UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 31, 2013
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-14338
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AUTODESK, INC.
(Exact name of registrant as specified in its charter)
Delaware | 94-2819853 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer Identification No.) | |
111 McInnis Parkway, San Rafael, California | 94903 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (415) 507-5000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.01 Par Value | The NASDAQ Stock Market LLC (NASDAQ Global Select Market) | |
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”). Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of July 31, 2012, the last business day of the registrant’s most recently completed second fiscal quarter, there were approximately 225.8 million shares of the registrant’s common stock outstanding that were held by non-affiliates, and the aggregate market value of such shares held by non-affiliates of the registrant (based on the closing sale price of such shares on the NASDAQ Global Select Market on July 31, 2012, the last trading day of our second fiscal quarter) was approximately $7.7 billion. Shares of the registrant’s common stock held by each executive officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 28, 2013, registrant had outstanding approximately 223.8 million shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for registrant’s Annual Meeting of Stockholders (the “Proxy Statement”), are incorporated by reference in Part III of this Form 10-K to the extent stated herein. The Proxy Statement will be filed within 120 days of the registrant’s fiscal year ended January 31, 2013.
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AUTODESK, INC. FORM 10-K
TABLE OF CONTENTS
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FORWARD-LOOKING INFORMATION
The discussion in this Annual Report on Form 10-K contains trend analyses and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are any statements that look to future events and consist of, among other things, our business strategies; anticipated future financial results; our belief that the strength of our channel network, technological leadership, brand recognition, breadth of product line and large installed base are benefitting us as global economies recover; expected trends in certain financial metrics; expected market trends, including the growth of cloud, mobile and social computing; our ability to successfully expand adoption of our products; our ability to gain market acceptance of new businesses and sales initiatives; our ability to successfully increase sales of product suites as part of our overall sales strategy; our belief that emerging economies continue to present long-term growth opportunities for us; the impact of our restructuring activities; the sufficiency of our cash to meet our working capital and operating resource expenditure requirements over the next 12 months; and our ability to generate sufficient future taxable income in appropriate tax jurisdictions to realize our net deferred tax assets. In addition, forward-looking statements also consist of statements involving expectations regarding product acceptance, activity related to our stock repurchase program, and short-term and long-term cash requirements, as well as statements involving trend analyses and statements including such words as “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” and similar expressions or the negative of these terms or other comparable terminology. These forward-looking statements speak only as of the date of this Annual Report on Form 10-K and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of a number of factors, including those set forth below in Item 1A, “Risk Factors,” and in our other reports filed with the U.S. Securities and Exchange Commission. We assume no obligation to update the forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made.
PART I
ITEM 1. BUSINESS
Note: A glossary of terms used in this Form 10-K appears at the end of this Item 1.
GENERAL
We are a world leading design software and services company, offering customers productive business solutions through powerful technology products and services. We serve customers in the architecture, engineering and construction; manufacturing; and digital media, consumer and entertainment industries. Our sophisticated software products enable our customers to experience their ideas before they are real. Customers are able to imagine, design and create their ideas by visualizing, simulating and analyzing real-world performance early in the design process by creating and manipulating digital prototypes. These capabilities allow our customers to optimize and improve their designs, save time and money, improve quality, communicate intentions and foster innovation. Our professional software products are sold globally, both directly to customers and through a network of resellers and distributors. Additionally, we sell a line of consumer products for digital art, personal design and creativity, and home design. These products are sold over the Internet and in various digital storefronts, including the Apple App Store and the Google Play Store.
Segments
We reported based on four reportable operating segments:
• | Platform Solutions and Emerging Business (“PSEB”), which accounted for 37% of our net revenue in fiscal 2013; |
• | Architecture, Engineering and Construction (“AEC”), which accounted for 30% of our net revenue in fiscal 2013; |
• | Manufacturing (“MFG”), which accounted for 25% of our net revenue in fiscal 2013; and |
• | Media and Entertainment (“M&E”), which accounted for 8% of our net revenue in fiscal 2013. |
A summary of our net revenue and results of operations for our business segments is found in Note 13, “Segments,” in the Notes to our Consolidated Financial Statements.
Our PSEB, AEC and MFG segments derive revenue from the sale of licenses and maintenance subscriptions for software
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products and services to customers who design, build, manage or own building, manufacturing and infrastructure projects. In addition to software products, the PSEB, AEC and MFG segments offer a range of services, including consulting, support and training, largely dedicated to enhancing our ability to sell licenses and maintenance subscriptions to our software products. Our M&E segment derives revenue from the sale of licenses of software products to creative professionals, post-production facilities, and broadcasters for a variety of applications, including feature films, television programs, commercials, music and corporate videos, interactive game production, web design and interactive web streaming. In addition, our animation products produced by our M&E segment are often used by customers of products from our other segments for the visualization of their designs.
The principal products and services of these segments include the following:
• | Flagship products, which accounted for approximately 56% of our net revenue in fiscal 2013, are our core standalone horizontal, vertical and model-based design products including AutoCAD, AutoCAD LT, AutoCAD Mechanical, AutoCAD Civil 3D, AutoCAD Map, AutoCAD Architecture, Maya and 3ds Max. |
• | Suites, which accounted for approximately 30% of our net revenue in fiscal 2013, are a combination of products that target a specific user objective (product design, building design, etc.) and support a set of workflows for that objective, including Autodesk Product Design Suites, Autodesk Building Design Suites, Autodesk Educational/academic Suites, Autodesk Infrastructure Design Suites and AutoCAD Design Suites. |
• | New and Adjacent products, which accounted for approximately 15% of our net revenue in fiscal 2013, are new product offerings as well as products that are not considered flagship or suites including Autodesk Creative Finishing products, Autodesk Moldflow products and Autodesk Vault. |
Corporate Information
We were incorporated in California in April 1982 and were reincorporated in Delaware in May 1994. Our principal executive office is located at 111 McInnis Parkway, San Rafael, California 94903, and the telephone number at that address is (415) 507-5000. Our internet address is www.autodesk.com. The information posted on our website is not incorporated into this Annual Report on Form 10-K. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on the Investor Relations portion of our web site at www.autodesk.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The public may also read and copy any material we file with the SEC at the SEC's Public Reference Room at 100 F Street N.E. Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1 (800) SEC-0330.
PRODUCTS
The principal product offerings from Autodesk’s different segments are as follows:
PSEB
Our PSEB segment includes our design product, AutoCAD. Our AutoCAD product is a platform product that underpins our design product offerings for all the industries we serve. For example, our AEC and MFG segments offer tailored versions of AutoCAD software for the industries they serve. Our AutoCAD product also provides a platform for our developer partners to build custom solutions for a range of diverse design-oriented markets. PSEB's revenue primarily includes revenue from sales of licenses of our design products, AutoCAD and AutoCAD LT, as well as the Autodesk Design Suite and many other design and consumer products. The segment’s principal product offerings included the following during fiscal 2013:
• | AutoCAD |
AutoCAD software, which is our largest revenue-generating product, is a customizable and extensible computer-aided design (CAD) application for professional design, drafting, detailing and visualization. AutoCAD software provides digital tools that can be used independently and in conjunction with other specific applications in fields ranging from construction to manufacturing, civil engineering and process plant design.
• | AutoCAD LT |
AutoCAD LT software is purpose built for professional drafting and detailing. AutoCAD LT includes document sharing
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capability without the need for software customization or certain advanced functionality found in our AutoCAD product. Users can share all design data with team members who use our AutoCAD product or other Autodesk products built on AutoCAD. AutoCAD LT software is our second largest revenue-generating product.
AEC
Our AEC software products help to improve the way building, civil infrastructure, process plant and construction projects are designed, built and managed. A broad portfolio of solutions enables greater efficiency, accuracy and sustainability across the entire project lifecycle. Our AEC solutions include advanced technology for building information modeling (“BIM”), AutoCAD-based design and documentation productivity software, sustainable design analysis applications, collaboration and project management solutions. BIM, an integrated process for building and infrastructure design, analysis, documentation and construction, uses consistent, coordinated information to improve communication and collaboration between the extended project team. AEC provides a comprehensive portfolio of BIM solutions that help customers deliver projects faster and more economically, while minimizing environmental impact. The segment’s principal product offerings included the following during fiscal 2013:
• | Autodesk Building Design Suites |
Autodesk Building Design Suites ("BDS") give the power of BIM or CAD, with tools for modeling, visualization, and documentation. With a comprehensive set of tools, BDS gives customers the ability to manage all phases of design and construction. Three editions of BDS are available to meet each customer's particular business needs and offers the depth and breadth of the Autodesk portfolio.
• | Autodesk Revit |
Purpose-built for BIM, the Autodesk Revit products collect information about a building project and allow this information to be coordinated across all other representations of the project, so that every drawing sheet, 2D and 3D view and schedule is based on internally consistent and complete information from the same underlying building database. The Autodesk Revit products, including AutoCAD Revit Architecture Suite, AutoCAD Revit MEP Suite and AutoCAD Revit Structure Suite, provide an intuitive, sophisticated, model-based design and documentation system for architects; mechanical, electrical and plumbing ("MEP") engineers; structural engineers; design-build teams; and other design and building industry professionals.
• | AutoCAD Civil 3D |
AutoCAD Civil 3D products provide a surveying, design, analysis, and documentation solution for civil engineering, including land development, transportation, and environmental projects. Using a model-centric approach that automatically updates documentation as design changes are made, AutoCAD Civil 3D products enable civil engineers, designers, drafters, and surveyors to significantly boost productivity and deliver higher-quality designs and construction documentation faster. With AutoCAD Civil 3D products, the entire project team works from the same consistent, up-to-date model so they stay coordinated throughout all project phases.
• | AutoCAD Map 3D |
AutoCAD Map 3D software provides direct access to data needed for infrastructure planning, design and management activities. AutoCAD Map 3D software helps professionals working on transportation, land development, water and power projects to more easily create, manage and analyze design geographic information system and asset data.
MFG
Our MFG segment provides manufacturers in automotive and transportation, industrial machinery, consumer products and building products with comprehensive digital prototyping solutions that bring together product data from all phases of the product development through production process to develop a single digital model created in Autodesk Inventor software. Our solutions for digital prototyping are scalable, attainable, cost-effective and allow for real-world simulation, enabling a broad group of manufacturers to realize benefits with minimal disruption to existing workflows. MFG’s principal product offerings included the following during fiscal 2013:
• | Autodesk Product Design Suites |
Autodesk Product Design Suites ("PDS") is a comprehensive solution for digital prototyping, delivering 3D design,
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visualization and simulation tools to complete the entire engineering process. The digital prototyping capabilities of PDS can help customers design better products, reduce development costs and get to market faster. Three editions of PDS are available to meet each customer's particular business needs and offers the depth and breadth of the Autodesk portfolio.
• | AutoCAD Mechanical |
AutoCAD Mechanical software is purpose-built to accelerate the mechanical design process. AutoCAD Mechanical software offers users significant productivity gains and helps save hours of design time by including all the functionality of AutoCAD software, in addition to comprehensive libraries of standards-based parts and tools for automating common design tasks.
• | Autodesk Inventor |
Autodesk Inventor allows manufacturers to go beyond 3D design to digital prototyping by giving engineers a comprehensive and flexible set of tools for 3D mechanical design, simulation, analysis, tooling, visualization and documentation. With Autodesk Inventor, engineers can integrate AutoCAD drawings and model-based design data into a single digital model, creating a virtual representation of a final product that enables them to validate the form, fit and function of the product before it is ever built.
• | Autodesk Moldflow |
The Autodesk Moldflow family of injection molding simulation software provides tools that help manufacturers optimize the design of plastic parts and injection molds, and study the injection molding process.
M&E
Our M&E segment is comprised of two product groups: Animation and Creative Finishing. Animation products are sold as software only and provide tools for digital sculpting, modeling, animation, effects, rendering, and compositing for design visualization, visual effects and games production. Creative Finishing products are primarily sold as turnkey solutions for editing, finishing and visual effects design and color grading. Principal product offerings in our M&E segment’s Animation and Creative Finishing product groups included the following during fiscal 2013:
Animation
• | Autodesk Maya |
Autodesk Maya software provides 3D modeling, animation, effects, rendering and compositing solutions that enable film and video artists, game developers and design visualization professionals to digitally create engaging, lifelike images, realistic animations and simulations, and extraordinary visual effects.
• | Autodesk 3ds Max |
Autodesk 3ds Max software provides 3D modeling, animation and rendering solutions that enable game developers, design visualization professionals and visual effects artists to digitally create realistic images, animations and complex scenes and to digitally communicate abstract or complex mechanical, architectural, engineering and construction concepts.
Creative Finishing
• | Autodesk Flame, Autodesk Smoke, Autodesk Lustre and Autodesk Flare |
Autodesk Flame software is an interactive real-time design, finishing, grading and visual effects solution for supervised post-production. Autodesk Smoke software is a non-linear and non-compressed online editing, effects and finishing software application and is used in commercials, music videos, corporate video, film as well as broadcast design projects. Autodesk Lustre software is a high-performance color grading solution used by artists for creative look development and final color and lighting effects for both film and television. Autodesk Flare software is a software solution that offers the compositing capabilities of Flame contributing to faster project completion.
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PRODUCT DEVELOPMENT AND INTRODUCTION
The technology industry is characterized by rapid technological change in computer hardware, operating systems and software. In addition, our customers’ requirements and preferences rapidly evolve, as do their expectations of the performance of our software. To keep pace with these changes, we maintain a vigorous program of new product development to address demands in the marketplace for our products. Just as the transition from mainframes to personal computers transformed the industry thirty years ago, we believe our industry is undergoing a similar transition from the personal computer to cloud, social, and mobile computing.
We dedicate considerable technical and financial resources to research and development to further enhance our existing products and to create new products and technologies. Research and development expenditures were $600.0 million or 26% of fiscal 2013 net revenue, $566.5 million or 26% of fiscal 2012 net revenue and $496.2 million or 25% of fiscal 2011 net revenue. Our software is primarily developed internally; however, we also use independent firms and contractors to perform some of our product development activities. Additionally, we acquire products or technology developed by others by purchasing or licensing products and technology from third parties. We continually review these investments in an effort to ensure that we are generating sufficient revenue or gaining a competitive advantage to justify their costs.
The majority of our research and product development is performed in the United States, China, Singapore and Canada. However, we employ experienced software developers in many of our other locations. Translation and localization of our products are performed in a number of local markets, principally Singapore and Switzerland. We generally localize and translate our products into German, French, Italian, Spanish, Russian, Japanese, Korean and simplified and traditional Chinese.
We plan to continue to manage significant product development operations internationally over the next several years. We believe that our ability to conduct research and development at various locations throughout the world allows us to optimize product development, lower costs and integrate local market knowledge into our development activities. We continually assess the significant costs and challenges, including intellectual property protection, against the benefits of our international development activities.
In addition, our business and our customers benefit from our relationships with a network of over 3,900 third-party developers who develop and sell their own products that further enhance the range of integrated solutions available to our customers.
For further discussion regarding risks from our product development and introduction efforts, see Item 1A, “Risk Factors.”
MARKETING AND SALES
We license or sell our products and services globally, primarily through indirect channels consisting of distributors and resellers. To a lesser extent we also transact directly with customers who are primarily large corporations. Our indirect channel model includes both a two-tiered distribution structure, where distributors sell to resellers, and a one-tiered structure, where Autodesk sells directly to resellers. We have a network of approximately 2,400 resellers and distributors worldwide. For fiscal 2013, approximately 83% of our revenue was derived from indirect channel sales through distributors and resellers, and we expect that the majority of our revenue will continue to be derived from indirect channel sales in the future. We employ a variety of incentive programs and promotions to align our reseller channel with our business strategies. Sales through our largest distributor, Tech Data Corporation and its affiliates, accounted for 23%, 17% and 16% of our net revenue for fiscal years 2013, 2012 and 2011, respectively. On October 27, 2011, Tech Data purchased certain assets of Mensch and Maschine Software (“MuM”), which has been a distributor of our products in Europe. The acquisition concentrates additional sales through Tech Data, which on a consolidated basis would have accounted for 21% and 22% of our net revenue for fiscal years 2012 and 2011, respectively, if the acquisition had taken place at the beginning of fiscal 2011. We believe our business is not substantially dependent on Tech Data, including following the acquisition of certain assets of MuM. Our customers through Tech Data are the resellers and end users who purchase our software licenses and services. Should any of the agreements between us and Tech Data be terminated for any reason, we believe the resellers and end users who currently purchase our products through Tech Data would be able to continue to do so under substantially the same terms from one of our many other distributors without substantial disruption to our revenue. No other distributor or reseller accounted for 10% or more of our revenue.
Our customer-related operations are divided into three geographic regions, the Americas; Europe, Middle East and Africa (“EMEA”); and Asia Pacific (“APAC”). Each geographic region is supported by global marketing and sales organizations. These organizations develop and manage overall marketing and sales programs and work closely with a network of domestic and international sales offices. Fiscal 2013 net revenue in the EMEA, Americas and APAC was $868.5 million (38%), $836.2
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million (36%) and $607.5 million (26%), respectively. We intend to continue to make our products available in foreign languages. We believe that international sales will continue to comprise the majority of our total net revenue. Adverse economic conditions in the countries that contribute a significant portion of our net revenue, including emerging economies, may have an adverse effect on our business in those countries and our overall financial performance. A summary of our financial information by geographic location is found in Note 13, “Segments,” in the Notes to Consolidated Financial Statements. Our international operations and sales subject us to a variety of risks; see Item 1A, “Risk Factors,” for further discussion.
We also work directly with reseller and distributor sales organizations, computer manufacturers, other software developers and peripherals manufacturers in cooperative advertising, promotions and trade-show presentations. We employ mass-marketing techniques such as webcasts, seminars, telemarketing, direct mailings, advertising in business and trade journals and social media. We have a worldwide user group organization and we have created online user communities dedicated to the exchange of information related to the use of our products.
In addition to sales of new software licenses, we generate revenue through our maintenance program and upgrade pricing options. These choices are available for a majority of our products and offer our customers two alternative means of migrating to the most recent version of our products.
Under the maintenance program, known by our user community as the Autodesk Subscription Program, customers who own a perpetual use license for the most recent version of the underlying product are able to purchase maintenance that provides them with unspecified upgrades when-and-if-available and are able to download e-Learning courses and receive online support over a one year or multi-year maintenance service period. Revenue from our maintenance program is reported separately on our Consolidated Statements of Operations and is referred to throughout this document as maintenance revenue.
Upgrade pricing offers customers who are not on our maintenance program an opportunity to purchase upgrades to the most current version of the same product for an incremental fee at current available prices but only to the extent that they are still on an Autodesk-supported version of our product. An upgrade also includes a crossgrade where a customer pays an incremental fee at currently available prices toward the purchase of a different product, which generally has a higher price. The cost of an upgrade is less than the cost of purchasing a new license. During fiscal 2013, customers could upgrade from software that is three versions prior to the latest version available or newer at a percentage of a full license; the license of the previous version of the product is terminated. Revenue from upgrades are reported on our Consolidated Statements of Operations in “License and other.”
