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Autodesk, Inc. - Quarter Report: 2018 April (Form 10-Q)



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2018
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
 
 
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)
(415) 507-5000
(Registrant’s telephone number, including area code)
 
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
 
 
 
  
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 June 4, 2018, registrant had outstanding 219,145,087 shares of common stock.
 




AUTODESK, INC. FORM 10-Q
TABLE OF CONTENTS

 
 
Page No.
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 





PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS

AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
 
 
Three Months Ended April 30,
 
2018
 
2017
Net revenue:
 
 
 
Subscription
$
350.4

 
$
173.4

Maintenance
181.2

 
263.6

Total maintenance and subscription revenue
531.6

 
437.0

Other (1)
28.3

 
48.7

Total net revenue
559.9

 
485.7

Cost of revenue:

 

Cost of maintenance and subscription revenue
50.4

 
54.9

Cost of other revenue (2)
12.8

 
18.6

Amortization of developed technology
3.6

 
4.7

Total cost of revenue
66.8

 
78.2

Gross profit
493.1

 
407.5

Operating expenses:

 
 
Marketing and sales
276.4

 
255.7

Research and development
172.8

 
187.7

General and administrative
72.9

 
78.3

Amortization of purchased intangibles
3.8

 
5.7

Restructuring and other facility exit costs, net
22.5

 
(0.3
)
Total operating expenses
548.4

 
527.1

Loss from operations
(55.3
)
 
(119.6
)
Interest and other expense, net
(8.5
)
 
(1.8
)
Loss before income taxes
(63.8
)
 
(121.4
)
Provision for income taxes
(18.6
)
 
(8.2
)
Net loss
$
(82.4
)
 
$
(129.6
)
Basic net loss per share
$
(0.38
)
 
$
(0.59
)
Diluted net loss per share
$
(0.38
)
 
$
(0.59
)
Weighted average shares used in computing basic net loss per share
218.6

 
219.9

Weighted average shares used in computing diluted net loss per share
218.6

 
219.9

____________________
(1)
Previously labeled as "License and other" in prior periods.
(2)
Previously labeled as "Cost of license and other revenue" in prior periods.


See accompanying Notes to Condensed Consolidated Financial Statements.


3



AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In millions)
(Unaudited)

 
Three Months Ended April 30,
 
2018
 
2017
Net loss
$
(82.4
)
 
$
(129.6
)
Other comprehensive loss (income), net of reclassifications:
 
 
 
Net gain (loss) on derivative instruments (net of tax effect of ($0.7) and $0.5, respectively)
6.0

 
(1.4
)
Change in net unrealized gain on available-for-sale debt securities (net of tax effect of $0.1 and ($0.3), respectively)
0.6

 
0.7

Change in defined benefit pension items (net of tax effect of ($1.4) and $0.0, respectively)
7.7

 
(0.5
)
Net change in cumulative foreign currency translation (loss) gain (net of tax effect of $0.3 and ($0.3), respectively)
(24.3
)
 
13.4

Total other comprehensive (loss) income
(10.0
)
 
12.2

Total comprehensive loss
$
(92.4
)
 
$
(117.4
)


See accompanying Notes to Condensed Consolidated Financial Statements.


4



AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
 
 
April 30, 2018
 
January 31, 2018
ASSETS
 
 
 
Current assets:



Cash and cash equivalents
$
1,093.0


$
1,078.0

Marketable securities
199.9


245.2

Accounts receivable, net
206.7


438.2

Prepaid expenses and other current assets
198.4


116.5

Total current assets
1,698.0


1,877.9

Marketable securities
171.5


190.8

Computer equipment, software, furniture and leasehold improvements, net
158.2


145.0

Developed technologies, net
23.1


27.1

Goodwill
1,604.9


1,620.2

Deferred income taxes, net
67.0


81.7

Other assets
188.7


170.9

Total assets
$
3,911.4


$
4,113.6

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

Current liabilities:



Accounts payable
$
103.5


$
94.7

Accrued compensation
127.5


250.9

Accrued income taxes
24.6


28.0

Deferred revenue
1,469.2


1,551.6

Other accrued liabilities
127.8


198.0

Total current liabilities
1,852.6


2,123.2

Long-term deferred revenue
337.2


403.5

Long-term income taxes payable
41.7


41.6

Long-term deferred income taxes
84.8

 
66.6

Long-term notes payable, net
1,586.6

 
1,586.0

Other liabilities
137.1


148.7

Stockholders’ deficit:



Common stock and additional paid-in capital
2,001.0


1,952.7

Accumulated other comprehensive loss
(133.8
)

(123.8
)
Accumulated deficit
(1,995.8
)

(2,084.9
)
Total stockholders’ deficit
(128.6
)

(256.0
)
Total liabilities and stockholders' deficit
$
3,911.4


$
4,113.6


See accompanying Notes to Condensed Consolidated Financial Statements.


