. Our indirect channels include value added resellers, direct market resellers, distributors, computer manufacturers, and other software developers. Our direct channels include internal sales resources dedicated to selling in our largest accounts, our highly specialized products, and business transacted through our online Autodesk branded store. See Note 3, "Revenue Recognition" in the Notes to the unaudited Condensed Consolidated Financial Statements for further detail on net revenue by indirect and direct channel sales for the three and nine months endedOctober 31, 2019 and 2018. We anticipate that our channel mix will continue to change as we scale our online Autodesk branded store business and our largest accounts shift towards direct-only business models. However, we expect our indirect channel will continue to transact and support the majority of our customers and revenue. We employ a variety of incentive programs and promotions to align our direct and indirect channels with our business strategies. In addition, we have a worldwide user group organization and we have created online user communities dedicated to the exchange of information related to the use of our products. One of our key strategies is to maintain an open-architecture design of our software products to facilitate third-party development of complementary products and industry-specific software solutions. This approach enables customers and third parties to customize solutions for a wide variety of highly specific uses. We offer several programs that provide strategic investment funding, technological platforms, user communities, technical support, forums, and events to developers who develop add-on applications for our products. For example, we have established the Autodesk Forge developer 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 as well as support ideas that push the boundaries of 3D printing. 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 which has been cultivated over an extensive period of time. 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 solutions quickly and easily. We have a significant number of registered third-party developers who create products that work well with our solutions and extend them for a variety of specialized applications. Autodesk is committed to helping fuel a lifelong passion for making with students of all ages. We offer free educational licenses of Autodesk software worldwide to students, educators, and accredited educational institutions. We inspire and support beginners with Tinkercad, a simple online 3D design and 3D printing tool. ThroughAutodesk Design Academy , we provide secondary and postsecondary school markets hundreds of standards-aligned class projects to support design-based disciplines in Science, Technology, Engineering, Digital Arts, and Math (STEAM) while using Autodesk's professional-grade 3D design, engineering and entertainment software used in industry. We also have madeAutodesk Design Academy curricula available on 34 --------------------------------------------------------------------------------Udemy andCoursera . Our intention is to make Autodesk software ubiquitous and the design and making software of choice for those poised to become the next generation of professional users. Our strategy includes improving our product functionality and expanding our product offerings through internal development as well as through the acquisition of products, technology, and businesses. For example, in fiscal 2019, we acquired Assemble Systems, a leading provider of key workflow software solutions,PlanGrid , a leading provider of construction productivity software, and BuildingConnected, a leading pre-construction platform. We believe that the acquisitions of Assemble Systems,PlanGrid and BuildingConnected will enable us to offer a more comprehensive, cloud-based construction platform. 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 factors in making decisions regarding acquisitions. We currently anticipate that we will continue to acquire products, technology, and businesses as compelling opportunities become available. To help our customers imagine, design, and make a better world, our sustainability initiatives focus our efforts on the areas where we can have the greatest positive impact: products and support, catalyzing impact and innovation in our future markets, and leading by example with our 100% renewable and sustainable business practices. Through our products and services, we are supporting our customers to better understand and improve the environmental performance of everything they make and mitigate the causes and effects of climate change. We evaluate annualized recurring revenue ("ARR"), growth of billings, and remaining performance obligations in determining business momentum. To analyze progress, we have disaggregated our growth between the original maintenance model ("maintenance plan") and the subscription plan model. Maintenance plan subscriptions peaked in the fourth quarter of our fiscal 2016 as we discontinued selling new maintenance plan subscriptions in fiscal 2017, and we expect the number of these subscriptions to keep declining over time as maintenance plan customers continue to convert to our subscription plans. Our strategy depends upon a number of assumptions, including: 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 II, Item 1A, "Risk Factors."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 make a better world by matching employees' volunteer time and/or donations to nonprofit organizations; and to support organizations and individuals using design to drive positive social and environmental impact. 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.
Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements are prepared in conformity withU.S. generally accepted accounting principles ("GAAP"). In preparing our Condensed Consolidated Financial Statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our Condensed 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 in our Form 10-K for the fiscal year endedJanuary 31, 2019 . In addition, we highlighted those policies that involve a higher degree of judgment and complexity with further discussion in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K. There have been no material changes to our critical accounting policies and estimates during the three months endedOctober 31, 2019 , as compared to those disclosed in our Form 10-K for the fiscal year endedJanuary 31, 2019 . We believe these policies are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Overview of the Three and Nine Months Ended
• Total net revenue increased 28% and 30% to$842.7 million and$2.38 billion for the three and nine months endedOctober 31, 2019 , respectively, compared to the same periods in the prior fiscal year. 35
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• Total ARR was$3.2 billion , an increase of 28% compared to the third quarter in the prior fiscal year.
• Subscription plan ARR was
third quarter in the prior fiscal year. • Deferred revenue was$2.42 billion , an increase of 16% compared to the fourth quarter in the prior fiscal year.
• Remaining performance obligations (short-term and long-term deferred
revenue plus unbilled deferred revenue) was
11% compared to the fourth quarter in the prior fiscal year.
Revenue Analysis
Net revenue increased during the three and nine months endedOctober 31, 2019 , as compared to the same periods in the prior fiscal year, primarily due to the respective 49% and 58% increase in subscription revenue. This was partially offset by a 39% and 38% decrease in maintenance revenue during the three and nine months endedOctober 31, 2019 , respectively, primarily as a result of the program to migrate customers from maintenance plans to subscription plans.
For further discussion of the drivers of these results, see below under the heading "Results of Operations."
We rely significantly upon major distributors and resellers in both theU.S. and international regions, including Tech Data Corporation and its global affiliates (collectively, "Tech Data"). Total sales to Tech Data accounted for 35% of Autodesk's total net revenue for both the three and nine months endedOctober 31, 2019 and 2018. During the three and nine months endedOctober 31, 2019 and 2018, Ingram Micro accounted for 10% and 11% of Autodesk's total net revenue, respectively. Our customers through Tech Data and Ingram Micro are the resellers and end users who purchase our software subscriptions and services. Should any of our agreements with Tech Data and Ingram Micro be terminated for any reason, we believe the resellers and end users who currently purchase our products through Tech Data and Ingram Micro would be able to continue to do so under substantially the same terms from one of our many other distributors without substantial disruption to our revenue. Consequently, we believe our business is not substantially dependent on Tech Data and Ingram Micro.