In fiscal 2013, we began offering our cloud and mobile platform, Autodesk 360. Customer adoption and usage of this platform grew throughout fiscal 2013 as customers across a range of industries began to take advantage of the scalable computing power and flexibility provided through these cloud and mobile services.
We are excited about the growth potential of our cloud and mobile services. We expect to introduce more rental and usage-based offerings during fiscal 2014. These offerings will be designed to give our customers even more flexibility in how they use our products and will provide us with new ways to capture new market opportunities. However, we expect adoption and consumption of our cloud and rental offerings to increase gradually over time. As such, we are not anticipating any significant changes to our core business model in fiscal 2014.
Our ability to effectively distribute our products depends in part upon the financial and business condition of our distributor and reseller networks. The loss of, or a significant reduction in, business with any one of our major distributors or large resellers could harm our business; see Item 1A, “Risk Factors,” for further discussion.
CUSTOMER AND RESELLER SUPPORT
We provide technical support and training to customers through a leveraged support model, augmented by direct programs designed to address certain specific needs. Our customers rely primarily on the resellers and distributors from which they purchased licenses to our products for technical support; however, we do provide certain direct support for some of our customers. We support our resellers and distributors through technical product training, sales training classes, the Internet and telephone. We also provide online support directly to our customers through our maintenance program. There are also a number of user group forums in which customers are able to share information.
EDUCATIONAL PROGRAMS
We offer free access to Autodesk software for students and educators around the world. We also offer education programs and specially priced software licensing options tailored for educational institutions, students, and faculty to train the next
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generation of users. In addition, we offer classroom support, including standardized curricula developed by educators, instructor development, and a rich assortment of online learning resources. Users are trained on our products at educational institutions, reducing the cost of training for our customers.
DEVELOPER PROGRAMS
One of our key strategies is to maintain an open-architecture design of our software products to facilitate third-party development of complementary products and industry-specific software solutions. This approach enables customers and third parties to customize solutions for a wide variety of highly specific uses. We offer several programs that provide marketing, sales, technical support and programming tools to developers who develop add-on applications for our products. Over 3,900 developers in the Autodesk Developer Network create interoperable products that further enhance the range of integrated solutions available to our customers.
COMPETITION
The markets for our products are highly competitive and subject to rapid change. We strive to increase our competitive separation by investing in research and development, allowing us to bring new products to market and create exciting new versions of existing products that offer compelling efficiencies for our customers. We also compete through investments in marketing and sales to more effectively reach new customers and better serve existing customers.
Our competitors include large, global, publicly traded companies; small, geographically focused firms; startup firms; and solutions produced in-house by their users. Our primary global competitors in the PSEB, AEC and MFG segments include Adobe Systems Incorporated, ANSYS, Inc., AVEVA Group plc, Bentley Systems, Incorporated, Dassault Systèmes S.A. and its subsidiary Dassault Systèmes SolidWorks Corp., Environmental Systems Research Institute, Inc. (ESRI), Intergraph Corporation, a wholly owned subsidiary of Hexagon AB, MSC Software Corporation, Nemetschek AG, Parametric Technology Corporation, Siemens Product Lifecycle Software, Inc., and Trimble Navigation Limited.
Our M&E segment also competes with a wide range of different companies from large, global, publicly-traded companies to small private entities. Large organizations that produce products that compete in some or all of our markets include Adobe Systems Incorporated, Apple Inc., Avid Technology, Inc., SONY Corporation and Thomson, among others. The media and entertainment market is highly fragmented with complex interdependencies between many of the larger businesses. As a result, some of our competitors also own subsidiaries that are our customers or our partners in developing or bringing to market some of our solutions. In addition to traditional competitors in developed economies, we encounter new competitors in emerging economies.
The software industry has limited barriers to entry, and the availability of computing power with continually expanding performance at progressively lower prices contributes to the ease of market entry. The industry is presently undergoing a platform shift from the personal computer to cloud and mobile computing. This shift lowers barriers to entry and poses a disruptive challenge to established software companies. The design software market is characterized by vigorous competition in each of the vertical markets in which we compete, both from existing competitors and by entry of competitors with innovative technologies. Competition is increasingly enhanced by consolidation of companies with complementary products and technologies and the possibility that competitors in one vertical segment may enter other vertical segments that we serve. In addition, some of our competitors in certain markets have greater financial, technical, sales and marketing and other resources than we do. Because of these and other factors, competitive conditions in these industries are likely to continue to intensify in the future. Increased competition could result in price reductions, reduced net revenue and profit margins and loss of market share, any of which could harm our business. See Item 1A, “Risk Factors,” for further discussion of risks regarding competition.
We believe that our future results depend largely upon our abilities to better serve customers by offering new products, including cloud and mobile computing products, whether by internal development or acquisition, and to continue to provide existing product offerings that compete favorably with respect to ease of use, reliability, performance, range of useful features, continuing product enhancements, reputation, price and training.
INTELLECTUAL PROPERTY AND LICENSES
We maintain an active program to legally protect our investment in technology through intellectual property rights. We protect our intellectual property through a combination of patent, copyright, trademark and trade secret protections, confidentiality procedures and contractual provisions. The nature and extent of legal protection associated with each such intellectual property right depends on, among other things, the type of intellectual property right and the given jurisdiction in
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which such right arises. We believe that our intellectual property rights are valuable and important to our business, including each of our segments.
Nonetheless, our intellectual property rights may not be successfully asserted in the future or may be invalidated, circumvented or challenged. In addition, the laws of various foreign countries where our products are distributed do not protect our intellectual property rights to the same extent as U.S. laws. Enforcement of intellectual property rights against alleged infringers can sometimes lead to costly litigation and counterclaims. Our inability to protect our proprietary information could harm our business.
From time to time, we receive claims alleging infringement of a third party’s intellectual property rights, including patents. Disputes involving our intellectual property rights or those of another party have in the past and may in the future lead to, among other things, costly litigation or product shipment delays, which could harm our business.
We retain ownership of software we develop. All software is licensed to users and primarily provided in object code pursuant to either shrink-wrap, embedded or on-line licenses, or signed license agreements. These agreements contain restrictions on duplication, disclosure and transfer.
We believe that because of the limitations of laws protecting our intellectual property and the rapid, ongoing technological changes in both the computer hardware and software industries, we must rely principally upon software engineering and marketing skills to maintain and enhance our competitive market position.
While we have recovered some revenue resulting from the unauthorized use of our software products, we are unable to measure the full extent to which piracy of our software products exists. We believe, however, that software piracy is and can be expected to be a persistent problem that negatively impacts our revenue and financial results.
In addition, through various licensing arrangements, we receive certain rights to intellectual property of others. We expect to maintain current licensing arrangements and to secure licensing arrangements in the future, as needed and to the extent available on reasonable terms and conditions, to support continued development and sales of our products and services. Some of these licensing arrangements require or may require royalty payments and other licensing fees. The amount of these payments and fees may depend on various factors, including but not limited to: the structure of royalty payments, offsetting considerations, if any, and the degree of use of the licensed technology.
See Item 1A, “Risk Factors,” for further discussion of risks related to protecting our intellectual property.
PRODUCTION AND SUPPLIERS
The production of our PSEB, AEC, MFG and certain M&E software products involves duplication of the software media and, for certain products, the printing of user manuals. The purchase of media and the transfer of the software programs onto media for distribution to customers are performed by us and by licensed subcontractors. Media for our products such as DVDs and USB flash drives are available from multiple sources. We offer our maintenance customers an electronic software download option for selected product updates. Customers who choose electronic fulfillment receive the latest version of the software from our vendor’s secure servers. For certain products, user manuals are made available by request only as we work toward reducing our cost of shipping and production as well as the use of natural resources. User manuals and packaging materials are produced to our specifications by outside sources. Production is either performed in leased facilities operated by us or by independent third-party contractors. To date, we have not experienced any material difficulties or delays in the production of our software and documentation.
EMPLOYEES
As of January 31, 2013, we employed approximately 7,300 people. None of our employees in the United States are represented by a labor union; however, in certain foreign countries, our employees are represented by work councils. We have never experienced any work stoppages and believe our employee relations are good. Reliance upon employees in other countries entails various risks and changes in these foreign countries, such as government instability or regulation unfavorable to foreign-owned businesses, that could negatively impact our business in the future.
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ACQUISTIONS
Over the past three years, we acquired new technology or supplemented our technology by purchasing businesses or certain technology related assets focused in specific markets or industries. For the three years ended January 31, 2013, 2012 and 2011, we acquired a number of companies and certain technology related assets, some of which were accounted for as business combinations. The following were key acquisitions for fiscal years 2013, 2012 and 2011:
Date of closing | Company | Details | ||
December 2012 | PI-VR GmbH ("PI-VR") | The PI-VR acquisition brings sophisticated visualization solutions that will strengthen and enhance our expertise in and offerings for automotive visualization. PI-VR has been integrated into, and the related goodwill was assigned to, the MFG segment. | ||
October 2012 | Qontext ("Qontext") | The Qontext acquisition provides us with an enterprise business and social collaboration platform which extends our reach into design networks via contextual workflows. This also expands our expertise in cloud and social networking by supplementing existing knowledge in cloud, web, and mobile development. Qontext has been integrated into, and the related goodwill was assigned to, the PSEB segment. | ||
August 2012 | Socialcam ("Socialcam") | The Socialcam acquisition strengthens our ability to make our product line more social, and deliver more mobile/web oriented products. In addition, the acquisition integrated with Autodesk 360 to further provide collaboration features to our professional customers. Socialcam has been integrated into, and the related goodwill was assigned to, the PSEB segment. | ||
June 2012 | Vela Systems, Inc. ("Vela") | The Vela acquisition provides a platform to deliver project information to the point of construction. Vela, integrated with Navisworks, augments the model-based data created in Revit, establishing a bi-direction and visual link between model elements and relevant information - streamlining the information management process from design through construction to hand-over and into operations. In addition, this acquisition delivers model-based construction via mobile and cloud. Vela has been integrated into, and the related goodwill was assigned to, the AEC segment. | ||
December 2011 | T-Splines, Inc. ("T-Splines") | The T-Splines acquisition strengthens our Digital Prototyping portfolio with more flexible free-form modeling and will help achieve closer integration between industrial design and engineering workflows. T-Splines has been integrated into, and the related goodwill was assigned to, the MFG segment. | ||
October 2011 | Micro Application Packages Limited ("MAP") | The MAP acquisition expands our portfolio for MEP contractors and fabricators by providing tools for the manufacturing, fabrication and installation of MEP systems. MAP has been integrated into, and the related goodwill was assigned to, the AEC segment. | ||
August 2011 | Turbo Squid, Inc. (“Turbo Squid”) | The acquisition of certain technology assets from Turbo Squid strengthens our online marketplace platform for our design application users. | ||
August 2011 | Instructables, Inc. ("Instructables") | The Instructables acquisition assists makers of all types by linking Instructables' vibrant online community to our software tools and services, such as SketchBook, 123D and Homestyler that allow anyone to explore design ideas and bring them to life. Instructables has been integrated into, and the related goodwill was assigned to, the PSEB segment. | ||
March 2011 | Blue Ridge Numerics, Inc. ("Blue Ridge") | The Blue Ridge acquisition broadens our solution for Digital Prototyping to provide customers with a spectrum of computational fluid dynamics (CFD) capabilities that help automate fluid flow and thermal simulation decision-making for designs, while eliminating costly physical prototyping cycles. Blue Ridge has been integrated into, and the related goodwill was assigned to, the MFG segment. | ||
March 2011 | Scaleform Corporation ("Scaleform") | The Scaleform acquisition furthers Autodesk's ability to provide customers with more complete workflows to more rapidly develop immersive 3D and casual game experiences. Scaleform has been integrated into, and the related goodwill was assigned to, the M&E segment. | ||
BACKLOG
We typically ship products shortly after receipt of an order, which is common in the software industry. Our backlog is comprised of current software license product orders which have not yet shipped. The category of current software license product orders which we have not yet shipped consists of orders from customers with approved credit status for currently available software products and may include both orders with current ship dates and orders with ship dates beyond the current fiscal period.
Backlog was $20.0 million at January 31, 2013 compared to $27.1 million at January 31, 2012. The actual amount of backlog at any particular time may not be a meaningful indicator of future business prospects as this amount is impacted by a number of factors not related to future trends or events such as the order fulfillment process, the method of software delivery or the linearity of our business within the fiscal period.
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GLOSSARY OF TERMS
BIM (Building Information Modeling)—BIM describes a model-based technology linked with a database of project information, and is the process of generating and managing information throughout the life cycle of a building. BIM is used as a digital representation of the building process to facilitate exchange and interoperability of information in digital formats.
Constant currency growth rates—We attempt to represent the changes in the underlying business operations by eliminating fluctuations caused by changes in foreign currency exchange rates as well as eliminating hedge gains or losses recorded within the current and comparative period. Our constant currency methodology removes all hedging gains and losses from the calculation.
Digital prototyping—Digital prototyping allows designers, architects and engineers to analyze, simulate and visualize a design using a digital or virtual model rather than a physical model.
Flagship—Autodesk flagship products are our core design products. Flagship includes the following products: 3ds Max, AutoCAD, AutoCAD LT, AutoCAD vertical products (such as AutoCAD Architecture, AutoCAD Map and AutoCAD Mechanical), Civil 3D, Maya, Plant 3D, and Revit products (standalone).
New and Adjacent—Autodesk new and adjacent products include Autodesk's new product offerings as well as products that are not included in flagship or suites. New and adjacent includes the following services and products: Autodesk Alias Design products, Autodesk Consulting, Autodesk Buzzsaw, Autodesk Constructware, Autodesk consumer products, Autodesk Creative Finishing products, Autodesk Moldflow products, Autodesk Navisworks, Autodesk Simulation, Autodesk Vault products, Autodesk 360 and all other products.
Suites—Autodesk design suites are a combination of products that target a specific user objective (product design, building design, etc.) and support a set of workflows for that objective. Our new design and creation suites include: Autodesk Design Suite, Autodesk Building Design Suite, Autodesk Educational/academic Suites, Autodesk Entertainment Creation Suite, Autodesk Factory Design Suite, Autodesk Infrastructure Design Suite, Autodesk Plant Design Suite, and Autodesk Product Design Suite. Our previously established suites include: Autodesk Inventor family suites, Autodesk Revit family suites, and education solutions suites.
Upgrade—Upgrades allow customers to pay an incremental fee at currently available prices toward the purchase of the latest version of the same product. Upgrades are available only for licenses of software that are up to three versions prior to the latest version available; an upgrade terminates the license to the previous version of the product. A similar exchange and termination of a previous version of a product that is four versions prior to the latest version available is recorded as commercial new revenue. Upgrades also includes crossgrades where a customer pays an incremental fee at currently available prices toward the purchase of a different product. The license to the previous product is terminated.
ITEM 1A. | RISK FACTORS |
We operate in a rapidly changing environment that involves significant risks, a number of which are beyond our control. In addition to the other information contained in this Form 10-K, the following discussion highlights some of these risks and the possible impact of these factors on our business, financial condition and future results of operations. If any of the following risks actually occur, our business, financial condition or results of operations may be adversely impacted, causing the trading price of our common stock to decline. In addition, these risks and uncertainties may impact the “forward-looking” statements described elsewhere in this Form 10-K and in the documents incorporated herein by reference. They could affect our actual results of operations, causing them to differ materially from those expressed in “forward-looking” statements.
Global economic conditions may further impact our business, financial results and financial condition.
As our business has expanded globally, we have increasingly become subject to risks arising from adverse changes in global economic and political conditions. The past several years have been characterized by weak global economic conditions, a tightening in the credit markets, relatively high unemployment, a low level of liquidity in many financial markets, increased government deficit spending and debt levels, uncertainty about certain governments' abilities to repay such debt or to address certain fiscal issues (such as the “fiscal cliff” and “sequestration” in the United States), and volatility in many financial instrument markets. There are a number of mixed indicators and it is not yet clear whether a sustainable recovery is occurring or a renewed slow-down is taking place.
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Over the past several years, many of our customers have experienced tighter credit, negative financial news and weaker financial performance of their businesses and have reduced their workforces, thereby reducing the number of licenses and the number of maintenance contracts they purchase from us. In addition, a number of our customers rely, directly and indirectly, on government spending. Current debt balances of many countries without proportionate increases in revenues have caused many countries to reduce spending and in some cases have forced those countries to restructure their debt in an effort to avoid defaulting under those obligations. This has not only impacted those countries but others that are holders of such debt and those assisting in such restructuring.
These actions may impact, and over the past several years have negatively impacted, our business, financial results and financial condition. In addition, these factors are causing, and over the past several years have caused, us to restructure our business and in turn we have and will incur restructuring charges. Moreover, our financial performance may be negatively impacted by:
• | lack of credit available to and the insolvency of key channel partners, which may impair our distribution channels and cash flows; |
• | counterparty failures negatively impacting our treasury functions, including timely access to our cash reserves and third-party fulfillment of hedging transactions; |
• | counterparty failures negatively affecting our insured risks; |
• | inability of banks to honor our existing line of credit, which could increase our borrowing expenses or eliminate our ability to obtain short-term financing; and |
• | decreased borrowing and spending by our end users on small and large projects in the industries we serve, thereby reducing demand for our products. |
Even if economic conditions in the U.S. and foreign markets improve generally, a slower economic recovery in industries important to our business, such as the architecture, engineering and construction, manufacturing and digital media and entertainment industries, may adversely affect our business, financial results and financial condition. If a macro-economic recovery does not occur as rapidly as anticipated, our ability to meet our long-term financial targets may also be adversely affected.
The actions that we are taking to reorganize our business in alignment with our current operating strategy and in response to our related business slowdown may be costly and may not be as effective as anticipated.
During the first quarter of fiscal year 2013, we undertook a number of important organizational changes to drive the success of our business. The reorganization included changes to the structure and alignment of our product development and marketing teams and re-organization of our sales teams. While these changes were intended to better serve our customers and drive future growth, we encountered challenges in the execution of these efforts which impacted our financial results in the short term. In order to achieve these organizational changes and to further our strategy, including our continuing shift to cloud and mobile computing, in the third quarter of fiscal year 2013, we commenced a company-wide restructuring plan. If we are unable to realize the outcomes from the restructuring efforts as planned, we may need to undertake additional restructuring efforts, and our business and operating results may be harmed. In taking any future restructuring actions, we may incur additional costs that negatively impact our operating margins. Additionally, a prolonged and slow economic recovery or a renewed recession in U.S. or foreign markets could also lead to additional restructuring actions and associated costs.
We have taken actions to reduce our cost structure to more closely align our costs with our revenue levels. In taking these actions, we have attempted to balance the cost of such initiatives against their longer term benefits. As a result of these actions, we have incurred and will incur additional costs in the short term that have the effect of reducing our operating margins. If we do not achieve the proper balance of these cost reduction initiatives, we may eliminate critical elements of our operations, the loss of which could negatively impact our ability to benefit from an economic recovery. We cannot assure that our cost cutting efforts will achieve appropriate levels of expenses, and we may take additional actions in the future.