Recurring Revenue and Net Revenue Retention Rate
In order to help better understand our financial performance, we use metrics such as recurring revenue, ARR and net revenue retention rate ("NR3"). Recurring revenue, ARR and NR3 are performance metrics and should be viewed independently of revenue and deferred revenue as recurring revenue, ARR and NR3 are not intended to be combined with those items. Our determination and presentation may differ from that of other companies. Please refer to the Glossary of Terms for the definitions of these metrics. 36 --------------------------------------------------------------------------------
The following table outlines our recurring revenue metric for the three and nine
months ended
Change
compared to
Three Months Ended prior fiscal year Three Months Ended (In millions, except percentage data) October 31, 2019 $ % October 31, 2018 Recurring Revenue (1)$ 806.2 $ 174.8 28 %$ 631.4 As a percentage of net revenue 96 % N/A N/A 96 % Change compared to Nine Months Ended prior fiscal year Nine Months Ended October 31, 2019 $ % October 31, 2018 Recurring Revenue (1)$ 2,281.2 $ 531.4 30 %$ 1,749.8 As a percentage of net revenue 96 % N/A N/A 95 %
________________
(1) The acquisition of a business may cause variability in the comparison of
recurring revenue in this table above and recurring revenue derived from the
revenue reported in the Condensed Consolidated Statements of Operations.
The following table outlines our ARR metric as of
As of Change compared to As of As of Change compared to October 31, prior quarter end July 31, October 31, prior fiscal year end As of 2019 $ % 2019 2019 $ % January 31, 2019
Subscription plan ARR
(184.7 ) (34 )% 549.3 Total ARR (1)$ 3,224.6 $ 155.8 5 %$ 3,068.8 $ 3,224.6 $ 475.2 17 %$ 2,749.4
________________
(1) The acquisition of a business may cause variability in the comparison of ARR
reported in this table above and ARR derived from the revenue reported in the
Condensed Consolidated Statements of Operations. Total ARR as ofOctober 31, 2019 increased 5% as compared toJuly 31, 2019 and 17% as compared to the end of fiscal 2019, primarily due to an 8% and 30% increase, in the respective periods, in subscription plan ARR primarily driven by product subscriptions, including the maintenance-to-subscription ("M2S") program as well as from our acquisitions in the fourth quarter of fiscal year 2019. The increase was partially offset by a 12% and 34% decrease, in the respective periods, in maintenance plan ARR driven by the M2S program.
NR3 was within the approximate range of 110% and 120% as of
Foreign Currency Analysis
We generate a significant amount of our revenue in
37 -------------------------------------------------------------------------------- The following table shows the impact of foreign exchange rate changes on our net revenue and total spend: Three Months Ended October 31, 2019 Nine Months Ended October 31, 2019 Constant Currency Constant Currency percent Positive/Negative/Neutral percent Positive/Negative/Neutral Percent change compared to change compared to
impact from foreign Percent change compared to change compared to impact from foreign
prior fiscal year prior fiscal year (1) exchange rate changes prior fiscal year prior fiscal year (1) exchange rate changes Net revenue 28 % 28 % Neutral 30 % 30 % Neutral Total spend 13 % 14 % Positive 14 % 15 % Positive ________________
(1) Please refer to the Glossary of Terms for the definitions of our constant
currency growth rates. Changes in the value of theU.S. dollar may have a significant effect on net revenue, total spend, and income (loss) from operations in future periods. We use foreign currency contracts to reduce the exchange rate effect on a portion of the net revenue of certain anticipated transactions but do not attempt to completely mitigate the impact of fluctuations of such foreign currency against theU.S. dollar.
Remaining Performance Obligations
Remaining performance obligations represent deferred revenue and contractually stated or committed orders under early renewal and multi-year billing plans for subscription, services, license and maintenance for which the associated deferred revenue has not yet been recognized. Unbilled deferred revenue is not included as a receivable or deferred revenue on our Condensed Consolidated Balance Sheets. See Note 3, "Revenue Recognition" for more details on Autodesk's performance obligations. (in millions) October 31, 2019 January 31, 2019 Deferred revenue $ 2,420.0 $ 2,091.4 Unbilled deferred revenue 549.3 591.0
Remaining performance obligations $ 2,969.3 $ 2,682.4
We expect that the amount of remaining performance obligations will change from quarter to quarter for several reasons, including the specific timing, duration and size of customer subscription and support agreements, varying billing cycles of such agreements, the specific timing of customer renewals, and foreign currency fluctuations.
Balance Sheet and Cash Flow Items
AtOctober 31, 2019 , we had$1.02 billion in cash and marketable securities. Our cash flow from operations increased to$716.9 million for the nine months endedOctober 31, 2019 , compared to$65.6 million for the nine months endedOctober 31, 2018 . We repurchased 1.7 million shares of our common stock for$264.2 million during the nine months endedOctober 31, 2019 . Comparatively, we repurchased 2.1 million shares of our common stock for$270.3 million during the nine months endedOctober 31, 2018 . See further discussion regarding the balance sheet and cash flow activities under the heading "Liquidity and Capital Resources." 38 --------------------------------------------------------------------------------
Results of OperationsNet Revenue
Net Revenue by Income Statement Presentation
Subscription revenue consists of our term-based product subscriptions, cloud service offerings, and flexible enterprise business arrangements. Revenue from these arrangements is recognized ratably over the contract term commencing with the date our service is made available to customers and when all other revenue recognition criteria have been satisfied.
Maintenance revenue consists of renewal fees for existing maintenance plan agreements that were initially purchased with a perpetual software license. Under our maintenance plan, customers are eligible to receive unspecified upgrades, when and if available, and technical support. We recognize maintenance revenue ratably over the term of the agreements, which is generally one year.