In addition, we are taking actions to stimulate demand for our products through a number of programs. Although we are attempting to balance the cost of these programs against their longer term benefits, it is possible that we will make such
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investments without a corresponding increase in demand for our products. This would further reduce our operating margins and have a negative impact on our financial results.
Existing and increased competition and rapidly evolving technological changes may reduce our revenue and profits.
The software industry has limited barriers to entry, and the availability of computing devices with continually expanding performance at progressively lower prices contributes to the ease of market entry. The industry is presently undergoing a platform shift from the personal computer to cloud and mobile computing. This shift lowers barriers to entry and poses a disruptive challenge to established software companies. The markets in which we compete are characterized by vigorous competition, both by entry of competitors with innovative technologies and by consolidation of companies with complementary products and technologies. In addition, some of our competitors in certain markets have greater financial, technical, sales and marketing and other resources. Furthermore, a reduction in the number and availability of compatible third-party applications, or our inability to rapidly adapt to technological and customer preference changes, including those related to cloud computing, mobile devices, and new computing platforms, may adversely affect the sale of our products. Because of these and other factors, competitive conditions in the industry are likely to intensify in the future. Increased competition could result in price reductions, reduced net revenue and profit margins and loss of market share, any of which would likely harm our business.
We believe that our future results largely depend upon our ability to offer products that compete favorably with respect to reliability, performance, ease of use, range of useful features, continuing product enhancements, reputation and price.
Our financial results fluctuate within each quarter and from quarter to quarter making our future revenue and financial results difficult to predict.
Our quarterly financial results have fluctuated in the past and will continue to do so in the future. These fluctuations could cause our stock price to change significantly or experience declines. In addition to the other factors described in this Part I, Item 1A, some of the factors that could cause our financial results to fluctuate include:
• | general market, economic, business and political conditions in particular geographies, including Europe and emerging economies, |
• | the ability of governments around the world to adopt fiscal policies, meet their financial and debt obligations, and to finance infrastructure projects, |
• | lower growth or contraction of our upgrade or maintenance programs, |
• | failure to achieve and maintain planned cost reductions and productivity increases, |
• | the effectiveness of our internal business reorganization, |
• | restructuring or other accounting charges and unexpected costs or other operating expenses, |
• | fluctuations in foreign currency exchange rates and the effectiveness of our hedging activity, |
• | failure to expand our AutoCAD and AutoCAD LT products customer base to related design products, |
• | our inability to rapidly adapt to technological and customer preference changes, including those related to cloud computing, mobile devices, and new computing platforms, |
• | the timing of the introduction of new products by us or our competitors, |
• | the success of new business or sales initiatives and increasing our portfolio of product suites, |
• | failure to maintain our revenue growth and profitability, |
• | the financial and business condition of our reseller and distribution channels, |
• | weak or negative growth in the industries we serve, including architecture, engineering and construction, manufacturing and digital media and entertainment markets, |
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• | failure to accurately predict the impact of acquired businesses or to identify and realize the anticipated benefits of acquisitions, and successfully integrate such acquired businesses and technologies, |
• | perceived or actual technical or other problems with a product or combination of products, |
• | unexpected or negative outcomes of matters and expenses relating to litigation or regulatory inquiries, |
• | failure to achieve anticipated levels of customer acceptance of key new applications, |
• | pricing pressure or changes in product pricing or product mix, |
• | platform and business model changes, |
• | increases in cloud services-related expenses, |
• | timing of additional investments in the development of our platform or deployment of our services, |
• | timing of product releases and retirements, |
• | failure to continue momentum of frequent release cycles or to move a significant number of customers from prior product versions in connection with our programs to retire major products, |
• | changes in tax laws or regulations, tax arrangements with foreign governments or accounting rules, such as increased use of fair value measures and the potential requirement that U.S. registrants prepare financial statements in accordance with International Financial Reporting Standards (“IFRS”), |
• | changes in sales compensation practices, |
• | dependence on and the timing of large transactions, |
• | failure to effectively implement our copyright legalization programs, especially in developing countries, |
• | failure to achieve sufficient sell-through in our channels for new or existing products, |
• | renegotiation or termination of royalty or intellectual property arrangements, |
• | interruptions or terminations in the business of our consultants or third party developers, |
• | the timing and degree of expected investments in growth and efficiency opportunities, |
• | failure to achieve continued success in technology advancements, |
• | catastrophic events or natural disasters, such as the earthquakes and tsunami in Japan in March 2011 and Superstorm Sandy in October 2012, |
• | regulatory compliance costs, |
• | security breaches and potential financial penalties to customers and government entities, |
• | costs associated with acquisitions of companies and technologies, |
• | potential goodwill impairment charges related to prior acquisitions, and |
• | adjustments arising from ongoing or future state and local sales tax examinations. |
We have also experienced fluctuations in financial results in interim periods in certain geographic regions due to seasonality or regional economic conditions. In particular, our financial results in Europe during our third quarter are usually
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affected by a slower summer period, and our Asia Pacific operations typically experience seasonal slowing in our third and fourth quarters.
Our operating expenses are based in part on our expectations for future revenue and are relatively fixed in the short term. Accordingly, any revenue shortfall below expectations have had, and in the future could have, an immediate and significant adverse effect on our profitability. Greater than anticipated expenses or a failure to maintain rigorous cost controls would also negatively affect profitability.
If we do not maintain good relationships with the members of our distribution channel, or achieve anticipated levels of sell-through, our ability to generate revenue will be adversely affected. If our distribution channel suffers financial losses, becomes financially unstable or insolvent, is negatively impacted by the 2011 consolidation between two important distributors, or is not provided the right mix of incentives to sell our products, our ability to generate revenue will be adversely affected.
We sell our software products both directly to end-users and through a network of distributors and resellers. For the fiscal year ended January 31, 2013, approximately 83% of our revenue was derived from indirect channel sales through distributors and resellers, and we expect that the majority of our revenue will continue to be derived from indirect channel sales in the future. Our ability to effectively distribute our products depends in part upon the financial and business condition of our distributor and reseller network. Computer software distributors and resellers typically are not highly capitalized, have previously experienced difficulties during times of economic contraction and experienced difficulties during the past several years. We have processes to ensure that we assess the creditworthiness of distributors and resellers prior to our sales to them. In the past we have taken steps to support them, and may take additional steps in the future, such as extending credit terms and providing temporary discounts. These steps, if taken, could harm our financial results. If our distributors and resellers were to become insolvent, they would not be able to maintain their business and sales, or provide customer support services, which would negatively impact our business and revenue.
We rely significantly upon major distributors and resellers in both the U.S. and international regions, including the distributor Tech Data Corporation and its global affiliates (“Tech Data”). Tech Data accounted for 23%, 17% and 16% of our total net revenue for the fiscal years ended January 31, 2013, 2012 and 2011, respectively.
On October 27, 2011, Tech Data purchased certain assets of Mensch und Maschine Software (“MuM”) in Europe. MuM had been a European distributor of our products in that region. The acquisition concentrates additional sales through Tech Data. On a consolidated basis, combined sales of the two entities would have accounted for 21% and 22% of our net revenue for fiscal 2012 and 2011, respectively, if the acquisition had taken place at the beginning of fiscal 2011. Although we believe that we are not substantially dependent on Tech Data, including following the acquisition of certain assets of MuM, if Tech Data were to experience a significant disruption with its business or if our relationship with Tech Data were to significantly deteriorate, it is possible that our ability to sell to end users would be, at least temporarily, negatively impacted. This could in turn negatively impact our financial results.
Over time, we have modified and will continue to modify aspects of our relationship with our distributors and resellers, such as their incentive programs, pricing to them and our distribution model to motivate and reward them for aligning their businesses with our strategy and business objectives. Changes in these relationships and underlying programs could negatively impact their business and harm our business. In addition, the loss of or a significant reduction in business with those distributors or resellers or the failure to achieve anticipated levels of sell-through with any one of our major international distributors or large resellers could harm our business. In particular, if one or more of such distributors or resellers were unable to meet their obligations with respect to accounts payable to us, we could be forced to write off such accounts and may be required to delay the recognition of revenue on future sales to these customers. These events could have a material adverse effect on our financial results.
A significant portion of our revenue is generated through maintenance revenue; decreases in maintenance attach or renewal rates or a decrease in the number of new licenses we sell would negatively impact our future revenue and financial results.
Our maintenance customers have no obligation to attach maintenance to their initial license or renew their maintenance contract after the expiration of their initial maintenance period, which is typically one year. Our customers' attach and renewal rates may decline or fluctuate as a result of a number of factors, including the overall global economy, the health of their businesses, and the perceived value of the maintenance program. If our customers do not attach maintenance to their initial license or renew their maintenance contract for our products, our maintenance revenue will decline and our financial results will suffer.
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In addition, a portion of the growth of our maintenance revenue has typically been associated with growth of the number of licenses that we sell. Any reduction in the number of licenses that we sell, even if our customers' attach rates do not change, will have a negative impact on our future maintenance revenue. This in turn would impact our business and harm our financial results.
We recognize maintenance revenue ratably over the term of the maintenance contracts, which is predominantly one year, but may also range up to five years. Decreases in net maintenance billings will negatively impact future maintenance revenue, however future maintenance revenue will also be impacted by other factors such as the amount, timing and mix of contract terms of future billings.
We are dependent on international revenue and operations, exposing us to significant regulatory, global economic, intellectual property, collections, currency exchange rate, taxation, political instability and other risks, which could adversely impact our financial results.
We are dependent on our international operations for a significant portion of our revenue. International net revenue represented 71% and 72% of our net revenue in fiscal 2013 and fiscal 2012, respectively. Our international revenue, including that from emerging economies, is subject to general economic and political conditions in foreign markets, including conditions in foreign markets resulting from economic and political conditions in the U.S. Our revenue is also impacted by the relative geographical and country mix of our revenue over time. These factors have recently adversely impacted and may in the future adversely impact our international revenue, and consequently our business as a whole. Our dependency on international revenue makes us much more exposed to global economic and political trends, which can negatively impact our financial results, even if our results in the U.S. are strong for a particular period. Further, a significant portion of our earnings from our international operations may not be freely transferable to the U.S. due to remittance restrictions, adverse tax consequences or other factors. Our intent is that amounts related to foreign earnings permanently reinvested outside the U.S. will remain outside the U.S., and we will meet our U.S. liquidity needs through ongoing cash flows, external borrowings (such as our Senior Notes), or both. However, if, in the future, amounts held by foreign subsidiaries are needed to fund our operations in the U.S., or to service our external borrowings, the repatriation of such amounts to the U.S. could result in a significant incremental tax liability in the period in which the decision to repatriate occurs and payment of any such tax liability would reduce the cash available to fund our operations.
We anticipate that our international operations will continue to account for a significant portion of our net revenue, and, as we expand our international development, sales and marketing expertise, will provide significant support to our overall efforts in countries outside of the U.S. Risks inherent in our international operations include fluctuating currency exchange rates, including risks related to any hedging activities we undertake, unexpected changes in regulatory requirements and practices, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions, transportation delays, operating in locations with a higher incidence of corruption and fraudulent business practices, particularly in emerging economies, increasing enforcement by the U.S. under the Foreign Corrupt Practices Act, adoption of stricter anti-corruption laws in certain countries, including the United Kingdom, difficulties in staffing and managing foreign sales and development operations, longer collection cycles for accounts receivable, potential changes in tax laws, including possible U.S. tax law changes that, if enacted, could significantly impact how U.S. multinational companies are taxed on foreign subsidiary earnings, tax arrangements with foreign governments, including our ability to meet and review the terms of those tax arrangements, and laws regarding the management of and access to data and public networks, possible future limitations upon foreign owned businesses, increased financial accounting and reporting burdens and complexities, inadequate local infrastructure, greater difficulty in protecting intellectual property, and other factors beyond our control, including popular uprisings, terrorism, war, natural disasters and diseases.
Some of our business partners also have international operations and are subject to the risks described above. Even if we are able to successfully manage the risks of international operations, our business may be adversely affected if our business partners are not able to successfully manage these risks.
Our business could suffer as a result of risks, costs and charges associated with strategic acquisitions and investments.
We regularly acquire or invest in businesses, software products and technologies that are complementary to our business through acquisitions, strategic alliances or equity or debt investments. The risks associated with such acquisitions include, among others, the difficulty of assimilating products, operations and personnel, inheriting liabilities such as intellectual property infringement claims, the failure to realize anticipated revenue and cost projections, the requirement to test and assimilate the internal control processes of the acquired business in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the diversion of management's time and attention. Our recent increase in the number of
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acquisitions further exacerbates these risks.
In addition, such acquisitions and investments involve other risks such as:
• | the inability to retain customers, vendors, distributors, business partners, and other entities associated with the acquired business; |
• | the potential impact on relationships with existing customers, vendors and distributors as business partners as a result of acquiring another business; |
• | the potential that due diligence of the acquired business or product does not identify significant problems; |
• | the potential any one or multiple of the investments become impaired in a given reporting period; |
• | the potential for incompatible business cultures; |
• | significant transaction or integration-related costs; |
• | potential additional exposure to fluctuations in currency exchange rates; and |
• | exposure to litigation or other claims in connection with, or inheritance of claims or litigation risk as a result of, an acquisition, including but not limited to, claims from terminated employees, customers, or other third parties. |
We may not be successful in overcoming such risks, and such acquisitions and investments may negatively impact our business. In addition, such acquisitions and investments have in the past and may in the future contribute to potential fluctuations in our quarterly financial results These fluctuations could arise from transaction-related costs and charges associated with eliminating redundant expenses or write-offs of impaired assets recorded in connection with acquisitions and investments. These costs or charges could negatively impact our financial results for a given period, cause quarter to quarter variability in our financial results or negatively impact our financial results for several future periods.
Net revenue or earnings shortfalls or the volatility of the market generally may cause the market price of our stock to decline.
The market price for our common stock has experienced significant fluctuations and may continue to fluctuate significantly. The market price for our common stock may be affected by a number of factors, including the other factors described in this Part I, Item 1A and the following:
• | shortfalls in our expected financial results, including net revenue, earnings or key performance metrics; |
• | uncertainty about certain governments' abilities to repay debt or effect fiscal policy; |
• | changes in estimates of future results or recommendations by securities analysts; |
• | the announcement of new products or product enhancements by us or our competitors; |
• | quarterly variations in our or our competitors' results of operations; |
• | unusual events such as significant acquisitions, divestitures, regulatory actions and litigation; |
• | changes in laws, rules or regulations applicable to our business; |
• | general socio-economic, political or market conditions; |
• | outstanding debt service obligations; and |
• | other factors, including factors unrelated to our operating performance, such as instability affecting the economy or the operating performance of our competitors. |
Significant changes in the price of our common stock could expose us to additional costly and time-consuming litigation.
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Historically, after periods of volatility in the market price of a company's securities, a company becomes more susceptible to securities class action litigation. This type of litigation is often expensive and diverts management's attention and resources.
We are exposed to fluctuations in currency exchange rates that could negatively impact our financial results and cash flows.
Because we conduct a substantial portion of our business outside the U.S. and we make certain business and resource decisions based on assumptions about foreign currency, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and economic conditions change, and they could have a material adverse impact on our financial results and cash flows.
We use derivative instruments to manage a portion of our cash flow exposure to fluctuations in foreign currency exchange rates. As part of our risk management strategy, we use foreign currency contracts to manage a portion of our exposures of underlying assets, liabilities and other obligations, which exist as part of our ongoing business operations. These foreign currency instruments have maturities that extend for one to twelve months in the future, and provide us with some protection against currency exposures. However, our attempts to hedge against these risks may not be completely successful, resulting in an adverse impact on our financial results.
The fluctuations of currencies in which we conduct business can both increase and decrease our overall revenue and expenses for any given fiscal period. Although our foreign currency cash flow hedge program extends beyond the current quarter in order to reduce our exposure to foreign currency volatility, we do not attempt to completely mitigate this risk, and in any case, will incur transaction fees in adopting such hedging programs. Such volatility, even when it increases our revenues or decreases our expenses, impacts our ability to accurately predict our future results and earnings.
Our strategy to develop and introduce new products and services, including our increased emphasis on cloud and mobile computing strategies, exposes us to risks such as limited customer acceptance, costs related to product defects and large expenditures that may not result in additional net revenue.
Rapid technological changes, as well as changes in customer requirements and preferences, characterize the software industry. Just as the transition from mainframes to personal computers transformed the industry 30 years ago, we believe our industry is undergoing a similar transition from the personal computer to cloud, mobile and social computing. In response, we are focused on providing cloud-based services and delivery of our solutions on mobile devices and new hardware platforms to enable our customers to be more agile and collaborative on their projects. We are also developing consumer products for digital art, personal design and creativity, and home design. We devote significant resources to the development of new technologies, such as our cloud-based and mobile services, design and entertainment products, digital prototyping and collaboration products and consumer products. In addition, we frequently introduce new business models or methods that require a considerable investment of technical and financial resources such as an increase in our portfolio of, and focus on, suites. We are making such investments through our internal reorganization efforts and further development and enhancement of our existing products, as well as through acquisitions of new product lines. Such investments may not result in sufficient revenue generation to justify their costs. Market acceptance of these new technologies, business models or methods will be dependent on our ability to (1) include functionality and usability in such releases that address certain customer requirements with which our operating history is not extensive, and (2) to optimally price our products in light of marketplace conditions, our costs and customer demand. Customer adoption of our cloud, mobile, and social computing services may not occur as rapidly as anticipated, or competitors may introduce new products and services that achieve acceptance among our current customers, adversely affecting our competitive position. In addition, our cloud, mobile, and social computing offerings price and deliver our products and services in a way that differs from our historical pricing and delivery methods.
In particular, a critical component of our growth strategy is to have customers of our AutoCAD and AutoCAD LT products expand their portfolios to include our suites and cloud-based services. Over time, we aim to migrate customers using standalone Autodesk products to expand their portfolio with our suites and cloud-based offerings. Should sales of licenses of our AutoCAD and AutoCAD LT or standalone Autodesk flagship products decrease without a corresponding increase in suites product or cloud-based services revenue or without purchases of customer seats to our suites, our results of operations will be adversely affected. Also, adoption of our cloud and mobile computing offerings and changes in the delivery of our software and services to our customers may change the way in which we recognize revenue relating to our software and services, with a potential negative impact on our financial performance. Additionally, the software products we offer are complex, and despite extensive testing and quality control, may contain errors or defects. These errors or defects could result in the need for corrective releases to our software products, damage to our reputation, loss of revenue, an increase in product returns or lack of market acceptance of our products, any of which would likely harm our business.
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Further, given the rapid speed of changing customer expectations and advancement of technology inherent in the software industry, the extensive and complex efforts required to create useful and widely accepted products and the rapid evolution of cloud computing, mobile devices, new computing platforms and other technologies, such as consumer products, our executive management team must act quickly, continuously and with vision. Although we have articulated a strategy that we believe will fulfill these challenges, if we fail to execute properly on that strategy, adapt that strategy as market conditions evolve or fail to internalize and execute on that strategy, we may fail to meet our customers' expectations, fail to compete with our competitors' products and technology and lose the confidence of our channel partners and employees. This in turn could adversely affect our business and financial performance.
From time to time we realign or introduce new business and sales initiatives; if we fail to successfully execute and manage these initiatives, our results of operations could be negatively impacted.
As part of our effort to accommodate our customers' needs and demands and the rapid evolution of technology, we from time to time evolve our business and sales initiatives such as realigning our development and marketing organizations, and expanding our portfolio of suites and our offering of software as a service, and realigning our internal resources in an effort to improve efficiency. Specifically, last year we undertook organizational changes in order to address major business initiatives, including our desire to accelerate our move to the cloud, transform our customers' experience, increase industry focus to meet customer demands, and develop more effective marketing. These reorganizational efforts included changes to the structure and alignment of our product development and marketing teams and re-organization of our sales teams by industry. We may take such actions without clear indications that they will prove successful, and at times, we have been met with short-term challenges in the execution of such initiatives. Market acceptance of any new business or sales initiative is dependent on our ability to match our customers' needs at the right time and price. Often we have limited prior experience and operating history in these new areas of emphasis. If any of our assumptions about expenses, revenue or revenue recognition principles from these initiatives proves incorrect, or our attempts to improve efficiency are not successful, our actual results may vary materially from those anticipated, and our financial results will be negatively impacted.
Because we derive a substantial portion of our net revenue from a small number of products, including our AutoCAD-based software products including suites, if these products are not successful, our revenue will be adversely affected.
We derive a substantial portion of our net revenue from sales of licenses of a limited number of our products, including AutoCAD software, products based on AutoCAD, which includes our suites that serve specific markets, upgrades to those products and products that are interoperable with AutoCAD. Any factor adversely affecting sales of these products, including the product release cycle, market acceptance, product competition, performance and reliability, reputation, price competition, economic and market conditions and the availability of third-party applications, would likely harm our financial results. During the fiscal year ended January 31, 2013, combined revenue from our AutoCAD and AutoCAD LT products, not including suites having AutoCAD or AutoCAD LT as a component, represented 33% of our total net revenue.
A breach of security in our products or computer systems may compromise the integrity of our products, harm our reputation, create additional liability and adversely impact our financial results.
We make significant efforts to maintain the security and integrity of our product source code and computer systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. These threats include identity theft, unauthorized access, DNS attacks, wireless network attacks, viruses and worms, advanced persistent threat (APT), application centric attacks, peer-to-peer attacks, phishing, backdoor trojans and distributed denial of service (DDoS) attacks. Any of the foregoing could attack our products and computer systems. Despite significant efforts to create security barriers to such programs, it is virtually impossible for us to entirely eliminate this risk. Like all software products, our software is vulnerable to such cyber attacks. In the past, hackers have targeted our software, and they may do so in the future. The impact of cyber attacks could disrupt the proper functioning of our software products, cause errors in the output of our customers' work, allow unauthorized access to sensitive, proprietary or confidential information of ours or our customers, and other destructive outcomes. Moreover, as we continue to invest in new lines of consumer products and services we are exposed to increased security risks and the potential for unauthorized access to, or improper use of, the information of our consumer users. If any of the foregoing were to occur, our reputation may suffer, customers may stop buying our products, we could face lawsuits and potential liability, and our financial performance could be negatively impacted.
We rely on third-parties to provide us with a number of operational services, including hosting and delivery, certain of our customer services and other operations; any interruption or delay in service from these third parties, breaches of security or
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privacy, or failures in data collection could expose us to liability, harm our reputation and adversely impact our financial performance.
We rely on hosted computer services from third parties for services that we provide our customers and computer operations for our internal use. As we gather customer data and host certain customer data in third-party facilities, a security breach could compromise the integrity or availability or result in the theft of customer data. In addition, our operations could be negatively affected in the event of a security breach, and we could be subject to the loss or theft of confidential or proprietary information, including source code.
Unauthorized access to this data may be obtained through break-ins, breaches of our secure networks by unauthorized parties, employee theft or misuse, or other misconduct. We rely on a number of third party suppliers in the operation of our business for the provision of various services and materials that we use in the operation of our business and production of our products. Although we seek to diversify our third party suppliers, we may from time to time rely on a single or limited number of suppliers, or upon suppliers in a single country, for these services or materials. The inability of such third parties to satisfy our requirements could disrupt our business operations or make it more difficult for us to implement our business strategy. If any of these situations were to occur, our reputation could be harmed, we could be subject to third party liability, including under data protection and privacy laws in certain jurisdictions, and our financial performance could be negatively impacted.
If we are not able to adequately protect our proprietary rights, our business could be harmed.
We rely on a combination of patent, copyright and trademark laws, trade secret protections, confidentiality procedures and contractual provisions to protect our proprietary rights. Despite such efforts to protect our proprietary rights, unauthorized parties from time to time have copied aspects of our software products or have obtained and used information that we regard as proprietary. Policing unauthorized use of our software products is time-consuming and costly. While we have recovered some revenue resulting from the unauthorized use of our software products, we are unable to measure the extent to which piracy of our software products exists and we expect that software piracy will remain a persistent problem. Furthermore, our means of protecting our proprietary rights may not be adequate.
Additionally, we actively protect the secrecy of our confidential information and trade secrets, including our source code. If unauthorized disclosure of our source code occurs, we could potentially lose future trade secret protection for that source code. The loss of future trade secret protection could make it easier for third-parties to compete with our products by copying functionality, which could adversely affect our financial performance and our reputation. We also seek to protect our confidential information and trade secrets through the use of non-disclosure agreements with our customers, contractors, vendors and partners. However, it is possible that our confidential information and trade secrets may be disclosed or published without our authorization. If this were to occur, it may be difficult and/or costly for us to enforce our rights, and our financial performance and reputation could be negatively impacted.
We may face intellectual property infringement claims that could be costly to defend and result in our loss of significant rights.
As more software patents are granted worldwide, the number of products and competitors in our industry segments grows and the functionality of products in different industry segments overlaps, we expect that software product developers will be increasingly subject to infringement claims. Infringement or misappropriation claims have in the past been, and may in the future be, asserted against us, and any such assertions could harm our business. Additionally, certain patent holders without products have become more aggressive in threatening and pursuing litigation in attempts to obtain fees for licensing the right to use patents. Any such claims or threats, whether with or without merit, have been and could in the future be time-consuming to defend, result in costly litigation and diversion of resources, cause product shipment delays or require us to enter into royalty or licensing agreements. In addition, such royalty or license agreements, if required, may not be available on acceptable terms, if at all, which would likely harm our business.
Our investment portfolio is composed of a variety of investment vehicles in a number of countries that are subject to interest rate trends, market volatility and other economic factors. If general economic conditions further decline, this could cause the credit ratings of our investments to deteriorate, illiquidity in the financial marketplace, and we may continue to experience a decline in interest income, and an inability to sell our investments, leading to impairment in the value of our investments.
It is our policy to invest our cash, cash equivalents and marketable securities in highly liquid instruments with, and in the custody of, financial institutions with high credit ratings and to limit the amounts invested with any one institution, type of security and issuer. However, we are subject to general economic conditions, interest rate trends and volatility in the financial marketplace that can affect the income that we receive from our investments, the net realizable value of our investments
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(including our cash, cash equivalents and marketable securities) and our ability to sell them. In the U.S., for example, the yields on our portfolio securities are very low due to general economic conditions. Any one of these factors could reduce our investment income, or result in material charges, which in turn could impact our overall net income and earnings per share.
From time to time we make direct investments in privately held companies. The privately held companies in which we invest are considered inherently risky. The technologies and products these companies have under development are typically in the early stages and may never materialize, which could result in a loss of all or a substantial part of our initial investment in these companies. The evaluation of privately held companies is based on information that we request from these companies, which is not subject to the same disclosure regulations as U.S. publicly traded companies, and as such, the basis for these evaluations is subject to the timing and accuracy of the data received from these companies.
If we were to experience a loss on any of our investments that loss may cause us to record an other-than-temporary impairment charge. The effect of this charge could impact our overall net income and earnings per share. In any of these scenarios, our liquidity may be negatively impacted, which in turn may prohibit us from making investments in our business, taking advantage of opportunities and potentially meeting our financial obligations as they come due.
We are subject to legal proceedings and regulatory inquiries, and we may be named in additional legal proceedings or become involved in regulatory inquiries in the future, all of which are costly, distracting to our core business and could result in an unfavorable outcome, or a material adverse effect on our business, financial condition, results of operations, cash flows or the trading price for our securities.
We are involved in legal proceedings and receive inquiries from regulatory agencies. As the global economy has changed and our business has evolved, we have seen an increase in litigation activity and regulatory inquiries. Like many other high technology companies, the number and frequency of inquiries from U.S. and foreign regulatory agencies we have received regarding our business and our business practices, and the business practices of others in our industry, have increased in recent years. In the event that we are involved in significant disputes or are the subject of a formal action by a regulatory agency, we could be exposed to costly and time consuming legal proceedings that could result in any number of outcomes. Although outcomes of such actions vary, any claims or regulatory actions initiated by or against us, whether successful or not, could result in expensive costs of defense, costly damage awards, injunctive relief, increased costs of business, fines or orders to change certain business practices, significant dedication of management time, diversion of significant operational resources, or otherwise harm our business. In any of these cases, our financial results could be negatively impacted.
Although we believe we currently have adequate internal control over financial reporting, we are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.
Pursuant to Section 404, we are required to furnish a report by our management on our internal control over financial reporting. The report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management.
Although we have determined that our internal control over financial reporting was effective as of January 31, 2013, as indicated in our Management Report on Internal Control over Financial Reporting, included in this Annual Report on Form 10-K, we must continue to monitor and assess our internal control over financial reporting. If our management identifies one or more material weaknesses in our internal control over financial reporting and such weakness remains uncorrected at fiscal year-end, we will be unable to assert such internal control is effective at fiscal year-end. If we are unable to assert that our internal control over financial reporting is effective at fiscal year-end (or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls or concludes that we have a material weakness in our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which would likely have an adverse effect on our business and stock price.
In preparing our financial statements we make certain assumptions, judgments and estimates that affect amounts reported in our consolidated financial statements, which, if not accurate, may significantly impact our financial results.
We make assumptions, judgments and estimates for a number of items, including the fair value of financial instruments, goodwill, long-lived assets and other intangible assets, the realizability of deferred tax assets and the fair value of stock awards.
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We also make assumptions, judgments and estimates in determining the accruals for employee related liabilities including commissions, bonuses, and sabbaticals; and in determining the accruals for uncertain tax positions, partner incentive programs, product returns reserves, allowances for doubtful accounts, asset retirement obligations and legal contingencies. These assumptions, judgments and estimates are drawn from historical experience and various other factors that we believe are reasonable under the circumstances as of the date of the consolidated financial statements. Actual results could differ materially from our estimates, and such differences could significantly impact our financial results.
Changes in existing financial accounting standards or practices, or taxation rules or practices may adversely affect our results of operations.
Changes in existing accounting or taxation rules or practices, new accounting pronouncements or taxation rules, or varying interpretations of current accounting pronouncements or taxation practice could have a significant adverse effect on our results of operations or the manner in which we conduct our business. Further, such changes could potentially affect our reporting of transactions completed before such changes are effective.
For example, the U.S.-based Financial Accounting Standards Board (“FASB”) is currently working together with the International Accounting Standards Board (“IASB”) on several projects to further align accounting principles and facilitate more comparable financial reporting between companies who are required to follow U.S. Generally Accepted Accounting Principles (“GAAP”) under SEC regulations and those who are required to follow IFRS outside of the U.S. These efforts by the FASB and IASB may result in different accounting principles under GAAP that may result in materially different financial results for us in areas including, but not limited to principles for recognizing revenue and lease accounting.
In addition, the SEC has not yet made a determination regarding how or if IFRS will be incorporated into the financial reporting system for U.S. companies. A change in accounting principles from GAAP to IFRS may have a material impact on the way in which we report financial results.
It is not clear if or when these potential changes in accounting principles may become effective, whether we have the proper systems and controls in place to accommodate such changes and the impact that any such changes may have on our consolidated financial position, results of operations and cash flows. In addition, as we evolve and change our business and sales models, we are currently unable to determine how these potential changes may impact our new models, particularly in the area of revenue recognition.
Changes in laws and/or regulations related to the Internet or related to privacy and data security concerns or changes in the Internet infrastructure itself may cause our business to suffer.
The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business applications. Federal, state or foreign government bodies or agencies have in the past adopted, and may in the future adopt, laws or regulations affecting data privacy and the transmission of certain types of content using the Internet. For example, the State of California has adopted legislation requiring operators of commercial websites and mobile applications that collect personal information from California residents to conspicuously post and comply with privacy policies that satisfy certain requirements. Several other U.S. states have adopted legislation requiring companies to protect the security of personal information that they collect from consumers over the Internet, and more states may adopt similar legislation in the future. Additionally, the Federal Trade Commission has used its authority under Section 5 of the Federal Trade Commission Act to bring actions against companies for failing to maintain adequate security for personal information collected from consumers over the Internet and for failing to comply with privacy-related representations made to Internet users. The U.S. Congress has at various times proposed federal legislation intended to protect the privacy of Internet users and the security of personal information collected from Internet users that would impose additional compliance burdens upon companies collecting personal information from Internet users, and the U.S. Congress may adopt such legislation in the future. The European Union also has adopted various directives regulating data privacy and security and the transmission of content using the Internet involving residents of the European Union, including those directives known as the Data Protection Directive, the E-Privacy Directive, and the Privacy and Electronic Communications Directive, and may adopt similar directives in the future. Several other countries, including Canada and several Latin American and Asian countries, have constitutional protections for, or have adopted legislation protecting, individuals' personal information. Additionally, some federal, state, or foreign governmental bodies have established laws which seek to censor the transmission of certain types of content over the Internet or require that individuals be provided with the ability to permanently delete all electronic personal information, such as the German Multimedia Law of 1997.
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Given the variety of global privacy and data protection regimes, it is possible we may find ourselves subject to inconsistent obligations. For instance, the USA Patriot Act is considered by some to be in conflict with certain directives of the European Union. Situations such as these require that we make prospective determinations regarding compliance with conflicting regulations. Increased enforcement of existing laws and regulations, as well as any laws, regulations or changes that may be adopted or implemented in the future, could limit the growth of the use of public cloud applications or communications generally, result in a decline in the use of the Internet and the viability of Internet-based applications, and require implementation of additional technological safeguards.
Our financial results could be negatively impacted if our tax positions are successfully challenged by tax authorities.
We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Our effective tax rate is based on our expected geographic mix of earnings, statutory rates, intercompany transfer pricing, and enacted tax rules. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions on a worldwide basis. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business. It is possible that these positions may be challenged by jurisdictional tax authorities and may have a significant impact on our effective tax rate.
Our business could be adversely affected if we are unable to attract and retain key personnel.
Our success and ability to invest and grow depend largely on our ability to attract and retain highly skilled technical, professional, managerial, sales and marketing personnel. Historically, competition for these key personnel has been intense. The loss of services of any of our key personnel (including key personnel joining our company through acquisitions), the inability to retain and attract qualified personnel in the future, or delays in hiring required personnel, particularly engineering and sales personnel, could make it difficult to meet key objectives, such as timely and effective product introductions and financial goals.
We rely on third party technologies and if we are unable to use or integrate these technologies, our product and service development may be delayed and our financial results negatively impacted.
We rely on certain software that we license from third parties, including software that is integrated with internally developed software and used in our products to perform key functions. These third-party software licenses may not continue to be available on commercially reasonable terms, and the software may not be appropriately supported, maintained or enhanced by the licensors. The loss of licenses to, or inability to support, maintain and enhance any such software could result in increased costs, or in delays or reductions in product shipments until equivalent software can be developed, identified, licensed and integrated, which would likely harm our business.
Disruptions with licensing relationships and third party developers could adversely impact our business.
We license certain key technologies from third parties. Licenses may be restricted in the term or the use of such technology in ways that negatively affect our business. Similarly, we may not be able to obtain or renew license agreements for key technology on favorable terms, if at all, and any failure to do so could harm our business.
Our business strategy has historically depended in part on our relationships with third-party developers who provide products that expand the functionality of our design software. Some developers may elect to support other products or may experience disruption in product development and delivery cycles or financial pressure during periods of economic downturn. In particular markets, such disruptions have in the past, and would likely in the future, negatively impact these third-party developers and end users, which could harm our business.
Additionally, technology created by outsourced product development, whether outsourced to third parties or developed externally and transferred to us through business or technology acquisitions, have certain additional risks such as effective integration into existing products, adequate transfer of technology know-how and ownership and protection of transferred intellectual property.
As a result of our strategy of partnering with other companies for product development, our product delivery schedules could be adversely affected if we experience difficulties with our product development partners.
We partner with certain independent firms and contractors to perform some of our product development activities. We believe our partnering strategy allows us to, among other things, achieve efficiencies in developing new products and
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maintaining and enhancing existing product offerings. Our partnering strategy creates a dependency on such independent developers. Independent developers, including those who currently develop products for us in the U.S. and throughout the world, may not be able or willing to provide development support to us in the future. In addition, use of development resources through consulting relationships, particularly in non-U.S. jurisdictions with developing legal systems, may be adversely impacted by, and expose us to risks relating to, evolving employment, export and intellectual property laws. These risks could, among other things, expose our intellectual property to misappropriation and result in disruptions to product delivery schedules.
We regularly invest resources to update and improve our internal information technology systems. Should our investments not succeed, or if delays or other issues with new or existing internal technology systems disrupt our operations, our business could be harmed.
We rely on our network and data center infrastructure, internal technology systems and our websites for our development, marketing, operational, support, sales, accounting and financial reporting activities. We are continually investing resources to update and improve these systems and environments in order to meet the growing requirements of our business and customers. Such improvements are often complex, costly and time consuming. In addition, such improvements can be challenging to integrate with our existing technology systems, or uncover problems with our existing technology systems. Unsuccessful implementation of hardware or software updates and improvements could result in disruption in our business operations, loss of revenue, errors in our accounting and financial reporting or damage to our reputation.
Our business may be significantly disrupted upon the occurrence of a catastrophic event.
Our business is highly automated and relies extensively on the availability of our network and data center infrastructure, our internal technology systems and our websites. We also rely on hosted computer services from third parties for services that we provide to our customers and computer operations for our internal use. The failure of our systems or hosted computer services due to a catastrophic event, such as an earthquake, fire, flood, tsunami, weather event, telecommunications failure, power failure, cyber attack or war, could adversely impact our business, financial results and financial condition. We have developed disaster recovery plans and maintain backup systems in order to reduce the potential impact of a catastrophic event, however there can be no assurance that these plans and systems would enable us to return to normal business operations. In addition, any such event could negatively impact a country or region in which we sell our products. This could in turn decrease that country's or region's demand for our products, thereby negatively impacting our financial results.