Other revenue consists of revenue from consulting, training and other services, and is recognized over time as the services are performed. Other revenue also includes software license revenue from the sale of products which do not incorporate substantial cloud services and is recognized up front. 39 -------------------------------------------------------------------------------- Three Months Change compared to Three Months Ended prior fiscal year Ended (In millions, except percentages) October 31, 2019 $ % October 31, 2018 Management comments Net Revenue: Subscription$ 715.0 $ 233.7 49 %$ 481.3 Up due to growth across all subscription plan types, led by renewal product subscription revenue, which benefited from the success of the M2S program. Also contributing to the increase was growth in new product subscriptions, cloud service offerings (which benefited from our acquisitions in the fourth quarter of fiscal year 2019) and EBA offerings. Maintenance (1) 91.2 (58.9 ) (39 )% 150.1 Down primarily due to the migration of maintenance plan subscriptions to subscription plan subscriptions with the M2S program. Total subscription and maintenance revenue 806.2 174.8 28 % 631.4 Other 36.5 7.0 24 % 29.5$ 842.7 $ 181.8 28 %$ 660.9 Nine Months Change compared to Nine Months Ended prior fiscal year Ended October 31, 2019 $ % October 31, 2018 Management Comments Net Revenue: Subscription$ 1,974.5 $ 722.2 58 %$ 1,252.3 Up due to growth across all subscription plan types, led by renewal product subscription revenue, which benefited from the success of the M2S program. Also contributing to the increase was growth in new product subscriptions, cloud service offerings (which benefited from our acquisitions in the fourth quarter of fiscal year 2019) and EBA offerings. Maintenance (1) 306.7 (191.0 ) (38 )% 497.7 Down primarily due to the migration of maintenance plan subscriptions to subscription plan subscriptions with the M2S program.
Total subscription and maintenance revenue 2,281.2 531.2 30 % 1,750.0 Other 93.8 11.3 14 % 82.5$ 2,375.0 $ 542.5 30 %$ 1,832.5 ____________________
(1) We expect maintenance revenue will slowly decline; however, the rate of
decline will vary based on the number of renewals, the renewal rate, and our
ability to incentivize maintenance plan customers to switch over to subscription plan offerings. 40
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Net Revenue by Product Family
Our product offerings are focused in four primary product families:
Architecture, Engineering and Construction ("AEC"), AutoCAD and AutoCAD LT,
Manufacturing ("MFG"), and
Three Months Change compared to Three Months Ended prior fiscal year Ended (In millions, except percentages) October 31, 2019 $ % October 31, 2018 Management comments Net Revenue by Product Family: AEC$ 358.0 $ 94.2 36 %$ 263.8 Up due to increases in revenue from AEC Collections, PlanGrid, EBAs, and BIM 360. AutoCAD and AutoCAD LT 245.4 54.8 29 % 190.6 Up due to increases in revenue from both AutoCAD and AutoCAD LT. MFG 182.2 23.7 15 % 158.5 Up due to increases in revenue from MFG Collections and EBAs. M&E 50.6 7.0 16 % 43.6 Up due to increases in revenue from Maya, M&E Collections, EBAs and 3DS Max. Other 6.5 2.1 48 % 4.4$ 842.7 $ 181.8 28 %$ 660.9 Nine Months Change compared to Nine Months Ended prior fiscal year Ended October 31, 2019 $ % October 31, 2018 Net Revenue by Product Family: AEC$ 996.5 $ 267.8 37 %$ 728.7 Up due to increases in revenue from AEC Collections, PlanGrid, EBAs, and BIM 360. ACAD and AutoCAD LT 689.9 167.1 32 % 522.8 Up due to increases in revenue from both AutoCAD and AutoCAD LT. MFG 524.3 84.3 19 % 440.0 Up due to increases in revenue from MFG Collections and EBAs. M&E 146.9 19.8 16 % 127.1 Up due to increases in revenue from M&E Collections, Maya, 3DS Max, and EBAs. Other 17.4 3.5 25 % 13.9$ 2,375.0 $ 542.5 30 %$ 1,832.5 41
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Net Revenue by Geographic Area
Constant currency change compared to Three Months Change compared to prior fiscal Three Months Ended October prior fiscal year year Ended October (In millions, except percentages) 31, 2019 $ % % 31, 2018 Net Revenue: Americas U.S.$ 287.3 $ 62.3 28 % *$ 225.0 Other Americas 62.0 18.5 43 % * 43.5 Total Americas 349.3 80.8 30 % 30 % 268.5 EMEA 329.6 63.1 24 % 25 % 266.5 APAC 163.8 37.9 30 % 31 % 125.9 Total Net Revenue$ 842.7 $ 181.8 28 % 28 %$ 660.9 Emerging Economies$ 101.6 $ 20.9 26 % 27 % $ 80.7 Constant currency change compared to Nine Months Change compared to prior fiscal Nine Months Ended October prior fiscal year year Ended October (In millions, except percentages) 31, 2019 $ % % 31, 2018 Net Revenue: Americas U.S.$ 804.3 $ 178.2 28 % *$ 626.1 Other Americas 166.7 43.3 35 % * 123.4 Total Americas 971.0 221.5 30 % 30 % 749.5 EMEA 943.0 207.3 28 % 27 % 735.7 APAC 461.0 113.7 33 % 34 % 347.3 Total Net Revenue$ 2,375.0 $ 542.5 30 % 30 %$ 1,832.5 Emerging Economies$ 286.9 $ 66.8 30 % 31 %$ 220.1 ____________________
* Constant currency data not provided at this level.
We believe that international revenue will continue to comprise a majority of our net revenue. Unfavorable economic conditions in the countries that contribute a significant portion of our net revenue, including in emerging economies such asBrazil ,Russia ,India , andChina , may have an adverse effect on our business in those countries and our overall financial performance. Changes in the value of theU.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. Increases to the levels of political and economic unpredictability or protectionism in the global market may impact our future financial results. 42
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Net Revenue by Sales Channel
Three Months Change compared to Three Months Ended prior fiscal year Ended (In millions, except percentages) October 31, 2019 $ % October 31, 2018 Management Comments Net Revenue by Sales Channel: Indirect$ 586.6 $ 109.6 23 %$ 477.0 Up due to an increase in subscription revenue offset by lower maintenance plan subscriptions as we continue to migrate customers to subscriptions through the M2S program. Direct 256.1 72.2 39 % 183.9 Up due to an increase in revenue from EBAs and our online Autodesk branded store as well as from our acquisitions in the fourth quarter of fiscal year 2019. Total Net Revenue$ 842.7 $ 181.8 28 %$ 660.9 Nine Months Change compared to Nine Months Ended prior fiscal year Ended October 31, 2019 $ % October 31, 2018 Management Comments Net Revenue by Sales Channel: Indirect$ 1,663.2 $ 347.7 26 %$ 1,315.5 Up due to an increase in subscription revenue offset by lower maintenance plan subscriptions as we continue to migrate customers to subscriptions through the M2S program. Direct 711.8 194.8 38 % 517.0 Up due to an increase in revenue from EBAs and our online Autodesk branded store as well as from our acquisitions in the fourth quarter of fiscal year 2019. Total Net Revenue$ 2,375.0 $ 542.5 30 %$ 1,832.5
Cost of Revenue and Operating Expenses
Cost of subscription and maintenance revenue includes the labor costs of providing product support to our subscription and maintenance customers, including allocated IT and facilities costs, professional services fees related to operating our network and cloud infrastructure, royalties, depreciation expense and operating lease payments associated with computer equipment, data center costs, salaries, related expenses of network operations, and stock-based compensation expense. Cost of other revenue includes labor costs associated with product setup, costs of consulting and training services contracts, and collaborative project management services contracts. Cost of other revenue also includes stock-based compensation expense, direct material and overhead charges, allocated IT and facilities costs, professional services fees and royalties. Direct material and overhead charges include the cost associated with electronic and physical fulfillment. Cost of revenue, at least over the near term, is affected by labor costs, the volume and mix of product sales, fluctuations in consulting costs, amortization of developed technology, new customer support offerings, royalty rates for licensed technology embedded in our products and stock-based compensation expense. 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, sales and dealer commissions, and 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 payment processing fees, the cost of supplies and equipment, gains and losses on our operating expense cash flow hedges, allocated IT and facilities costs, and labor costs associated with sales and order management. 43
-------------------------------------------------------------------------------- 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, the expense of travel, entertainment and training for such personnel, professional services such as fees paid to software development firms and independent contractors, gains and losses on our operating expense cash flow hedges, and allocated IT and facilities costs. General and administrative expenses include salaries, bonuses, acquisition-related transition costs, benefits and stock-based compensation expense for our CEO, 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, net IT and facilities costs, and the cost of supplies and equipment. Change compared to Three Months Ended prior fiscal year Three Months Ended (In millions, except percentages) October 31, 2019 $ % October 31, 2018 Management comments Cost of revenue: Subscription and $ 54.2$ (0.6 ) (1 )% $ 54.8 Down primarily due to a decrease maintenance in variable costs associated with the customer support organization. Other 16.9 3.0 22 % 13.9 Up primarily due to an increase in employee-related costs due to higher headcount. Amortization of 8.4 4.8 133 % 3.6 Up due to an increase in developed technology amortization expense from acquired developed technologies as a result of our acquisitions in the fourth quarter of fiscal year 2019. Total cost of revenue $ 79.5$ 7.2 10 % $ 72.3 Operating expenses: Marketing and sales $ 330.7$ 33.1 11 % $ 297.6 Up primarily due to an increase in employee-related costs driven by higher headcount as well as an increase in stock-based compensation expense driven by awards granted and assumed through our acquisitions in the fourth quarter of fiscal year 2019. Research and 213.0 32.0 18 % 181.0 Up primarily due to an increase in development employee-related costs driven by higher headcount as well as an increase in stock-based compensation expense driven by awards granted and assumed through our acquisitions in the fourth quarter of fiscal year 2019. General and 99.1 11.7 13 % 87.4 Up primarily due to an increase in administrative employee-related costs driven by higher headcount as well as an increase in stock-based compensation expense driven by awards granted and assumed through our acquisitions in the fourth quarter of fiscal year 2019. Amortization of 9.7 5.5 131 % 4.2 Up due to an increase in purchased intangibles amortization expense from acquired purchased intangibles as a result of our acquisitions in the fourth quarter of fiscal year 2019. Restructuring and 0.1 (3.6 ) * 3.7 Decreased as we substantially other exit costs, net completed the actions authorized under the fiscal 2018 restructuring plan. Total operating $ 652.6$ 78.7 14 % $ 573.9 expenses Change compared to Nine Months Ended prior fiscal year Nine Months Ended October 31, 2019 $ % October 31, 2018 Management comments Cost of revenue: Subscription and $ 166.9$ 7.6 5 % $ 159.3 Up due to an increase in cloud maintenance hosting and employee-related costs driven by higher headcount. Other 48.6 9.6 25 % 39.0 Up due to an increase in employee-related costs driven by higher headcount. Amortization of 26.2 15.6 147 % 10.6 Up due to an increase in developed technology amortization expense from acquired developed technologies as a result of our acquisitions in the fourth quarter of fiscal year 2019.
Total cost of revenue $ 241.7$ 32.8 16 % $ 208.9 44
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Operating expenses:
Marketing and sales
employee-related costs driven by
higher headcount as well as an
increase in stock-based
compensation expense driven by
awards granted and assumed through
our
acquisitions in the fourth
quarter of fiscal 2019. Research and 634.0 99.4 19 % 534.6 Up primarily due to increased development
employee-related costs driven by
higher headcount as well as an
increase in stock-based
compensation expense driven by
awards granted and assumed through
our
acquisitions in the fourth
quarter of fiscal 2019. General and 299.6 60.2 25 % 239.4 Up primarily due to increased administrative
employee-related costs driven by
higher headcount as well as an
increase in stock-based
compensation expense driven by
awards granted and assumed through
our
acquisitions in the fourth
quarter of fiscal 2019. Amortization of 29.2 17.4 147 % 11.8 Up due to an increase in purchased intangibles
amortization expense from acquired
purchased intangibles as a result
of
our acquisitions in the fourth
quarter of fiscal year 2019. Restructuring and 0.5 (39.5 ) * 40.0 Decreased as we substantially other exit costs, net
completed the actions authorized
under the fiscal 2018
restructuring plan.
Total operating
____________________
* Percentage is not meaningful.