We issued $750.0 million aggregate principal amount of senior unsecured notes in a debt offering in December 2013 and have an existing $400.0 million revolving credit facility, and may incur other debt in the future, which may adversely affect our financial condition and future financial results.
In December 2012, we issued 1.95% notes due December 15, 2017 in an aggregate principal amount of $400.0 million and 3.6% notes due December 15, 2022 in an aggregate principal amount of $350.0 million. As the December 2017 and December 2022 debt matures, we will have to expend significant resources to either repay or refinance these notes. If we decide to refinance the notes, we may be required to do so on different or less favorable terms or we may be unable to refinance the notes at all, both of which may adversely affect our financial condition.
We also have a $400.0 million revolving credit facility. As of January 31, 2013 we had no outstanding borrowings on the line of credit. Although we have no current plans to borrow under this credit facility, we may use the proceeds of any future borrowing for general corporate purposes, or for future acquisitions or expansion of our business. Our existing and future levels of indebtedness may adversely affect our financial condition and future financial results by, among other things:
• | increasing our vulnerability to adverse changes in general economic, industry and competitive conditions; |
• | requiring the dedication of a greater than expected portion of our expected cash from operations to service our indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures and acquisitions; and |
• | limiting our flexibility in planning for, or reacting to, changes in our business and our industry. |
We are required to comply with the covenants set forth in our senior unsecured notes and revolving credit facility. Our ability to comply with these covenants may be affected by events beyond our control. If we breach any of the covenants and do not obtain a waiver from the noteholders or lenders, then, subject to applicable cure periods, any outstanding indebtedness may be declared immediately due and payable. In addition, changes by any rating agency to our credit rating may negatively impact
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the value and liquidity of our securities. Under certain circumstances, if our credit ratings are downgraded or other negative action is taken, the interest rate payable by us under our revolving credit facility could increase. Downgrades in our credit ratings could also restrict our ability to obtain additional financing in the future and could affect the terms of any such financing.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
We have received no written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of our 2013 fiscal year that remain unresolved.
ITEM 2. | PROPERTIES |
We lease 1,834,000 square feet of office space in 112 locations in the United States and internationally through our foreign subsidiaries. In addition, we own 25,000 square feet of office space in two locations internationally through our foreign subsidiaries. Our executive offices and corporate headquarters are located in leased office space in San Rafael, California. Our San Rafael facilities consist of 265,000 square feet under leases that have expiration dates ranging from December 2016 to December 2019. We and our foreign subsidiaries lease additional space in various locations throughout the world for local sales, product development and technical support personnel.
All facilities are in good condition. Our facilities, excluding those in restructuring, are operating at capacities averaging 82% occupancy worldwide as of January 31, 2013. We believe that our existing facilities and offices are adequate to meet our requirements for the foreseeable future. See Note 8, “Commitments and Contingencies,” in the Notes to Consolidated Financial Statements for more information about our lease commitments.
ITEM 3. | LEGAL PROCEEDINGS |
We are involved in a variety of claims, suits, investigations and proceedings in the normal course of business activities including claims of alleged infringement of intellectual property rights, commercial, employment, piracy prosecution, business practices and other matters. In our opinion, resolution of pending matters is not expected to have a material adverse impact on our consolidated results of operations, cash flows or financial position. Given the unpredictable nature of legal proceedings, there is a reasonable possibility that an unfavorable resolution of one or more such proceedings could in the future materially affect our results of operations, cash flows or financial position in a particular period, however, based on the information known by us as of the date of this filing and the rules and regulations applicable to the preparation of the Company's financial statements, any such amount is either immaterial or it is not possible to provide an estimated amount of any such potential loss.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on the NASDAQ Global Select Market under the symbol ADSK. The following table lists the high and low sales prices for each quarter in the last two fiscal years.
High | Low | ||||||
Fiscal 2013 | |||||||
First Quarter | $ | 42.69 | $ | 35.55 | |||
Second Quarter | 41.28 | 28.52 | |||||
Third Quarter | 36.21 | 27.70 | |||||
Fourth Quarter | 40.00 | 30.22 | |||||
Fiscal 2012 | |||||||
First Quarter | $ | 45.55 | $ | 38.47 | |||
Second Quarter | 45.99 | 34.34 | |||||
Third Quarter | 35.83 | 23.41 | |||||
Fourth Quarter | 36.60 | 29.80 | |||||
Dividends
We did not declare any cash or stock dividends in either fiscal 2013 or fiscal 2012. We anticipate that, for the foreseeable future, we will not pay any cash or stock dividends.
Stockholders
As of January 31, 2013, the number of common stockholders of record was 510. Because many of our shares of common stock are held by brokers or other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by the record holders.
Issuer Purchases of Equity Securities
The purpose of our stock repurchase program is to offset dilution from the issuance of stock under our employee stock plans, reduce shares over time as facts and circumstances warrant and for such other purposes as may be in our interests and the interests of our stockholders, which has the effect of returning excess cash generated from our business to stockholders. The number of shares acquired and the timing of the purchases are based on several factors, including general market conditions, the volume of employee stock option exercises, stock issuances, the trading price of our common stock, cash on hand and available in the U.S., and company defined trading windows. In December 2010, the Board of Directors approved a plan which authorized the repurchase of an additional 20.0 million shares; at January 31, 2013, 17.8 million shares have been repurchased under the plan. In June 2012, the Board of Directors approved an additional plan, which authorized the repurchase of an additional 30.0 million shares; as of January 31, 2013, no shares have been repurchased under this plan. Neither of these plans have a fixed expiration date. During the three and twelve months ended January 31, 2013, we repurchased 2.6 million and 12.5 million shares of our common stock, respectively. At January 31, 2013, 32.2 million shares remained available for repurchase under the existing repurchase authorizations. See Note 9, “Stockholders' Equity,” in the Notes to Consolidated Financial Statements for further discussion.
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The following table provides information about the repurchase of our common stock under the stock repurchase programs in open-market transactions during the quarter ended January 31, 2013:
(Shares in thousands) | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(2) | ||||||||
November 1- November 30 | — | $ | — | — | 34,801.1 | |||||||
December 1 - December 31 | 2,426.5 | 35.44 | 2,426.5 | 32,374.6 | ||||||||
January 1 - January 31 | 130.2 | 36.43 | 130.2 | 32,244.4 | ||||||||
Total | 2,556.7 | $ | 35.50 | 2,556.7 | ||||||||
____________________
(1) | Represents shares purchased in open-market transactions under the stock repurchase programs approved by the Board of Directors. |
(2) | These amounts correspond to the plans approved by the Board of Directors in June 2012 and December 2010 that authorize the repurchase of 30.0 million and 20.0 million shares, respectively. The plans do not have fixed expiration dates. |
Sales of Unregistered Securities
There were no sales of unregistered securities during the three months ended January 31, 2013.
Company Stock Performance
The following graph shows a five-year comparison of cumulative total return (equal to dividends plus stock appreciation) for our Common Stock, the Standard & Poor’s 500 Stock Index and the Dow Jones U.S. Software Index.
Comparison of Five Year Cumulative Total Stockholder Return(1)
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(1) | Assumes $100 invested on January 31, 2008, in Autodesk’s stock, the Standard & Poor’s 500 Stock Index, and the Dow Jones U.S. Software Index, with reinvestment of all dividends. Total stockholder returns for prior periods are not an indication of future investment returns. |
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ITEM 6. | SELECTED FINANCIAL DATA |
The following selected consolidated financial data is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K to fully understand factors that may affect the comparability of the information presented below. The financial data for the years ended January 31, 2013, 2012 and 2011 are derived from, and are qualified by reference to, the audited consolidated financial statements that are included in this Form 10-K. The financial data for the years ended January 31, 2010 and 2009 are derived from audited, consolidated financial statements which are not included in this Form 10-K.
Fiscal year ended January 31, | |||||||||||||||||||
2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
(In millions, except per share data) | |||||||||||||||||||
For the Fiscal Year: | |||||||||||||||||||
Net revenue | $ | 2,312.2 | $ | 2,215.6 | $ | 1,951.8 | $ | 1,713.7 | $ | 2,315.2 | |||||||||
Income from operations | 305.9 | 355.6 | 271.4 | 65.6 | 244.5 | ||||||||||||||
Provision for income taxes | (62.6 | ) | (77.6 | ) | (60.0 | ) | (26.7 | ) | (68.9 | ) | |||||||||
Net income(1) | 247.4 | 285.3 | 212.0 | 58.0 | 183.6 | ||||||||||||||
Cash flow from operations | 559.1 | 573.5 | 540.8 | 246.8 | 593.9 | ||||||||||||||
Common Stock Data: | |||||||||||||||||||
Basic net income per share | $ | 1.09 | $ | 1.25 | $ | 0.93 | $ | 0.25 | $ | 0.81 | |||||||||
Diluted net income per share | 1.07 | 1.22 | 0.90 | 0.25 | 0.80 | ||||||||||||||
Dividends paid per share | — | — | — | — | — | ||||||||||||||
Income from operations includes the following items(2): | |||||||||||||||||||
Stock-based compensation expense | $ | 156.3 | $ | 108.8 | $ | 80.7 | $ | 93.6 | $ | 89.5 | |||||||||
Amortization of purchased intangibles | 81.8 | 70.3 | 55.9 | 58.4 | 46.6 | ||||||||||||||
Restructuring charges (benefits), net | 43.9 | (1.3 | ) | 10.8 | 48.2 | 40.2 | |||||||||||||
Impairment | — | — | — | 21.0 | 128.9 | ||||||||||||||
In-process research and development | — | — | — | — | 26.9 | ||||||||||||||
Provision for income taxes includes the following item: | |||||||||||||||||||
Establishment of valuation allowance on deferred tax assets | $ | — | $ | — | $ | — | $ | 21.0 | $ | — | |||||||||
At Year End: | |||||||||||||||||||
Total assets | $ | 4,308.4 | $ | 3,227.8 | $ | 2,787.6 | $ | 2,447.2 | $ | 2,420.7 | |||||||||
Long-term liabilities | 1,221.5 | 390.8 | 308.5 | 269.7 | 309.9 | ||||||||||||||
Stockholders’ equity | 2,043.2 | 1,882.9 | 1,609.3 | 1,473.5 | 1,310.7 | ||||||||||||||
____________________
(1) | Net income includes the items identified below in “Income from operations” net of tax. |
(2) | These items are recorded on a pre-tax basis. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The discussion in our MD&A 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” below; anticipated future net revenue; future operating margin and other future financial results (by product type and geography) and operating expenses; the effect of unemployment and availability of credit; the effects of the U.S. credit downgrade and weak global economic conditions; our backlog; expected trends in certain financial metrics; expected market trends, including the growth of cloud, mobile and social computing; the impact of acquisitions and investment activities; the effect of fluctuations in exchange rates and our hedging activities on our financial results; our abilities to successfully expand adoption of our products; our ability to gain market acceptance of new businesses and sales initiatives; our ability to successfully increase sales of product suites as part of our overall sales strategy; the impact of economic volatility and geopolitical activities in certain countries, particularly emerging economy countries, and the resulting effect on our financial results; and the impact of our restructuring activities. In addition, forward-looking statements also consist of statements involving expectations regarding product acceptance, continuation of our stock repurchase program, statements regarding our liquidity and short-term and long-term cash requirements, as well as statements involving trend analyses and statements including such words as “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” and similar expressions or the negative of these terms or other comparable terminology. These forward-looking statements speak only as of the date of this Annual Report on Form 10-K and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth above in Item 1A, “Risk Factors,” and in our other reports filed with the U.S. Securities and Exchange Commission. We assume no obligation to update the forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made.
Strategy
Autodesk’s vision is to help people imagine, design and create a better world. We do this by developing software for the world’s designers, architects, engineers, and digital artists—the people who create the world's products, buildings, infrastructure, films, and games. Autodesk serves customers in three primary markets: architecture, engineering and construction; manufacturing; and digital media and entertainment.
Our goal is to provide our customers with the world’s most innovative, and engaging design software and services. Our product and services portfolio allows our customers to digitally visualize, simulate, and analyze their projects, helping them to better understand the consequences of their design decisions; save time, money, and resources; and become more innovative.
Today, complex challenges such as globalization, urbanization, and sustainable design are driving our customers to new levels of performance and competitiveness, and we are committed to helping them address those challenges and take advantage of new opportunities. To achieve these goals, we are capitalizing on two of our strongest competitive advantages: our ability to bring advanced technology to mainstream markets, and the breadth and depth of our product portfolio.
By innovating in existing technology categories, we bring powerful new design capabilities to volume markets. Our products are designed to be easy-to-learn and use, and to provide customers with a low cost of deployment, a low total cost of ownership, and a rapid return on investment. In addition, our software architecture allows for extensibility and integration with other products. The breadth of our technology and product line gives us a unique competitive advantage, because it allows our customers to address a wide variety of problems in ways that transcend industry and disciplinary boundaries. This is particularly important in helping our customers address the complex challenges mentioned above. We also believe that our technological leadership and global brand recognition have positioned us well for long-term growth and industry leadership.
In addition to the competitive advantages afforded by our technology, our large global network of distributors, resellers, third-party developers, customers, educational institutions, faculty and students is a key competitive advantage. This network of relationships provides us with a broad and deep reach into volume markets around the world. Our distributor and reseller network is extensive and provides our customers with the resources to purchase, deploy, learn, and support our products quickly and easily. We have a significant number of registered third-party developers who create products that work well with Autodesk products and extend them for a variety of specialized applications. Users with expertise in our products are broadly and globally available from educational institutions and in the existing workforce. We offer extensive educational programs, including student versions of software, curricula and faculty development. We have an extensive global community of students who are experienced with our software and poised to become the next generation of professional users – thus reducing the cost of training and providing fresh talent for our customers. Our global network of distributors, resellers, third party developers,
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customers, educational institutions and students has been developed over our thirty year history. We believe it is an enduring competitive advantage that is difficult for others to replicate.
We continually strive to increase the business value of our design tools to our customers in a number of ways. First, we seek to address an increasing portion of our customers' workflow with products that extend the value of our customers' digital design information into visualization, analysis and simulation. Second, we seek to improve our product interoperability and usability, thus improving our customers' productivity and effectiveness. Third, we continue to develop new ways to deliver capability and value to our customers, such as product suites, cloud and social-based services, and delivery of our solutions on mobile devices and new hardware platforms. Fourth, we extend our customers' workflow with products for adjacent users and for the “customers of our customers,” thus increasing the value of the design information our customers produce. Finally, we continue to develop new lines of consumer products and services that are delivered and experienced through the Web, tablets, and other mobile devices providing our advanced visualization technologies to consumers—a whole new category of Autodesk customer.
Autodesk was founded during the platform transition from mainframes and engineering workstations to personal computers. We developed and sustained a compelling value proposition based upon desktop software for the personal computer. Just as the transition from mainframes to personal computers transformed the industry thirty years ago, we believe our industry is undergoing a similar transition from the personal computer to cloud, social, and mobile computing. To address this shift, our major business initiatives include our desire to accelerate the business' move to the cloud, transform our customers' experience, increase industry focus to meet customer demands, and develop more effective marketing.
During the first quarter of fiscal year 2013, we undertook a number of important organizational changes to drive the success of our business. The reorganization included changes to the structure and alignment of our product development and marketing teams and re-organization of our sales teams. While these changes were intended to better serve our customers and drive future growth, we have encountered challenges in the execution of these efforts which have impacted our financial results in the short term. In order to achieve these organizational changes and to further our strategy, including our continuing shift to cloud and mobile computing, in the third quarter of fiscal year 2013, we commenced a company-wide restructuring plan. The plan included a reduction of approximately 500 positions and the consolidation of eight leased facilities with a total cost of up to $52.0 million ("Fiscal 2013 Plan"), of which $43.9 million was incurred during fiscal 2013. The termination benefits and facility related liabilities have been substantially paid as of fiscal year ended January 31, 2013. Autodesk expects to pay the remainder of the termination benefits and facility related liabilities through the fourth quarter of fiscal 2019. For further discussion see Note 15, “ Restructuring Reserves,” in the Notes to the Consolidated Financial Statements.
Our growth strategy is predicated upon leading the transition in the industries we serve into the cloud in three ways:
• | Grow. We believe sufficient opportunity remains in our PC-based software business, and we intend to continue to grow this business. In particular, we are offering product suites with improved interoperability and usability to enhance our customers' productivity. We are continuing to drive maintenance and new licensing models to better match the business needs of our customers. We will continue to emphasize developing direct relationships with large, global customers and pursuing opportunities in emerging economies. |
• | Transform. At the same time we grow our desktop software business, we are migrating many of our products to the cloud. This entails development of new cloud computing infrastructure and redesigning our applications to leverage the cloud. We are also developing new capabilities that are enabled by the cloud such as collaborative Product Lifecycle Management ("PLM") and on line simulation. Our goal is to lead our industry in transitioning to the cloud. |
• | Expand. We believe that the combination of cloud, social and mobile computing affords us the opportunity to expand our business into new markets. For example, we have added new customers through our consumer products. We intend to continue to develop our business to both add new customers and find new capabilities to incorporate in our core business. |
We believe that expanding our customers' portfolios to include our suites presents a meaningful growth opportunity and is an important part of our overall strategy. As our customers in all industries adopt our design suites, we believe they will experience an increase in their productivity and the value of their design data. For fiscal 2013, revenue from suites increased 16%, as compared to the prior fiscal year. As a percentage of revenue, suites increased to 30% in fiscal 2013 as compared to 27% in fiscal 2012.
Expanding our geographic coverage is another key element of our growth strategy. Much of the growth in the world’s construction and manufacturing is happening in emerging economies. Further, emerging economies face many of the
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challenges that our design technology can help address, for example infrastructure build-out. Although revenue from emerging countries decreased 4% during fiscal 2013 as compared to fiscal 2012, we believe that emerging economies continue to present long-term growth opportunities for us. Revenue from emerging countries represented 14% and 16% of fiscal 2013 and fiscal 2012 net revenue, respectively. While we believe there are long-term growth opportunities in emerging economies, conducting business in these countries presents significant challenges, including economic volatility, geopolitical risk, local competition, intellectual property protection, poorly developed business infrastructure, scarcity of talent and software piracy.
Our strategy includes improving our product functionality and expanding our product offerings through internal development as well as through the acquisition of products, technology and businesses. Acquisitions often increase the speed at which we can deliver product functionality to our customers; however, they entail cost and integration challenges and may, in certain instances, negatively impact our operating margins. We continually review these trade-offs in making decisions regarding acquisitions. We currently anticipate that we will acquire products, technology and businesses as compelling opportunities become available.