The following table highlights our expectation for the absolute dollar change and percent of revenue change between the fourth quarter of fiscal 2020, as compared to the fourth quarter of fiscal 2019:
Absolute dollar Percent of net impact revenue impact Cost of revenue Increase Decrease Marketing and sales Increase Decrease Research and development Increase Decrease General and administrative Decrease Decrease Amortization of purchased intangibles Increase
Flat
Interest and Other Expense, Net
The following table sets forth the components of interest and other expense, net:
Three Months Ended October 31, Nine Months Ended October 31, (in millions) 2019 2018 2019 2018
Interest and investment expense, net
$ (42.3 ) $ (36.6 ) (Loss) gain on foreign currency (0.5 ) 1.3 2.5 5.2 (Loss) gain on strategic investments and dispositions, net (0.5 ) 2.8 (3.3 ) 9.5 Other income 0.7 7.4 5.4 11.5
Interest and other expense, net
The Interest and other expense, net, negatively changed by$11.0 million and$27.3 million during the three and nine months endedOctober 31, 2019 , respectively, as compared to the same periods in the prior fiscal year. This was primarily driven by an increase in interest expense resulting from our term loan entered into onDecember 17, 2018 , with aggregate principal balance outstanding of$150.0 million as ofOctober 31, 2019 , losses in the current periods versus gains in previous periods for unrealized gains on our privately-held strategic investments and curtailment gains on our pension plans in the prior periods. The negative change was partially offset by mark-to-market gains in the current periods versus losses in the prior periods on marketable securities. 45 --------------------------------------------------------------------------------
Interest expense and investment income fluctuates based on average cash, marketable securities, debt balances, average maturities and interest rates.
Gains and losses on foreign currency are primarily due to the impact of re-measuring foreign currency transactions and net monetary assets into the functional currency of the corresponding entity. The amount of the gain or loss on foreign currency is driven by the volume of foreign currency transactions and the foreign currency exchange rates for the 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. Autodesk had an income tax expense of$29.7 million , relative to pre-tax income of$96.4 million for the three months endedOctober 31, 2019 , and an income tax expense of$35.2 million , relative to pre-tax income of$11.5 million for the three months endedOctober 31, 2018 . Autodesk had an income tax expense of$88.8 million , relative to pre-tax income of$171.5 million for the nine months endedOctober 31, 2019 , and an income tax expense of 69.8 million, relative to pre-tax losses of$75.7 million for the nine months endedOctober 31, 2018 . Income tax expense for the three months endedOctober 31, 2019 decreased and nine months endedOctober 31, 2019 increased primarily due to foreign earnings and withholding taxes. Autodesk regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, Autodesk considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available 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, Autodesk considered cumulative losses as a significant source of negative evidence and maintained a valuation allowance against our deferred tax attributes in theU.S. and certain foreign jurisdictions as ofOctober 31, 2019 . As we continually strive to optimize our overall business model and tax laws and regulations evolve, tax planning strategies may become feasible and prudent whereby management may determine that it is more likely than not that the foreign orU.S. , federal or state deferred tax assets will be realized; therefore, we will continue to evaluate the evidence around our ability to utilize our net deferred tax assets each quarter, both in theU.S. and foreign jurisdictions, based on all available evidence, both positive and negative. As ofOctober 31, 2019 , we had$215.8 million of gross unrecognized tax benefits, of which$198.4 million would reduce our valuation allowance, if recognized. The remaining$17.4 million would impact the effective tax rate, if recognized. It is possible that the amount of unrecognized tax benefits will change in the next twelve months; however, an estimate of the range of the possible change cannot be made at this time. We anticipate that theU.S. Department of Treasury will continue to interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered. As future guidance is issued, we may make adjustments to amounts that we have previously recorded that may materially impact our financial statements in the period in which the adjustments are made. 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 impacts of the Tax Act. A significant amount of our earnings is generated by ourEurope andAsia 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. 46
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Other Financial Information
In addition to our results determined under GAAP discussed above, we believe the following non-GAAP measures are useful to investors in evaluating our operating performance. For the three and nine months endedOctober 31, 2019 and 2018, our gross profit, gross margin, income (loss) from operations, operating margin, net income (loss), diluted net income (loss) per share and diluted shares used in per share calculation on a GAAP and non-GAAP basis were as follows (in millions except for gross margin, operating margin, and per share data): Three Months Ended October 31, Nine Months Ended October 31, 2019 2018 2019 2018 (Unaudited) Gross profit$ 763.2 $ 588.6 $ 2,133.3 $ 1,623.6 Non-GAAP gross profit$ 776.6 $ 597.1 $ 2,174.2 $ 1,646.6 Gross margin 91 % 89 % 90 % 89 % Non-GAAP gross margin 92 % 90 % 92 % 90 %
Income (loss) from operations
$ 209.2 $ (65.3 ) Non-GAAP income from operations$ 225.3 $ 92.2 $ 543.7 $ 176.8 Operating margin 13 % 2 % 9 % (4 )% Non-GAAP operating margin 27 % 14 % 23 % 10 % Net income (loss)$ 66.7 $ (23.7 ) $ 82.7$ (145.5 ) Non-GAAP net income$ 173.4 $ 65.0 $ 417.5 $ 122.6 GAAP diluted net income (loss) per share$ 0.30 $ (0.11 ) $ 0.37$ (0.67 ) Non-GAAP diluted net income per share$ 0.78 $ 0.29 $ 1.88 $ 0.55 GAAP diluted weighted average shares used in per share calculation 221.9 218.9 222.1 218.7 Non-GAAP diluted weighted average shares used in per share calculation 221.9 221.6 222.1 221.7 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 condensed 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, to 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 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. 47 --------------------------------------------------------------------------------
Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures
(In millions except for gross margin, operating margin, and per share data):
Three Months Ended October 31, Nine Months Ended October 31, 2019 2018 2019 2018 (Unaudited) Gross profit$ 763.2 $ 588.6 $ 2,133.3 $ 1,623.6 Stock-based compensation expense 4.7 4.9 14.4 12.4 Amortization of developed technologies 8.4 3.6 26.2 10.6 Acquisition related costs 0.3 - 0.3 - Non-GAAP gross profit$ 776.6 $ 597.1 $ 2,174.2 $ 1,646.6 Gross margin 91 % 89 % 90 % 89 % Stock-based compensation expense 1 % 1 % 1 % 1 % Amortization of developed technologies 1 % 1 % 1 % 1 % Non-GAAP gross margin (1) 92 % 90 % 92 % 90 % Income (loss) from operations$ 110.6 $ 14.7 $ 209.2 $ (65.3 ) Stock-based compensation expense 94.0 64.2 257.4 175.5 Amortization of developed technologies 8.4 3.6 26.2 10.6 Amortization of purchased intangibles 9.7 4.2 29.2 11.8 CEO transition costs - - - (0.1 ) Acquisition related costs 2.5 1.8 21.2 4.3 Restructuring and other exit costs, net 0.1 3.7 0.5 40.0
Non-GAAP income from operations