Our strategy depends upon a number of assumptions, including that we will be able to continue making our technology available to mainstream markets; leverage our large global network of distributors, resellers, third-party developers, customers, educational institutions, and students; improve the performance and functionality of our products; and adequately protect our intellectual property. If the outcome of any of these assumptions differs from our expectations, we may not be able to implement our strategy, which could potentially adversely affect our business. For further discussion regarding these and related risks see Part I, Item 1A, “Risk Factors.”
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles. In preparing our Consolidated Financial Statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our Consolidated Financial Statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments and estimates. Our significant accounting policies are described in Note 1, “Business and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements. We believe that of all our significant accounting policies, the following policies involve a higher degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collection is probable. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.
For multiple element arrangements containing only software and software-related elements, we allocate the sales price among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on their vendor-specific objective evidence (“VSOE”) of fair value. VSOE is the price charged when an element is sold separately or a price set by management with the relevant authority. If we do not have VSOE of an undelivered software license, we defer revenue recognition on the entire sales arrangement until all elements for which we do not have VSOE are delivered. If we do not have VSOE for undelivered maintenance or services, the revenue for the arrangement is recognized over the longest contractual service period in the arrangement. We are required to exercise judgment in determining whether VSOE exists for each undelivered element based on whether our pricing for these elements is sufficiently consistent.
For multiple elements arrangements involving non-software elements, including cloud subscription services, our revenue recognition policy is based upon the accounting guidance contained in ASC 605, Revenue Recognition. For these arrangements, we first allocate the total arrangement consideration based on the relative selling prices of the software group of elements as a whole and to the non-software elements. We then further allocate consideration within the software group to the respective elements within that group using the residual method as described above. We exercise judgment and use estimates in connection with the determination of the amount of revenue to be recognized in each accounting period.
Our assessment of likelihood of collection is also a critical factor in determining the timing of revenue recognition. If we do not believe that collection is probable, the revenue will be deferred until the earlier of when collection is deemed probable or payment is received.
Our indirect channel model includes both a two-tiered distribution structure, where distributors sell to resellers, and a
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one-tiered structure where Autodesk sells directly to resellers. Our product license revenue from distributors and resellers are generally recognized at the time title to our product passes to the distributor, in a two-tiered structure, or reseller, in a one-tiered structure, provided all other criteria for revenue recognition are met. This policy is predicated on our ability to estimate sales returns, among other criteria. We are also required to evaluate whether our distributors and resellers have the ability to honor their commitment to make fixed or determinable payments, regardless of whether they collect payment from their customers. Our policy also presumes that we have no significant performance obligations in connection with the sale of our product licenses by our distributors and resellers to their customers. If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.
Marketable Securities. At January 31, 2013 we had $753.2 million of short and long-term marketable securities. Marketable securities are stated at fair value. As described in Note 2, “Financial Instruments,” in the Notes to the Consolidated Financial Statements, we estimate the fair value of our marketable securities each quarter. Fair value is defined as an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. When identical or similar assets are traded in active markets, the level of judgment required to estimate their fair value is relatively low. This is generally true for our cash and cash equivalents and the majority of our marketable securities, which we consider to be Level 1 assets and Level 2 assets. However, determining the fair value of marketable securities when observable inputs are not available (Level 3) requires significant judgment. For example we use a discounted cash flow model to estimate the fair value of our auction rate securities; because we have determined that the market for those securities is inactive. These assumptions are inherently subjective and involve significant management judgment. Whenever possible, we use observable market data and rely on unobservable inputs only when observable market data is not available, when determining fair value.
Business Combinations. We allocate the purchase price of acquired companies to assets and liabilities, as well as to in-process research and development based upon their estimated fair values at the acquisition date. The purchase price allocation process requires us to make significant estimates and assumptions, especially at the acquisition date with respect to intangible assets and deferred revenue obligations.
Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates used in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to: future expected cash flows from sales, maintenance agreements and acquired developed technologies; the acquired company’s trade name and customer relationships as well as assumptions about the period of time the acquired trade name and customer relationships will continue to be used in the combined company’s product portfolio; expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; and discount rates.
Goodwill. We test goodwill for impairment annually in our fourth fiscal quarter or sooner should events or changes in circumstances indicate potential impairment. When assessing goodwill for impairment, we assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Qualitative factors considered in this assessment include cost factors; financial performance; legal, regulatory, contractual, political, business, or other factors; entity specific factors; industry and market considerations, macroeconomic conditions, and other relevant events and factors affecting the reporting unit. If, after assessing the totality of events or circumstances, it is more likely than not that the fair value of the reporting unit is greater than its carrying value, then performing the two-step impairment test is unnecessary. If the two-step impairment test is necessary, we use discounted cash flow models which include assumptions regarding projected cash flows. Variances in these assumptions could have a significant impact on our conclusion as to whether goodwill is impaired, or the amount of any impairment charge. Impairment charges, if any, result from instances where the fair values of net assets associated with goodwill are less than their carrying values. As changes in business conditions and our assumptions occur, we may be required to record impairment charges.
For our annual impairment assessment in fiscal 2013, based on a review of the qualitative factors described above, we determined that for each of our Platform Solutions and Emerging Business, Manufacturing ("MFG") and Architecture, Engineering and Construction ("AEC") reporting units, it was more likely than not that the fair vale of the reporting units exceeded the carrying amount. As a result, we concluded that performing the two-step impairment test was not necessary for these reporting units.
For the Media and Entertainment (“M&E”) reporting unit, Autodesk deemed the two-step impairment test was necessary and used a discounted cash flow model which included assumptions regarding projected cash flows. Based on this testing,
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Autodesk determined that there was no impairment of goodwill for the M&E reporting unit during the year ended January 31, 2013.
Realizability of Long-Lived Assets. We assess the realizability of our long-lived assets and related intangible assets, other than goodwill, annually during the fourth fiscal quarter, or sooner should events or changes in circumstances indicate the carrying values of such assets may not be recoverable. We consider the following factors important in determining when to perform an impairment review: significant under-performance of a business or product line relative to budget; shifts in business strategies which affect the continued uses of the assets; significant negative industry or economic trends; and the results of past impairment reviews. When such events or changes in circumstances occur, we assess recoverability of these assets.
We assess recoverability of these assets by comparing the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If impairment indicators were present based on our undiscounted cash flow models, which include assumptions regarding projected cash flows, we would perform a discounted cash flow analysis to assess impairments on long-lived assets. Variances in these assumptions could have a significant impact on our conclusion as to whether an asset is impaired or the amount of any impairment charge. Impairment charges, if any, result in situations where any fair values of these assets are less than their carrying values.
In addition to our recoverability assessments, we routinely review the remaining estimated useful lives of our long-lived assets. Any reduction in the useful life assumption will result in increased depreciation and amortization expense in the quarter when such determinations are made, as well as in subsequent quarters.
We will continue to evaluate the values of our long-lived assets in accordance with applicable accounting rules. As changes in business conditions and our assumptions occur, we may be required to record impairment charges.
Income Taxes. We currently have $165.0 million of net deferred tax assets, primarily a result of tax credits, net operating losses, and timing differences for reserves, accrued liabilities, stock options, deferred revenue, purchased technologies and capitalized intangibles, partially offset by the establishment of U.S. deferred tax liabilities on unremitted earnings from certain foreign subsidiaries, deferred tax liabilities associated with tax method change on advanced payments and valuation allowances against U.S. and Canadian deferred tax assets. We perform a quarterly assessment of the recoverability of these net deferred tax assets and believe that we will generate sufficient future taxable income in appropriate tax jurisdictions to realize the net deferred tax assets. Our judgments regarding future profitability may change due to future market conditions and other factors, including intercompany transfer pricing adjustments. Any change in future profitability may require material adjustments to these net deferred tax assets, resulting in a reduction in net income in the period when such determination is made. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business. It is possible that these positions may be challenged by jurisdictional tax authorities and may have a significant impact on our effective tax rate.
Stock-Based Compensation. We measure stock-based compensation cost at the grant date fair value of the award, and recognize expense on a straight-line basis over the requisite service period, which is generally the vesting period. We estimate the fair value of certain stock-based payment awards (including grants of stock options and employee stock purchases related to the employee stock purchase plan) using the Black-Scholes-Merton option-pricing model. The determination of the fair value of a stock-based award on the date of grant using the Black-Scholes-Merton option-pricing model is affected by our stock price on the date of grant as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the award, actual and projected employee stock option exercise behaviors, the risk-free interest rate for the expected term of the award and expected dividends. The variables used in the model are reviewed on a quarterly basis and adjusted, as needed. Share-based compensation cost for restricted stock is measured on the closing fair market value of our commons stock on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense in our Consolidated Statements of Operations.
Legal Contingencies. As described in Part I, Item 3, “Legal Proceedings” and Part II, Item 8, Note 8, “Commitments and Contingencies,” in the Notes to Consolidated Financial Statements, we are periodically involved in various legal claims and proceedings. We routinely review the status of each significant matter and assess our potential financial exposure. If the potential loss from any matter is considered probable and the amount can be reasonably estimated, we record a liability for the estimated loss. Because of inherent uncertainties related to these legal matters, we base our loss accruals on the best information available at the time. As additional information becomes available, we reassess our potential liability and may revise our estimates. Such revisions could have a material impact on future quarterly or annual results of operations.
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Recently Issued Accounting Standards
See Part II, Item 8, Note 1, “Business and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated herein by reference.
Overview of Fiscal 2013
Fiscal Year Ended | As a % of Net Revenue | Fiscal Year Ended | As a % of Net Revenue | ||||||||||
January 31, 2013 | January 31, 2012 | ||||||||||||
(in millions) | |||||||||||||
Net Revenue | $ | 2,312.2 | 100 | % | $ | 2,215.6 | 100 | % | |||||
Cost of revenue | 238.5 | 10 | % | 229.1 | 10 | % | |||||||
Gross Profit | 2,073.7 | 90 | % | 1,986.5 | 90 | % | |||||||
Operating expenses | 1,767.8 | 76 | % | 1,630.9 | 74 | % | |||||||
Income from Operations | $ | 305.9 | 13 | % | $ | 355.6 | 16 | % | |||||
We experienced mixed results in fiscal 2013. During fiscal 2013, as compared to fiscal 2012, net revenue increased 4% and gross profit increased 4%, while income from operations decreased 14%. Contributing to the year over year increases in revenue during fiscal 2013 were increases in revenue from maintenance and new seat license revenue. We experienced increases in revenue for many of our major products, reportable segments and geographic areas during fiscal 2013 as compared to the same period in the prior fiscal year. The reasons for these increases are discussed below under the heading "Results from Operations."
Revenue from flagship products was 56% of total net revenue during fiscal 2013, an increase of 1% as compared to fiscal 2012. Revenue from suites was 30% of total net revenue for fiscal 2013, an increase of 16% as compared to fiscal 2012. Revenue from new and adjacent products was 15% of total net revenue during the fiscal 2013, a decreased of 3% as compared to fiscal 2012. We anticipate that, as our new and existing customers migrate from our stand-alone products, our revenue from suites will increase as a percentage of revenue and that our revenue from our flagship and new and adjacent products will decline as a percentage of revenue.
While net revenue increased $96.6 million or 4% for fiscal 2013, as compared to fiscal 2012, our operating expenses increased $136.9 million or 8% for fiscal 2013. The increase in operating expenses was primarily due to higher employee related costs and restructuring charges incurred in fiscal 2013 as a result of the Fiscal 2013 Plan. Similarly, income from operations decreased 14% in fiscal 2013, as compared to fiscal 2012, and our total operating margin decreased from 16% for fiscal 2012 to 13% for fiscal 2013 primarily due to higher employee related costs and restructuring charges during fiscal 2013.
We believe net revenue for fiscal 2014 will increase by approximately 6% compared to fiscal 2013. We anticipate fiscal 2014 operating margin will increase by approximately 455 to 480 basis points compared to fiscal 2013.
We generate a significant amount of our revenue in the U.S., Japan, Germany, Canada, and the United Kingdom. Our revenue was negatively impacted from foreign exchange rate changes during fiscal 2013, as compared to fiscal 2012. Had applicable exchange rates from fiscal 2012 been in effect during fiscal 2013 and had we excluded foreign exchange hedge gains and losses from fiscal 2013, (“on a constant currency basis”), net revenue would have increased 5% compared to the prior fiscal year. During fiscal 2013, total spend, defined as cost of revenue plus operating expenses, increased 8% both as reported and on a constant currency basis compared to the prior fiscal year. Changes in the value of the U.S. dollar may have a significant effect on net revenue, total spend and income from operations in future periods. We use foreign currency contracts to reduce the exchange rate effect on a portion of the net revenue of certain anticipated transactions but do not attempt to completely mitigate the impact of fluctuation of such foreign currency against the U.S. dollar.
We rely significantly upon major distributors and resellers in both the U.S. and international regions, including Tech Data Corporation and its global affiliates (collectively, “Tech Data”). Tech Data accounted for 23% and 17% of our consolidated net revenue during fiscal year 2013 and 2012, respectively. On October 27, 2011, Tech Data purchased certain assets of Mensch und Maschine Software (“MuM”), which has been a distributor of our products in Europe. The acquisition concentrates additional sales through Tech Data, which on a consolidated basis would have accounted for 21% of our net revenue for fiscal years 2012 if the acquisition had taken place at the beginning of fiscal 2012.We believe our business is not substantially
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dependent on Tech Data. Our customers through Tech Data are the resellers and end users who purchase our software licenses and services. Should any of the agreements between Tech Data and us be terminated for any reason, we believe the resellers and end users who currently purchase our products through Tech Data would be able to continue to do so under substantially the same terms from one of our many other distributors without substantial disruption to our revenue.
Our primary goals for fiscal 2014 are to grow revenue from our current levels consistent with seasonal trends, manage our operating margin, and to invest in product functionality and new product lines, including suites offerings, while controlling our operating expenses. In addition, we will continue to look closely at our cost structure to find ways to improve our operating margin while allowing continued investment in growth and productivity initiatives. There can be no assurance that we will achieve our financial goals and improve our financial results. Additionally, we believe that unemployment rates and the availability of credit to major industries we serve are important indicators for our business. If we are unable to successfully achieve our major business initiatives or if global economic conditions deteriorate, we may not achieve our financial goals.
At January 31, 2013, we had $2,365.4 million in cash and marketable securities. This amount includes the aggregate net proceeds of $739.3 million, after deducting the underwriting discounts and related offering expenses, from our December 2012 registered underwritten public offering of $400.0 million aggregate principal amount of 1.95% senior notes due December 15, 2017 and $350.0 million aggregate principal amount of 3.6% senior notes due December 15, 2022.
We completed fiscal 2013 with a higher deferred revenue balance and a higher accounts receivable balance as compared to fiscal 2012. Our deferred revenue balance at January 31, 2013 included $733.5 million of customer maintenance contracts, which will be recognized as revenue ratably over the life of the contracts. The term of our maintenance contracts is typically one year but may be two or three year, or occasionally as long as five years. We repurchased 12.5 million shares of our common stock for $431.2 million during fiscal 2013. Comparatively, we repurchased 9.7 million shares of our common stock for $327.4 million during fiscal 2012.
Results of Operations
Fiscal Year Ended January 31, 2013 | Increase (decrease) compared to prior fiscal year | Fiscal Year Ended January 31, 2012 | Increase (decrease) compared to prior fiscal year | Fiscal Year Ended January 31, 2011 | |||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Net Revenue: | |||||||||||||||||||||||||
License and other | $ | 1,390.6 | $ | 33.0 | 2 | % | $ | 1,357.6 | $ | 185.5 | 16 | % | $ | 1,172.1 | |||||||||||
Maintenance | 921.6 | 63.6 | 7 | % | 858.0 | 78.3 | 10 | % | 779.7 | ||||||||||||||||
$ | 2,312.2 | $ | 96.6 | 4 | % | $ | 2,215.6 | $ | 263.8 | 14 | % | $ | 1,951.8 | ||||||||||||
Net Revenue by Geographic Area: | |||||||||||||||||||||||||
Americas | $ | 836.2 | $ | 37.7 | 5 | % | $ | 798.5 | $ | 97.0 | 14 | % | $ | 701.5 | |||||||||||
Europe, Middle East and Africa | 868.5 | 6.3 | 1 | % | 862.2 | 79.4 | 10 | % | 782.8 | ||||||||||||||||
Asia Pacific | 607.5 | 52.6 | 9 | % | 554.9 | 87.4 | 19 | % | 467.5 | ||||||||||||||||
$ | 2,312.2 | $ | 96.6 | 4 | % | $ | 2,215.6 | $ | 263.8 | 14 | % | $ | 1,951.8 | ||||||||||||
Net Revenue by Operating Segment: | |||||||||||||||||||||||||
Platform Solutions and Emerging Business | $ | 849.7 | $ | 16.6 | 2 | % | $ | 833.1 | $ | 116.9 | 16 | % | $ | 716.2 | |||||||||||
Architecture, Engineering and Construction | 694.3 | 67.9 | 11 | % | 626.4 | 58.4 | 10 | % | 568.0 | ||||||||||||||||
Manufacturing | 573.8 | 33.5 | 6 | % | 540.3 | 70.3 | 15 | % | 470.0 | ||||||||||||||||
Media and Entertainment | 194.4 | (21.4 | ) | (10 | )% | 215.8 | 18.2 | 9 | % | 197.6 | |||||||||||||||
$ | 2,312.2 | $ | 96.6 | 4 | % | $ | 2,215.6 | $ | 263.8 | 14 | % | $ | 1,951.8 | ||||||||||||
Fiscal 2013 Net Revenue Compared to Fiscal 2012 Net Revenue
License and Other Revenue
License and other revenue is comprised of two components: all forms of product license revenue and other revenue. Product license revenue includes: software license revenue from the sale of new seat licenses, upgrades, product revenue for
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Creative Finishing and revenue from on-demand software and services. Other revenue includes revenue from consulting, training, Autodesk Developers Network and Creative Finishing customer support, and is recognized over time, as the services are performed.
Total license and other revenue increased 2% during fiscal 2013 as compared to fiscal 2012. This increase was primarily due to the 6% increase in revenue from commercial new seat licenses during fiscal 2013 as compared to fiscal 2012. During fiscal 2013, all of the 6% increase was due to the increase in the number of seats sold. Average net revenue per seat was flat in fiscal 2013 as compared to fiscal 2012. Commercial new seat revenue, as a percentage of license and other revenue, was 69% for fiscal 2013 and 67% for fiscal 2012.
Offsetting the increase in commercial new seat license revenue during fiscal 2013, as compared to fiscal 2012, was the 3% decrease in upgrade revenue. Upgrade revenue decreased during fiscal 2013 in comparison to fiscal 2012 primarily due to more successful upgrade promotions run during fiscal 2012 than in fiscal 2013.
Backlog related to current software license product orders that had not shipped at the end of the quarter decreased by $7.1 million during fiscal 2013 from $27.1 million at January 31, 2012 to $20.0 million at January 31, 2013. Backlog from current software license product orders that we have not yet shipped consists of orders for currently available licensed software products from customers with approved credit status and may include orders with current ship dates and orders with ship dates beyond the current fiscal period.