$ 543.7 $ 176.8 Operating margin 13 % 2 % 9 % (4 )% Stock-based compensation expense 11 % 10 % 11 % 10 % Amortization of developed technologies 1 % 1 % 1 % 1 % Amortization of purchased intangibles 1 % 1 % 1 % 1 % Acquisition related costs - % - % 1 % - % Restructuring and other exit costs, net - % 1 % - % 2 % Non-GAAP operating margin (1) 27 % 14 % 23 % 10 % Net income (loss)$ 66.7 $ (23.7 ) $ 82.7$ (145.5 ) Stock-based compensation expense 94.0 64.2 257.4 175.5 Amortization of developed technologies 8.4 3.6 26.2 10.6 Amortization of purchased intangibles 9.7 4.2 29.2 11.8 CEO transition costs - - - (0.1 ) Acquisition related costs 2.5 1.8 21.2 4.3 Restructuring and other exit costs, net 0.1 (2.1 ) 0.5 34.5 Loss (gain) on strategic investments and dispositions, net 0.4 (2.9 ) 3.2 (9.5 ) Discrete tax benefit (provision) items 0.3 (3.6 ) 1.3 (12.3 ) Income tax effect of non-GAAP adjustments (8.7 ) 23.5 (4.2 ) 53.3 Non-GAAP net income$ 173.4 $ 65.0 $ 417.5 $ 122.6 48
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Three Months Ended October 31, Nine Months Ended October 31, 2019 2018 2019 2018
(Unaudited)
Diluted net income (loss) per share
0.42 0.28 1.16 0.79 Amortization of developed technologies 0.04 0.02 0.12 0.06 Amortization of purchased intangibles 0.04 0.02 0.13 0.05 Acquisition related costs 0.02 0.01 0.10 0.02 Restructuring and other exit costs, net - - - 0.16 Loss (gain) on strategic investments and dispositions, net - (0.01 ) 0.01 (0.04 ) Discrete tax benefit (provision) items - (0.02 ) 0.01 (0.06 ) Income tax effect of non-GAAP adjustments (0.04 ) 0.10 (0.02 ) 0.24
Non-GAAP diluted net income per share
____________________
(1) Totals may not sum due to rounding.
Our non-GAAP financial measures may exclude the following:
Stock-based compensation expenses. We exclude stock-based compensation expenses from non-GAAP measures primarily because they are non-cash expenses and management finds it useful to exclude certain non-cash charges to assess the appropriate level of various operating expenses to assist in budgeting, planning and forecasting future periods. Moreover, because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use under FASB ASC Topic 718, we believe excluding stock-based compensation expenses allows investors to make meaningful comparisons between our recurring core business operating results and those of other companies. Amortization of developed technologies and purchased intangibles. We incur amortization of acquisition-related developed technology and purchased intangibles in connection with acquisitions of certain businesses and technologies. Amortization of developed technologies and purchased intangibles is inconsistent in amount and frequency and is significantly affected by the timing and size of our acquisitions. Management finds it useful to exclude these variable charges from our cost of revenues to assist in budgeting, planning and forecasting future periods. Investors should note that the use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of developed technologies and purchased intangible assets will recur in future periods. CEO transition costs. We exclude amounts paid to the Company's former CEOs upon departure under the terms of their transition agreements, including severance payments, acceleration of restricted stock units, and continued vesting of performance stock units, and legal fees incurred with the transition. Also excluded from our non-GAAP measures are recruiting costs related to the search for a new CEO. These costs represent non-recurring expenses and are not indicative of our ongoing operating expenses. We further believe that excluding the CEO transition costs from our non-GAAP results is useful to investors in that it allows for period-over-period comparability.Goodwill impairment. This is a non-cash charge to write-down goodwill to fair value when there was an indication that the asset was impaired. As explained above, management finds it useful to exclude certain non-cash charges to assess the appropriate level of various operating expenses to assist in budgeting, planning and forecasting future periods. Restructuring and other exit costs, net. These expenses are associated with realigning our business strategies based on current economic conditions. In connection with these restructuring actions or other exit actions, we recognize costs related to termination benefits for former employees whose positions were eliminated, the closure of facilities and cancellation of certain contracts. We exclude these charges because these expenses are not reflective of ongoing business and operating results. We believe it is useful for investors to understand the effects of these items on our total operating expenses. Acquisition related costs. We exclude certain acquisition related costs, including due diligence costs, professional fees in connection with an acquisition, certain financing costs, and certain integration related expenses. These expenses are unpredictable, and dependent on factors that may be outside of our control and unrelated to the continuing operations of the acquired business, or our Company. In addition, the size and complexity of an acquisition, which often drives the magnitude of acquisition related costs, may not be indicative of such future costs. We believe excluding acquisition related costs facilitates the comparison of our financial results to the Company's historical operating results and to other companies in our industry. 49 -------------------------------------------------------------------------------- Loss (gain) on strategic investments and dispositions. We exclude gains and losses related to our strategic investments and dispositions from our non-GAAP measures primarily because management finds it useful to exclude these variable gains and losses on these investments and dispositions in assessing our financial results. Included in these amounts are non-cash unrealized gains and losses on the derivative components, dividends received, realized gains and losses on the sales or losses on the impairment of these investments and dispositions. We believe excluding these items is useful to investors because these excluded items do not correlate to the underlying performance of our business and these losses or gains were incurred in connection with strategic investments and dispositions which do not occur regularly. Discrete tax provision items. We exclude the GAAP tax provision, including discrete items, from the non-GAAP measure of net (loss) income, and include a non-GAAP tax provision based upon the projected annual non-GAAP effective tax rate. Discrete tax items include income tax expenses or benefits that do not relate to ordinary income from continuing operations in the current fiscal year, unusual or infrequently occurring items, or the tax impact of certain stock-based compensation. Examples of discrete tax items include, but are not limited to, certain changes in judgment and changes in estimates of tax matters related to prior fiscal years, certain costs related to business combinations, certain changes in the realizability of deferred tax assets or changes in tax law. Management believes this approach assists investors in understanding the tax provision and the effective tax rate related to ongoing operations. We believe the exclusion of these discrete tax items provides investors with useful supplemental information about our operational performance. Establishment of a valuation allowance on certain net deferred tax assets. This is a non-cash charge to record a valuation allowance on certain deferred tax assets. As explained above, management finds it useful to exclude certain non-cash charges to assess the appropriate level of various cash expenses to assist in budgeting, planning and forecasting future periods. Income tax effects on the difference between GAAP and non-GAAP costs and expenses. The income tax effects that are excluded from the non-GAAP measures relate to the tax impact on the difference between GAAP and non-GAAP expenses, primarily due to stock-based compensation, amortization of purchased intangibles and restructuring charges and other exit costs (benefits) for GAAP and non-GAAP measures.