Revenue from the sales of our services, training and support, included in “License and other revenue,” represented less than 5% of net revenue for all periods presented.
Maintenance Revenue
Our maintenance revenue relates to a program known by our user community as the Subscription Program. Our maintenance program provides our commercial and educational customers with a cost effective and predictable budgetary option to obtain the productivity benefits of our new releases and enhancements when and if released during the term of their contracts. Under our maintenance program, customers are eligible to receive unspecified upgrades when and if available, downloadable training courses and online support. We recognize maintenance revenue ratably over the maintenance contract periods.
Maintenance revenue increased 7% during fiscal 2013, as compared to fiscal 2012, primarily due to a 7% increase in commercial maintenance revenue. The 7% increase in commercial maintenance revenue was due to a 6 percentage point increase in commercial enrollment during the corresponding maintenance contract term and a 1 percentage point increase in average net revenue per maintenance seat. Commercial maintenance revenue represented 98% of maintenance revenue for both fiscal 2013 and 2012.
Changes in maintenance revenue lag changes in net billings for maintenance contracts because we recognize the revenue from those contracts ratably over their contract terms. The term of our maintenance contracts is predominantly one year but may be two or three years or occasionally as long as five years. Net maintenance billings increased 4% during fiscal 2013 as compared to fiscal 2012. Net maintenance billings increased due to early maintenance renewals in advance of a price increase and due to new multi-year maintenance contracts.
Our deferred revenue balance at January 31, 2013 and January 31, 2012 was $834.6 million and $719.2 million, respectively, primarily related to customer maintenance contracts, which will be recognized as revenue ratably over the life of the contracts.
Net Revenue by Geographic Area
Net revenue in the Americas geography increased by 5% both as reported and on a constant currency basis, during fiscal 2013, as compared to fiscal 2012. This increase was primarily due to an 8% increase in maintenance revenue during fiscal 2013 as compared to fiscal 2012. Revenue from new seats was flat during fiscal 2013 as compared to fiscal 2012. The increase in our revenue in this geography was led by the U.S. and Canada.
Net revenue in the EMEA geography increased by 1%, or 3% on a constant currency basis, during fiscal 2013 as compared to fiscal 2012. The increase was primarily due to a 5% increase in maintenance revenue, partially offset by a 6% decrease in new seat revenue. The increase in our revenue in this geography was led by Ireland, Finland and Germany, partially offset by a decrease in revenue from Sweden and the United Kingdom.
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Net revenue in the APAC geography increased by 9%, or 8% on a constant currency basis, during fiscal 2013, as compared to fiscal 2012, primarily due to an 18% increase in new seat revenue and a 12% increase in maintenance revenue. Net revenue expansion in the APAC geography during fiscal 2013 was led by Japan, followed by China and South Korea.
Net revenue in emerging economies decreased by 4%, or 2% on a constant currency basis, during fiscal 2013 as compared to fiscal 2012, primarily due to a decrease in revenue from Brazil, Poland and India, partially offset by an increase in revenue from China. Revenue from emerging economies represented 14% of net revenue for fiscal 2013 and 16% for fiscal 2012.
International net revenue represented 71% and 72% of our net revenue in fiscal 2013 and fiscal 2012, respectively. We believe that international revenue will continue to comprise a majority of our total net revenue. Unfavorable economic conditions in the countries that contribute a significant portion of our net revenue, including in emerging economies, may have an adverse effect on our business in those countries and our overall financial performance. Changes in the value of the U.S. dollar relative to other currencies have significantly affected, and could continue to significantly affect, our financial results for a given period even though we hedge a portion of our current and projected revenue. Additionally, the U.S. credit-rating downgrade and weak global economic conditions that have been characterized by restructuring of sovereign debt, high unemployment, and volatility in the financial markets may impact our future financial results.
Net Revenue by Operating Segment
We have four reportable segments: PSEB, AEC, MFG and M&E. We have no material inter-segment revenue.
Net revenue for PSEB, which includes our Autodesk Design Suite, increased 2% during fiscal 2013, as compared to fiscal 2012, primarily due to a 4% increase in revenue from our flagship AutoCAD and AutoCAD LT products.
Net revenue for AEC increased 11% during fiscal 2013, as compared to fiscal 2012, primarily due to a 26% increase in revenue from our AEC suites, which includes our Autodesk Building Design Suite.
Net revenue for MFG increased 6% during fiscal 2013, as compared to fiscal 2012, primarily due to an 8% increase in revenue from our MFG suites, which includes the Autodesk Product Design Suite.
Net revenue for M&E decreased 10% during fiscal 2013, as compared to fiscal 2012, primarily due to an 8% decrease in revenue from our Animation product group, which includes our Autodesk Entertainment Creation Suite, and a 16% decrease in revenue from Creative Finishing. The decrease in Animation revenue was primarily due to a 22% decrease in revenue from our flagship product, 3Ds Max, partially offset by a 26% increase in revenue from our animation suites, which includes our Autodesk Entertainment Creation Suite. The overall decrease in M&E revenue is related to a general decrease in the M&E industry end-market demand, as well as the inclusion of our M&E products in other Autodesk industry suites.
Fiscal 2012 Net Revenue Compared to Fiscal 2011 Net Revenue
License and Other Revenue
License and other revenue is comprised of two components: all forms of product license revenue and other revenue. Product license revenue includes: software license revenue from the sale of new seat licenses, upgrades, product revenue for Creative Finishing and revenue from on-demand software and services. Other revenue includes revenue from consulting, training, Autodesk Developers Network and Creative Finishing customer support, and is recognized over time, as the services are performed.
Total license and other revenue increased 16% during fiscal 2012 as compared to fiscal 2011 primarily due to a 16% increase in revenue from commercial new seat licenses. During fiscal 2012, 13 percentage points of the 16% increase was due to an increase in the number of seats sold, and 3 percentage points was due to an increase in the average net revenue per seat. Commercial new seat revenue, as a percentage of license and other revenue, was 67% for both fiscal 2012 and 2011.
Also contributing to the increase in license and other revenue during fiscal 2012, as compared to fiscal 2011, was a 14% increase in upgrade revenue. Upgrade revenue increased during fiscal 2012 in comparison to fiscal 2011 primarily due to an ACAD LT upgrade promotion during the first quarter of fiscal 2012, an increase in large enterprise transactions, customers migrating from stand-alone products to suites and a promotion that was run related to the education solutions suites.
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Backlog related to current software license product orders that had not shipped at the end of the quarter decreased by $0.4 million during fiscal 2012 from $27.5 million at January 31, 2011 to $27.1 million at January 31, 2012. Backlog from current software license product orders that we have not yet shipped consists of orders for currently available licensed software products from customers with approved credit status and may include orders with current ship dates and orders with ship dates beyond the current fiscal period.
Revenue from the sales of our services, training and support, included in “License and other revenue,” represented less than 5% of net revenue for all periods presented.
Maintenance Revenue
Our maintenance revenue relates to a program known by our user community as the Subscription Program. Our maintenance program provides our commercial and educational customers with a cost effective and predictable budgetary option to obtain the productivity benefits of our new releases and enhancements when and if released during the term of their contracts. Under our maintenance program, customers are eligible to receive unspecified upgrades when and if available, downloadable training courses and online support. We recognize maintenance revenue ratably over the maintenance contract periods.
Maintenance revenue increased 10% during fiscal 2012, as compared to fiscal 2011, primarily due to a 10% increase in commercial maintenance revenue. The 10% increase in commercial maintenance revenue was due to an 8 percentage point increase in commercial enrollment during the corresponding maintenance contract term and a 2 percentage point increase in net revenue per maintenance seat. Commercial maintenance revenue represented 98% of maintenance revenue for both fiscal 2012 and 2011.
Changes in maintenance revenue lag changes in net billings for maintenance contracts because we recognize the revenue from those contracts ratably over their contract terms. Our maintenance contracts are for a term of predominantly one year, but may be two or three year, or occasionally as long as five year, terms. Net maintenance billings increased 19% during fiscal 2012 as compared to fiscal 2011. This increase was due to an increase in maintenance renewals, new multi-year maintenance contracts, and the impact from the upgrade promotions mentioned above in "License and Other Revenue."
Our deferred revenue balance at January 31, 2012 and January 31, 2011 was $719.2 million and $587.9 million, respectively, related to customer maintenance contracts, which will be recognized as revenue ratably over the life of the contracts.
Net Revenue by Geographic Area
Net revenue in the Americas geography increased by 14% both as reported and on a constant currency basis, during fiscal 2012, as compared to fiscal 2011. This increase was primarily due to a 14% increase in revenue from new seats during fiscal 2012 as compared to fiscal 2011. Maintenance revenue increased 10% during fiscal 2012 as compared to fiscal 2011. The increase in our revenue in this geography was led by the U.S. and Canada.
Net revenue in the EMEA geography increased by 10% both as reported and on a constant currency basis, during fiscal 2012 as compared to fiscal 2011. The increase was primarily due to a 14% increase in new seat revenue and a 6% increase in maintenance revenue. The increase in our revenue in this geography was led by the Russian Federation, Belgium, United Kingdom and Germany.
Net revenue in the APAC geography increased by 19%, or 12% on a constant currency basis, during fiscal 2012, as compared to fiscal 2011, primarily due to a 20% increase in new seat revenue and a 21% increase in maintenance revenue. Net revenue expansion in the APAC geography during fiscal 2012 occurred in virtually all countries, led by Japan, followed by Australia and South Korea.
Net revenue in emerging economies increased by 16%, or 13% on a constant currency basis, during fiscal 2012 as compared to fiscal 2011, primarily due to revenue from the Russian Federation, India, Mexico, and Brazil. This growth was a significant factor in our international sales growth during fiscal 2012. Revenue from emerging economies represented 16% of net revenue for fiscal 2012 and 15% for fiscal 2011.
International net revenue represented 72% and 71% of our net revenue in fiscal 2012 and fiscal 2011, respectively. We believe that international revenue will continue to comprise a majority of our total net revenue. Unfavorable economic conditions in the countries that contribute a significant portion of our net revenue may have an adverse effect on our business in
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those countries and our overall financial performance. Changes in the value of the U.S. dollar relative to other currencies have significantly affected, and could continue to significantly affect, our financial results for a given period even though we hedge a portion of our current and projected revenue. Additionally, the U.S. credit-rating downgrade and weak global economic conditions that have been characterized by restructuring of sovereign debt, high unemployment, and volatility in the financial markets may impact our future financial results.
Net Revenue by Operating Segment
We have four reportable segments: PSEB, AEC, MFG and M&E. We have no material inter-segment revenue. Note, we have conformed our explanation of the increases within the individual segments to align with current period presentation.
Net revenue for PSEB, which includes our Autodesk Design Suite, increased 16% during fiscal 2012, as compared to fiscal 2011, primarily due to a 11% increase in revenue from our flagship AutoCAD LT and AutoCAD products.
Net revenue for AEC increased 10% during fiscal 2012, as compared to fiscal 2011, primarily due to a 37% increase in revenue from our AEC suites, which includes our Autodesk Building Design Suite.
Net revenue for MFG increased 15% during fiscal 2012, as compared to fiscal 2011, primarily due to a 16% increase in revenue from our MFG suites, which includes the Autodesk Product Design Suite.
Net revenue for M&E increased 9% during fiscal 2012, as compared to fiscal 2011, primarily due to a 15% increase in revenue from our Animation product group, which includes our Autodesk Entertainment Creation Suite, offset by a 3% decrease in revenue from Creative Finishing. The increase in Animation revenue was primarily due to a 13% increase in revenue from our flagship Autodesk Maya products.
Cost of Revenue and Operating Expenses
Cost of Revenue
Fiscal Year Ended January 31, 2013 | Increase (decrease) compared to prior fiscal year | Fiscal Year Ended January 31, 2012 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2011 | |||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Cost of revenue: | |||||||||||||||||||||||||
License and other | $ | 198.1 | $ | 11.0 | 6 | % | $ | 187.1 | $ | 24.9 | 15 | % | $ | 162.2 | |||||||||||
Maintenance | 40.4 | (1.6 | ) | (4 | )% | 42.0 | 7.6 | 22 | % | 34.4 | |||||||||||||||
$ | 238.5 | $ | 9.4 | 4 | % | $ | 229.1 | $ | 32.5 | 17 | % | $ | 196.6 | ||||||||||||
As a percentage of net revenue | 10 | % | 10 | % | 10 | % | |||||||||||||||||||
Cost of license and other revenue includes labor costs of order fulfillment and costs of fulfilling consulting and training services contracts and collaborative project management services contracts. Cost of license and other revenue also includes stock-based compensation expense, direct material and overhead charges, amortization of purchased technology, professional services fees and royalties. Direct material and overhead charges include the cost of hardware sold (mainly PC-based workstations for Creative Finishing in the M&E segment), costs associated with transferring our software to electronic media, printing of user manuals and packaging materials, and shipping and handling costs.
Cost of license and other revenue increased 6% during fiscal 2013, as compared to fiscal 2012, primarily due to an increase in cloud services-related expenses. Cost of license and other revenue increased 15% during fiscal 2012, as compared to fiscal 2011, primarily due to increased support costs and lower margin consulting engagements.
Cost of maintenance revenue includes labor costs of providing product support to our maintenance customers, including stock-based compensation expense for these employees, rent and occupancy, shipping and handling costs, and professional services fees. Cost of maintenance revenue decreased 4% during fiscal 2013 as compared to fiscal 2012 primarily due to an increase in electronic fulfillment. Cost of maintenance revenue increased 22% during fiscal 2012 as compared to fiscal 2011 due to an increase in maintenance support headcount and increased annual fulfillment costs related to supplying USB flash drives of our suites products.
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Cost of revenue, at least over the near term, is affected by the volume and mix of product sales, mix of physical versus electronic fulfillment, fluctuations in consulting costs, amortization of purchased technology, new customer support offerings, royalty rates for licensed technology embedded in our products, and employee stock-based compensation expense.
We expect cost of revenue to increase in absolute dollars and slightly increase as a percentage of net revenue during fiscal 2014, as compared to fiscal 2013, primarily due to an increase in costs associated with meeting our major business initiatives.
Marketing and Sales
Fiscal Year Ended January 31, 2013 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2012 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2011 | |||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Marketing and sales | $ | 875.5 | $ | 32.9 | 4 | % | $ | 842.6 | $ | 66.6 | 9 | % | $ | 776.0 | |||||||||||
As a percentage of net revenue | 38 | % | 38 | % | 40 | % | |||||||||||||||||||
Marketing and sales expenses include salaries, bonuses, benefits, and stock-based compensation expense for our marketing and sales employees, and the expense of travel, entertainment and training for such personnel, 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 labor costs of sales and order processing, sales and dealer commissions, rent and occupancy, and the cost of supplies and equipment.
Marketing and sales expenses increased 4% during fiscal 2013, as compared to fiscal 2012, primarily due to higher employee-related costs from salaries and fringe benefits and stock-based compensation primarily associated with increased headcount and merit increases in fiscal 2013. These costs were partially offset by a decrease in professional fees and advertising costs. Marketing and sales expenses increased 9% during fiscal 2012, as compared to fiscal 2011, primarily due to higher employee-related costs related to salaries and fringe benefits primarily associated with increased head count and the reinstatement of merit increases in fiscal 2012.
We expect to balance our need to invest in the marketing and sales of our products with our desire to actively manage our sales and marketing operating expenses. As a result, we expect marketing and sales expense to increase in absolute dollars but remain relatively consistent as a percentage of net revenue in fiscal 2014 as compared to fiscal 2013, primarily due to an increase in costs as we work towards meeting our major business initiatives.
Research and Development
Fiscal Year Ended January 31, 2013 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2012 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2011 | |||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Research and development | $ | 600.0 | $ | 33.5 | 6 | % | $ | 566.5 | $ | 70.3 | 14 | % | $ | 496.2 | |||||||||||
As a percentage of net revenue | 26 | % | 26 | % | 25 | % | |||||||||||||||||||
Research and development expenses, which are expensed as incurred, consist primarily of salaries, bonuses, benefits and stock-based compensation expense for research and development employees, and the expense of travel, entertainment and training for such personnel, rent and occupancy, and professional services, such as fees paid to software development firms and independent contractors.
Research and development expenses increased 6% during fiscal 2013, as compared to fiscal 2012, primarily due to an increase in stock-based compensation expense associated with the acquisition of Socialcam in the third quarter of fiscal 2013 and an increase in salaries and fringe benefits primarily due to merit increases in fiscal 2013. Research and development expenses increased 14% during fiscal 2012, as compared to fiscal 2011, primarily due to an increase in salaries and fringe benefits primarily associated with increased headcount and the reinstatement of merit increases in fiscal 2012 and an increase in professional service fees in fiscal 2012 as compared to fiscal 2011.
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We expect research and development expense to increase in absolute dollars, but remain relatively consistent as a percentage of net revenue during fiscal 2014, as compared to fiscal 2013, as we continue to invest in product development in fiscal 2014.
General and Administrative
Fiscal Year Ended January 31, 2013 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2012 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2011 | |||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
General and administrative | $ | 248.4 | $ | 25.3 | 11 | % | $ | 223.1 | $ | 22.3 | 11 | % | $ | 200.8 | |||||||||||
As a percentage of net revenue | 11 | % | 10 | % | 10 | % | |||||||||||||||||||
General and administrative expenses include salaries, bonuses, benefits and stock-based compensation expense for our finance, human resources and legal employees, as well as professional fees for legal and accounting services, expenses related to our operating expense hedge activity, amortization of acquisition related customer relationships and trade names, and expense of travel, entertainment and training.
General and administrative expenses increased 11% from fiscal 2012 to fiscal 2013 primarily due to an increase in amortization of acquisition related customer relationships and trade names and fluctuations in our operating expense hedge activity in fiscal 2013. Also contributing to the increase was an increase in salaries primarily due to merit increases in fiscal 2013 as compared to fiscal 2012. General and administrative expenses increased 11% from fiscal 2011 to fiscal 2012, primarily due to an increase in amortization of acquisition related customer relationships and trade names and the increase in salaries primarily associated with increased head count and the reinstatement of merit increases in fiscal 2012.
We expect general and administrative expense to increase in absolute dollars but remain relatively consistent as a percentage of net revenue during fiscal 2014, as compared to fiscal 2013, primarily due to an increase in costs associated with supporting our major business initiatives.