Liquidity and Capital Resources
Our primary source of cash is from the sale of our software and related services. Our primary use of cash is payment of our operating costs, which consist primarily of employee-related expenses, such as compensation and benefits, as well as general operating expenses for marketing, facilities and overhead costs. In addition to operating expenses, we also use cash to fund our stock repurchase program, repay existing debt and invest in our growth initiatives, which include acquisitions of products, technology and businesses. See further discussion of these items below.
At
OnDecember 17, 2018 , Autodesk entered into a Credit Agreement (the "Credit Agreement") for an unsecured revolving loan facility in the aggregate principal amount of$650.0 million , with an option to request increases in the amount of the credit facility by up to an additional$350.0 million . The maturity date on the credit facility isDecember 2023 . AtOctober 31, 2019 , Autodesk had no outstanding borrowings on this line of credit. As ofDecember 5, 2019 , we have no amounts outstanding under the credit facility. See Part I, Item 1, Note 12, "Borrowing Arrangements," in the Notes to Condensed Consolidated Financial Statements for further discussion on our covenant requirements. If we are unable to remain in compliance with the covenants, we will not be able to draw on our credit facility. OnDecember 17, 2018 , we also entered into a Term Loan Agreement which provided for a delayed draw term loan facility in the aggregate principal amount of$500.0 million . OnDecember 19, 2018 , we borrowed a$500.0 million term loan under the Term Loan Agreement in connection with the acquisition ofPlanGrid, Inc. inDecember 2018 . See Part I, Item 1, Note 12, "Borrowing Arrangements," in the Notes to Condensed Consolidated Financial Statements for further discussion on the Term Loan Agreement terms. AtOctober 31, 2019 ,$150.0 million was outstanding under the Term Loan Agreement. As ofDecember 5, 2019 ,$100.0 million remains outstanding under the Term Loan Agreement. See Part I , Item 1, Note 19 , "Subsequent Events," in the Notes to the Condensed Consolidated Financial Statements for further discussion. In addition to the Term Loan Agreement, as ofOctober 31, 2019 , we have$1.60 billion aggregate principal amount of Notes outstanding, of which$449.4 million is classified as "Current portion of long-term notes payable, net" in the Condensed Consolidated Balance Sheets in Part I, Item 1. See Part I, Item 1, Note 12, "Borrowing Arrangements," in the Notes to Condensed Consolidated Financial Statements for further discussion. 50 -------------------------------------------------------------------------------- Our cash and cash equivalents are held by diversified financial institutions globally. Our primary commercial banking relationship is with Citigroup and its global affiliates. In addition,Citibank N.A ., an affiliate of Citigroup, is one of the lead lenders and agent in the syndicate of our$650.0 million line of credit as well as our Term Loan Agreement. Long-term cash requirements for items other than normal operating expenses are anticipated for the following: repayment of debt; common stock repurchases; the acquisition of businesses, software products, or technologies complementary to our business; and capital expenditures, including the purchase and implementation of internal-use software applications. Our cash, cash equivalents, and marketable securities balances are concentrated in a few locations around the world, with substantial amounts held outside ofthe United States . As ofOctober 31, 2019 , approximately 63% of our total cash or cash equivalents and marketable securities are located in foreign jurisdictions and that percentage will fluctuate subject to business needs. There are several factors that can impact our ability to utilize foreign cash balances, such as foreign exchange restrictions, foreign regulatory restrictions or adverse tax costs. The Tax Act included a mandatory one-time tax on accumulated earnings of foreign subsidiaries and generally eliminatedU.S. taxes on foreign subsidiary distributions in future periods. As a result, earnings in foreign jurisdictions are generally available for distribution to theU.S. with little to no incrementalU.S. taxes. We regularly review our capital structure and consider a variety of potential financing alternatives and planning strategies to ensure we have the proper liquidity available in the locations in which it is needed. We expect to meet our liquidity needs through or in combination of current cash balances, ongoing cash flows, and external borrowings. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part II, Item 1A titled "Risk Factors." However, based on our current business plan and revenue prospects, we believe that our existing balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for at least the next 12 months. Our revenue, earnings, cash flows, receivables, and payables are subject to fluctuations due to changes in foreign currency exchange rates, for which we have put in place foreign currency contracts as part of our risk management strategy. See Part I, Item 3, "Quantitative and Qualitative Disclosures about Market Risk" for further discussion. Nine Months Ended October 31, (in millions) 2019 2018 Net cash provided by operating activities $ 716.9$ 65.6 Net cash (used in) provided by investing activities (42.7 ) 39.7 Net cash used in financing activities (600.0 ) (291.9 ) Net cash provided by operating activities of$716.9 million for the nine months endedOctober 31, 2019 , includes$413.0 million of non-cash expenses, including stock-based compensation expense, and depreciation, amortization and accretion expense, an increase in changes in operating assets and liabilities of$221.2 million , and our net income of$82.7 million . The primary working capital source of cash was an increase in deferred revenue from$2.09 billion as ofJanuary 31, 2019 , to$2.42 billion as ofOctober 31, 2019 . The primary working capital uses of cash was a decrease in accounts payable and accrued liabilities and an increase in accounts receivable. Net cash used in investing activities was$42.7 million for the nine months endedOctober 31, 2019 , primarily due to capital expenditures and purchases of marketable securities partially offset by the sale and maturities of marketable securities. AtOctober 31, 2019 , our short-term investment portfolio had an estimated fair value of$68.3 million and a cost basis of$59.8 million . The portfolio fair value consists of short-term trading securities that were invested in a defined set of mutual funds as directed by the participants in our Deferred Compensation Plan (see Note 10, "Deferred Compensation," in the Notes to the Condensed Consolidated Financial Statements for further discussion). Net cash used in financing activities was$600.0 million for the nine months endedOctober 31, 2019 , primary due to the repayment of debt and the repurchases of common stock. These cash outflows were offset in part by cash proceeds from the issuance of common stock. 51
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Issuer Purchases of
Autodesk's stock repurchase program provides Autodesk with the ability to offset the dilution from the issuance of stock under our employee stock plans and reduce shares outstanding over time, and has the effect of returning excess cash generated from our business to stockholders. Under the share repurchase program, Autodesk may repurchase shares from time to time in open market transactions, privately-negotiated transactions, accelerated share repurchase programs, tender offers, or by other means. The share repurchase program does not have an expiration date and the pace and timing of repurchases will depend on factors such as cash generation from operations, available surplus, the volume of employee stock plan activity, remaining shares available in the authorized pool, cash requirements for acquisitions, economic and market conditions, stock price and legal and regulatory requirements.
The following table provides information about the repurchase of common stock in
open-market transactions during the three months ended
Total
Number of Maximum Number of
Shares
Purchased Shares that May
as Part of Yet Be Total Number of Publicly Purchased Under Shares Average Price Announced Plans the Plans or (Shares in millions) Purchased Paid per Share or Programs (1) Programs (2) August 1 - August 31 0.4$ 144.32 0.4 16.1 September 1 - September 30 0.1 144.51 0.1 16.0 October 1 - October 31 0.3 144.73 0.3 15.7 Total 0.8$ 144.49 0.8 ________________
(1) This represents shares purchased in open-market transactions under the stock
repurchase plan approved by the Board of Directors.
(2) These amounts correspond to the plan approved by the Board of Directors in
plan does not have a fixed expiration date. See Note 15, "Stockholders'
Deficit," in the Notes to the unaudited Condensed Consolidated Financial
Statements for further discussion.
Off-Balance Sheet Arrangements
As of
Glossary of Terms
Annualized Recurring Revenue (ARR): Represents the annualized value of our average monthly recurring revenue for the preceding three months. "Maintenance plan ARR" captures ARR relating to traditional maintenance attached to perpetual licenses. "Subscription plan ARR" captures ARR relating to subscription offerings. Refer to the definition of recurring revenue below for more details on what is included within ARR. Recurring revenue acquired with the acquisition of a business is captured when total subscriptions are captured in our systems and may cause variability in the comparison of this calculation. ARR is currently one of our key performance metrics to assess the health and trajectory of our business. ARR should be viewed independently of revenue and deferred revenue as ARR is a performance metric and is not intended to be combined with any of these items.
Billings: Total revenue plus the net change in deferred revenue from the beginning to the end of the period.
Cloud Service Offerings: Represents individual term-based offerings deployed through web browser technologies or in a hybrid software and cloud configuration. Cloud service offerings that are bundled with other product offerings are not captured as a separate cloud service offering.
Constant Currency (CC) 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. We calculate constant currency growth rates by (i) applying the applicable prior period exchange rates to current period results and (ii) excluding any gains or losses from foreign currency hedge contracts that are reported in the current and comparative periods.
Core Business: Represents the combination of maintenance, product, and EBA.
52 -------------------------------------------------------------------------------- Enterprise Business Agreements (EBAs): Represents programs providing enterprise customers with token-based access or a fixed maximum number of seats to a broad pool of Autodesk products over a defined contract term.
Free Cash Flow: Cash flow from operating activities minus capital expenditures.
Industry Collections: Autodesk Industry Collections are a combination of products and services that target a specific user objective and support a set of workflows for that objective. Our Industry Collections consist of: Autodesk Architecture, Engineering and Construction Collection, Autodesk Product Design & Manufacturing Collection, and Autodesk Media and Entertainment Collection. We introduced Industry Collections effectiveAugust 1, 2016 to replace our suites. Maintenance Plan: Our maintenance plans provide 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 plans, customers are eligible to receive unspecified upgrades when and if available, and technical support. We recognize maintenance revenue over the term of the agreements, generally one year. Net Revenue Retention Rate (NR3): Measures the year-over-year change in ARR for the population of customers that existed one year ago ("base customers"). Net revenue retention rate is calculated by dividing the current period ARR related to base customers by the total ARR from one year ago. ARR is based on USD reported revenue, and fluctuations caused by changes in foreign currency exchange rates and hedge gains or losses have not been eliminated. ARR related to acquired companies is excluded from the calculation for at least one year from integration. Other Revenue: Consists of revenue from consulting, training and other services, and is recognized over time as the services are performed. Other Revenue also includes software license revenue from the sale of products that do not incorporate substantial cloud services and is recognized up front. Product Subscription: Provides customers the most flexible, cost-effective way to access and manage 3D design, engineering, and entertainment software tools. Our product subscriptions currently represent a hybrid of desktop and SaaS functionality, which provides a device-independent, collaborative design workflow for designers and their stakeholders. Recurring Revenue: Consists of the revenue for the period from our traditional maintenance plans and revenue from our subscription plan offerings. It excludes subscription revenue related to consumer product offerings, select Creative Finishing product offerings, education offerings, and third party products. Recurring revenue acquired with the acquisition of a business is captured when total subscriptions are captured in our systems and may cause variability in the comparison of this calculation.
Remaining Performance Obligations: The sum of total short-term, long-term, and unbilled deferred revenue. Current remaining performance obligations is the amount of revenue we expect to recognize in the next twelve months.
Spend: The sum of cost of revenue and operating expenses.
Subscription Plan: Comprises our term-based product subscriptions, cloud service offerings, and EBAs. Subscriptions represent a combined hybrid offering of desktop software and cloud functionality which provides a device-independent, collaborative design workflow for designers and their stakeholders. With subscription, customers can use our software anytime, anywhere, and get access to the latest updates to previous versions.
Subscription Revenue: Includes subscription fees from product subscriptions, cloud service offerings, and EBAs.
Unbilled Deferred Revenue: Unbilled deferred revenue represents contractually stated or committed orders under early renewal and multi-year billing plans for subscription, services and maintenance for which the associated deferred revenue has not been recognized. Under FASB Accounting Standards Codification ("ASC") Topic 606, unbilled deferred revenue is not included as a receivable or deferred revenue on our Condensed Consolidated Balance Sheet. 53
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