Restructuring Charges (Benefits), Net
Fiscal Year Ended January 31, 2013 | Increase compared to prior fiscal year | Fiscal Year Ended January 31, 2012 | Decrease compared to prior fiscal year | Fiscal Year Ended January 31, 2011 | |||||||||||||||||||||
$ | % | $ | % | ||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||
Restructuring charges (benefits), net | $ | 43.9 | $ | 45.2 | 3,477 | % | $ | (1.3 | ) | $ | (12.1 | ) | (112 | )% | $ | 10.8 | |||||||||
As a percentage of net revenue | 2 | % | — | % | 1 | % | |||||||||||||||||||
During the third quarter of fiscal 2013, Autodesk initiated a restructuring plan that included a reduction in force and the consolidation of certain leased facilities. During fiscal 2013, Autodesk recorded a restructuring charge of $43.9 million. Of this amount, $40.6 million was recorded for one-time termination benefits and other costs and $3.3 million was recorded for facilities-related costs. These termination benefits and facility related liabilities have been substantially paid as of fiscal year ended January 31, 2013. See Note 15, “Restructuring Reserves,” in Notes to Consolidated Financial Statements for further discussion.
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Interest and Other Income, Net
The following table sets forth the components of interest and other income, net:
Fiscal Year Ended January 31, | |||||||||||
2013 | 2012 | 2011 | |||||||||
(in millions) | |||||||||||
Interest and investment income, net (1) | $ | 4.9 | $ | 5.4 | $ | 8.9 | |||||
Gain (loss) on foreign currency | 1.2 | (1.1 | ) | (14.0 | ) | ||||||
(Loss) gain on strategic investments (1) | (4.0 | ) | 0.3 | 2.0 | |||||||
Other income | 2.0 | 2.7 | 3.7 | ||||||||
Interest and other income, net | $ | 4.1 | $ | 7.3 | $ | 0.6 | |||||
____________________
(1) | For comparability, the presentation of the balances at January 31, 2012 and January 31, 2011 was adjusted to align to current year presentation. |
Interest and other income, net, decreased $3.2 million during fiscal 2013, as compared to fiscal 2012, primarily due to a reduction in our net interest and investment income and losses incurred due to impairment of certain strategic investments. A loss on strategic investments occurs when a net reduction in valuation occurs or an impairment is recorded. Impairment results from the determination that the value of the investment is no longer recoverable.
The decrease in interest and investment income, net, during fiscal 2013 as compared to fiscal 2012 is primarily due to interest expense resulting from the issuance of $400.0 million aggregate principal amount of 1.95% senior notes due December 15, 2017 and $350.0 million aggregate principal amount of 3.6% senior notes due December 15, 2022, and a decrease in the fair value of our trading securities that are marked-to-market each period. Interest and investment income fluctuates based on average cash, marketable securities and debt balances, average maturities and interest rates.
Interest and other income, net, increased $6.7 million during fiscal 2012, as compared to fiscal 2011, primarily due to a reduction in foreign currency losses. These losses are due to the impact of re-measuring foreign currency transactions into the functional currency of the corresponding entity. The amount of gain (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.
Our effective tax rate was 20% and 21% during fiscal 2013 and fiscal 2012, respectively. Our effective tax rate decreased one percentage point from fiscal 2012 to fiscal 2013 due to lower state tax expense and various other items, offset in part by increased non-deductible stock-based compensation expense.
Our effective tax rate was 21% and 22% during fiscal 2012 and 2011, respectively. Our effective tax rate decreased one percentage point from fiscal 2011 to fiscal 2012 primarily due to an increase in tax benefits from foreign earnings taxed at different rates in fiscal 2012 compared to fiscal 2011, partially offset by tax benefits associated with closure of audits in fiscal 2011.
Our future effective 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, research credits, state income taxes, the tax impact of stock-based compensation, accounting for uncertain tax positions, business combinations, U.S. Manufacturer's deduction, closure of statute of limitations or settlement of tax audits, changes in valuation allowances and changes in tax laws including possible U.S. tax law changes that, if enacted, could significantly impact how U.S. multinational companies are taxed on foreign subsidiary earnings. A significant amount of our earnings is generated by our Europe and Asia Pacific subsidiaries. Our future effective tax rates may be adversely affected to the extent earnings are lower than anticipated in countries where we have lower statutory tax rates or we repatriate certain foreign earnings on which U.S. taxes have not previously been provided.
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At January 31, 2013, we had net deferred tax assets of $165.0 million. We believe that we will generate sufficient future taxable income in appropriate tax jurisdictions to realize these assets.
For additional information regarding our income tax provision and reconciliation of our effective rate to the federal statutory rate of 35%, see Note 4, “Income Taxes,” in the Notes to Consolidated Financial Statements.
Other Financial Information
In addition to our results determined under U.S. generally accepted accounting principles (“GAAP”) discussed above, we believe the following non-GAAP measures are useful to investors in evaluating our operating performance. For the fiscal years ended January 31, 2013, 2012 and 2011, our gross profit, gross margin, income from operations, operating margin, net income and diluted earnings per share on a GAAP and non-GAAP basis were as follows (in millions except for gross margin, operating margin and per share data):
January 31, 2013 | January 31, 2012 | January 31, 2011 | |||||||||
(Unaudited) | |||||||||||
Gross profit | $ | 2,073.7 | $ | 1,986.5 | $ | 1,755.2 | |||||
Non-GAAP gross profit | $ | 2,118.6 | $ | 2,028.4 | $ | 1,790.0 | |||||
Gross margin | 90 | % | 90 | % | 90 | % | |||||
Non-GAAP gross margin | 92 | % | 92 | % | 92 | % | |||||
Income from operations | $ | 305.9 | $ | 355.6 | $ | 271.4 | |||||
Non-GAAP income from operations | $ | 587.9 | $ | 533.4 | $ | 418.8 | |||||
Operating margin | 13 | % | 16 | % | 14 | % | |||||
Non-GAAP operating margin | 25 | % | 24 | % | 21 | % | |||||
Net income | $ | 247.4 | $ | 285.3 | $ | 212.0 | |||||
Non-GAAP net income (1) | $ | 450.0 | $ | 405.4 | $ | 310.4 | |||||
Diluted earnings per share | $ | 1.07 | $ | 1.22 | $ | 0.90 | |||||
Non-GAAP diluted earnings per share (1) | $ | 1.94 | $ | 1.74 | $ | 1.32 | |||||
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(1) | Effective in the second quarter of fiscal 2013, Autodesk began excluding gains and losses on strategic investments for purposes of its non-GAAP financial measures. Prior period non-GAAP interest and other income (expense), net, net income and earnings per share amounts have been revised to conform to the current period presentation. |
For our internal budgeting and resource allocation process, we use non-GAAP measures to supplement our consolidated financial statements presented on a GAAP basis. These non-GAAP measures do not include certain items that may have a material impact upon our reported financial results. We use non-GAAP measures in making operating decisions because we believe those measures provide meaningful supplemental information regarding our earning potential. In addition, these non-GAAP financial measures facilitate comparisons to our historical results and operating guidance as well as that of competitors. We also use 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 not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP. The non-GAAP financial measures are meant to supplement, and be viewed in conjunction with, GAAP financial measures. We urge investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.
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Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures
(In millions except for gross margin, operating margin and per share data):
Fiscal Year Ended January 31, | |||||||||||
2013 | 2012 | 2011 | |||||||||
(Unaudited) | |||||||||||
Gross profit | $ | 2,073.7 | $ | 1,986.5 | $ | 1,755.2 | |||||
Stock-based compensation expense | 5.2 | 3.9 | 2.9 | ||||||||
Amortization of purchased intangibles(1) | 39.7 | 38.0 | 31.9 | ||||||||
Non-GAAP gross profit | $ | 2,118.6 | $ | 2,028.4 | $ | 1,790.0 | |||||
Gross margin | 90 | % | 90 | % | 90 | % | |||||
Stock-based compensation expense | — | % | — | % | — | % | |||||
Amortization of purchased intangibles | 2 | % | 2 | % | 2 | % | |||||
Non-GAAP gross margin | 92 | % | 92 | % | 92 | % | |||||
Income from operations | $ | 305.9 | $ | 355.6 | $ | 271.4 | |||||
Stock-based compensation expense | 156.3 | 108.8 | 80.7 | ||||||||
Amortization of purchased intangibles(1) | 81.8 | 70.3 | 55.9 | ||||||||
Restructuring charges (benefits), net | 43.9 | (1.3 | ) | 10.8 | |||||||
Non-GAAP income from operations | $ | 587.9 | $ | 533.4 | $ | 418.8 | |||||
Operating margin | 13 | % | 16 | % | 14 | % | |||||
Stock-based compensation expense | 7 | % | 5 | % | 4 | % | |||||
Amortization of purchased intangibles(1) | 3 | % | 3 | % | 3 | % | |||||
Restructuring charges (benefits), net | 2 | % | — | % | — | % | |||||
Non-GAAP operating margin | 25 | % | 24 | % | 21 | % | |||||
Net income | $ | 247.4 | $ | 285.3 | $ | 212.0 | |||||
Stock-based compensation expense | 156.3 | 108.8 | 80.7 | ||||||||
Amortization of purchased intangibles(1) | 81.8 | 70.3 | 55.9 | ||||||||
Restructuring charges (benefits), net | 43.9 | (1.3 | ) | 10.8 | |||||||
Loss (gain) on strategic investments(2) | 4.0 | (0.3 | ) | (2.0 | ) | ||||||
Discrete tax provision items | (26.7 | ) | (6.8 | ) | (6.0 | ) | |||||
Income tax effect of non-GAAP adjustments | (56.7 | ) | (50.9 | ) | (43.0 | ) | |||||
Non-GAAP net income | $ | 450.0 | $ | 405.1 | $ | 308.4 | |||||
Diluted net income per share | $ | 1.07 | $ | 1.22 | $ | 0.90 | |||||
Stock-based compensation expense | 0.67 | 0.47 | 0.34 | ||||||||
Amortization of purchased intangibles(1) | 0.36 | 0.30 | 0.24 | ||||||||
Impairment of goodwill | — | — | — | ||||||||
Restructuring charges (benefits), net | 0.18 | (0.01 | ) | 0.05 | |||||||
Loss (gain) on strategic investments(2) | 0.02 | — | (0.01 | ) | |||||||
Discrete tax provision items | (0.12 | ) | (0.03 | ) | (0.03 | ) | |||||
Income tax effect of non-GAAP adjustments | (0.24 | ) | (0.21 | ) | (0.18 | ) | |||||
Non-GAAP diluted net income per share | $ | 1.94 | $ | 1.74 | $ | 1.31 | |||||
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(1) | Amortization of purchased intangibles includes amortization of purchased developed technology, customer relationships, and trade names for acquisitions subsequent to December 2005. |
(2) | Effective in the second quarter of fiscal 2013, Autodesk began excluding gains and losses on strategic investments for purposes of its non-GAAP financial measures. Prior period non-GAAP interest and other income (expense), net, net income and earnings per share amounts have been revised to conform to the current period presentation. |
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Our non-GAAP financial measures as set forth in the table above 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.
Amortization of purchased intangibles. We incur amortization of acquisition-related purchased intangible assets in connection with acquisitions of certain businesses and technologies. The amortization of purchased intangibles varies depending on the level of acquisition activity and management finds it useful to exclude these variable charges to assess the appropriate level of various operating expenses to assist in budgeting, planning and forecasting future periods.
Goodwill impairment. This is a non-cash charge to write-down goodwill to fair value when there was an indication that the asset was impaired. As explained above, management finds it useful to exclude certain non-cash charges to assess the appropriate level of various operating expenses to assist in budgeting, planning and forecasting future periods.
Restructuring charges (benefits), net. These expenses are associated with realigning our business strategies based on current economic conditions. In connection with these restructuring actions, we recognize costs related to termination benefits for former employees whose positions were eliminated, and the closure of facilities and cancellation of certain contracts. We exclude these charges because these expenses are not reflective of ongoing financial results in the current period.
Loss (gain) on strategic investments. We exclude gains and losses related to our strategic investments from our non-GAAP measures primarily because management finds it useful to exclude these variable gains and losses on these investments in assessing our financial results. Included in these amounts are non-cash unrealized gains and losses on the derivative components and realized gains and losses on the sale or losses on the impairment of these investments.
Establishment of a valuation allowance on certain net deferred tax assets. This is a non-cash charge to record a valuation allowance on certain deferred tax assets. As explained above, management finds it useful to exclude certain non-cash charges to assess the appropriate level of various cash expenses to assist in budgeting, planning and forecasting future periods.
Discrete tax items. We exclude the GAAP tax provision, including discrete items, from the non-GAAP measure of income, and include a non-GAAP tax provision based upon the projected annual non-GAAP effective tax rate. Discrete tax items include income tax expenses or benefits that do not relate to ordinary income from continuing operations in the current fiscal year, unusual or infrequently occurring items, or the tax impact of certain stock-based compensation. Examples of discrete tax items include, but are not limited to, certain changes in judgment and changes in estimates of tax matters related to prior fiscal years, certain costs related to business combinations, certain changes in the 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.
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 costs and expenses, primarily due to stock-based compensation, purchased intangibles and restructuring for GAAP and non-GAAP measures.
Liquidity and Capital Resources
Our primary source of cash is from the sale of licenses to our products. Our primary use of cash is payment of our operating costs which consist primarily of employee-related expenses, such as compensation and benefits, as well as general operating expenses for marketing, facilities and overhead costs. In addition to operating expenses, we also use cash to invest in our growth initiatives, which include acquisitions of products, technology and businesses and to fund our stock repurchase program. See further discussion of these items below.
At January 31, 2013, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling $2,365.4 million and net accounts receivable of $495.1 million.
In December 2012, we issued $400.0 million aggregate principal amount of 1.95% senior notes due December 15, 2017 and $350.0 million aggregate principal amount of 3.6% senior notes due December 15, 2022, (collectively, the "Senior Notes"). In addition, we have a line of credit facility that permits unsecured short-term borrowings of up to $400.0 million. This line of credit facility was entered into in May 2011 and expires in 2016. During fiscal 2013, we borrowed $110.0 million under the credit facility. In the fourth quarter of fiscal 2013, we re-paid the outstanding balance on our credit facility with a portion of the
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net proceeds from the sale of the Senior Notes issued in December 2012. Borrowings under the credit facility and the remaining net proceeds from the offering of the Senior Notes are available for general corporate purposes.
Our cash and cash equivalents are held by diversified financial institutions globally. Our primary commercial banking relationship is with Citibank and its global affiliates (“Citibank”). In addition, Citibank is one of the lead lenders and agent in the syndicate of our $400.0 million line of credit.
The increase in our cash, cash equivalents and marketable securities to $2,365.4 million at January 31, 2013 from $1,604.1 million at January 31, 2012 is principally the proceeds from the issuance of our Senior Notes and the result of cash generated from operations. These increases to cash, cash equivalents and marketable securities were partially offset by cash used for repurchases of our common stock (net of stock issuance proceeds), acquisitions including business combinations and technology purchases, capital expenditures, and other investing activities.
The primary source for net cash provided by operating activities of $559.1 million for fiscal 2013 was net income of $247.4 million increased by the effect of non-cash expenses totaling $284.1 million associated with depreciation, amortization, accretion and stock-based compensation. In addition, net cash flow used by changes in operating assets and liabilities was $10.1 million. The primary source of working capital was an increase in deferred revenue due to higher maintenance billings for fiscal 2013 compared to fiscal 2012. The primary working capital uses of cash were increases in accounts receivable due to higher billings in fiscal 2013 compared to fiscal 2012. Our days sales outstanding in trade receivables was 74 at January 31, 2013 compared to 61 at January 31, 2012. The increase in days sales outstanding is due to higher billings in the last month of fiscal 2013 compared to the last month of fiscal 2012.
At January 31, 2013, our short-term investment portfolio had an estimated fair value of $342.1 million and a cost basis of $337.8 million. The portfolio fair value consisted of $123.0 million invested in commercial paper and corporate securities, $83.3 million invested in U.S treasury securities, $79.5 million invested in U.S. government agency securities, $35.3 million invested in mutual funds, $15.1 million invested in certificates of deposit and time deposits with remaining maturities at the date of purchase greater than 90 days and less than one year, $4.6 million invested in municipal securities, $1.0 million invested in sovereign debt and $0.3 million invested in other short-term securities.
At January 31, 2013, $35.3 million of trading securities were invested in a defined set of mutual funds as directed by the participants in our Deferred Compensation Plan (see Note 6, “Deferred Compensation,” in the Notes to Consolidated Financial Statements for further discussion).
Long-term cash requirements for items other than normal operating expenses are anticipated for the following: the acquisition of businesses, software products, or technologies complementary to our business; stock repurchases; and capital expenditures, including the purchase and implementation of internal-use software applications.
Our strategy includes improving our product functionality and expanding our product offerings through internal development as well as through the acquisition of products, technology and businesses. Acquisitions often increase the speed at which we can deliver product functionality to our customers; however, they entail cost and integration challenges and may, in certain instances, negatively impact our operating margins. We continually review these trade-offs in making decisions regarding acquisitions. We currently anticipate that we will acquire products, technology and businesses as compelling opportunities become available. In fiscal 2013 and 2012, we increased spend on acquisitions in comparison to previous years, but our decision to acquire businesses or technology is dependent on our business needs, the availability of suitable sellers and technology, and our own financial condition.
Our cash, cash equivalent and marketable securities balances are concentrated in a few locations around the world, with substantial amounts held outside of the U.S. Certain amounts held outside the U.S. could be repatriated to the U.S. (subject to local law restrictions), but under current U.S. tax law, could be subject to U.S. income taxes less applicable foreign tax credits. We have provided for the U.S. income tax liability on foreign earnings, except for foreign earnings that are considered permanently reinvested outside the U.S. Our intent is that amounts related to foreign earnings permanently reinvested outside the U.S. will remain outside the U.S. and we will meet our U.S. liquidity needs through ongoing cash flows, external borrowings, or both. 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.
Our existing cash, cash equivalents and investment balances may decline in fiscal 2013 in the event of a weakening of the global economy or changes in our planned cash outlay. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part I, Item 1A titled “Risk Factors.” However, based on our current business plan and revenue prospects, we believe that our existing balances, our anticipated cash flows from operations
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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 existing credit facility at March 18, 2013 is $400.0 million of which we have no amounts outstanding. This credit facility is available for working capital and general corporate purposes. In addition, as of March 18, 2013, we have $750.0 million aggregate principal amount of Senior Notes outstanding.
Our revenue, earnings, cash flows, receivables and payables are subject to fluctuations due to changes in foreign currency exchange rates. Our risk management strategy uses foreign currency contracts to manage our exposure to foreign currency volatility that exists as part of our ongoing business operations. We use hedge contracts, such as cash flow hedges. to reduce the exchange rate impact on a portion of the net revenue or operating expense of certain anticipated transactions. In addition, we use hedge contracts, such as balance sheet hedges, to reduce the exchange rate risk associated primarily with foreign currency denominated receivables and payables. As of January 31, 2013 and 2012, we had open cash flow and balance sheet related hedge contracts with future settlements within one to twelve months. Contracts were primarily denominated in euros, Japanese yen, Swiss francs, British pounds, Canadian dollars, and Australian dollars. We do not enter into any foreign exchange derivative instruments for trading or speculative purposes. The notional amount of our option and forward contracts was $438.2 million and $494.7 million at January 31, 2013 and 2012