5



AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
 
Three Months Ended April 30,
 
2018
 
2017
Operating activities:



Net loss
$
(82.4
)

$
(129.6
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:



Depreciation, amortization and accretion
24.1


28.4

Stock-based compensation expense
54.4


66.8

Deferred income taxes
13.3

 
(0.4
)
Restructuring and other facility exit costs, net
22.5


(0.3
)
Other operating activities
10.5


7.3

Changes in operating assets and liabilities
 



Accounts receivable
231.4

 
220.9

Prepaid expenses and other current assets
(1.4
)
 
6.2

Accounts payable and accrued liabilities
(227.7
)
 
(133.1
)
Deferred revenue
(58.5
)
 
13.3

Accrued income taxes
(3.1
)
 
(34.3
)
Net cash (used in) provided by operating activities
(16.9
)

45.2

Investing activities:



Purchases of marketable securities
(9.9
)

(119.4
)
Sales of marketable securities
6.2


100.0

Maturities of marketable securities
68.6


282.6

Capital expenditures
(16.7
)

(8.6
)
Other investing activities
(0.6
)

3.9

Net cash provided by investing activities
47.6


258.5

Financing activities:



Proceeds from issuance of common stock, net of issuance costs
49.1


50.1

Taxes paid related to net share settlement of equity awards
(38.8
)

(33.0
)
Repurchases of common stock
(22.0
)

(195.9
)
Net cash used in financing activities
(11.7
)

(178.8
)
Effect of exchange rate changes on cash and cash equivalents
(4.0
)

2.2

Net increase in cash and cash equivalents
15.0


127.1

Cash and cash equivalents at beginning of period
1,078.0


1,213.1

Cash and cash equivalents at end of period
$
1,093.0


$
1,340.2


See accompanying Notes to Condensed Consolidated Financial Statements.


6



AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in millions, except share and per share data, or as otherwise noted)
 
1. Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of Autodesk, Inc. (“Autodesk,” “we,” “us,” “our,” or the “Company”) as of April 30, 2018, and for the three months ended April 30, 2018 and 2017, have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information along with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In management’s opinion, Autodesk made all adjustments (consisting of normal, recurring and non-recurring adjustments) during the quarter that were considered necessary for the fair statement of the financial position and operating results of the Company. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. In addition, the results of operations for the three months ended April 30, 2018 are not necessarily indicative of the results for the entire fiscal year ending January 31, 2019, or for any other period. Further, the balance sheet as of January 31, 2018 has been derived from the audited balance sheet as of this date. There have been no material changes, other than what is discussed herein, to Autodesk's significant accounting policies as compared to the significant accounting policies disclosed in the Annual Report on Form 10-K for the fiscal year ended January 31, 2018. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes, together with management’s discussion and analysis of financial position and results of operations contained in Autodesk’s Annual Report on Form 10-K for the fiscal year ended January 31, 2018, filed on March 22, 2018.

2. Recently Issued Accounting Standards

With the exception of those discussed below, there have been no recent changes in accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”) or adopted by the Company during the three months ended April 30, 2018, that are of significance, or potential significance, to the Company.

Accounting standards adopted

Effective in the first quarter of fiscal 2019, Autodesk adopted FASB Accounting Standards Update No. 2017-05 ("ASU 2017-05"), "Other Income– Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets." The ASU, among other things, clarifies the scope of the derecognition of nonfinancial assets, the definition of in-substance financial assets, and impacts the accounting for partial sales of nonfinancial assets by requiring full gain recognition upon the sale. The new guidance was adopted prospectively as there was no impact on the Company's prior periods consolidated statements of financial position and results of operations which would be reflected in either the full or modified retrospective transition approach. The future effect of the adoption will depend upon the nature of the Company's future dispositions, if any.

Effective in the first quarter of fiscal 2019, Autodesk adopted FASB Accounting Standards Update No. 2017-01 ("ASU 2017-01"), "Business Combinations: Clarifying the Definition of a Business" which provides a more robust framework to use in determining when a set of assets and activities is considered a business. The new guidance was applied on a prospective basis and did not have an impact on Autodesk's consolidated financial statements during the three months ended April 30, 2018, as no acquisitions were completed. The future effect of the adoption will depend upon the nature of the Company's future acquisitions, if any.

Effective in the first quarter of fiscal 2019, Autodesk adopted FASB Accounting Standards Update No. 2016-16 ("ASU 2016-16"), “Income Taxes: Intra-Entity Transfers of Assets Other than Inventory” which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The new guidance was applied on a modified retrospective basis with a cumulative increase of $1.9 million to the opening balance of "Accumulated deficit" at February 1, 2018. The ASU did not have any other material impacts on Autodesk's consolidated financial statements.

Effective in the first quarter of fiscal 2019, Autodesk adopted FASB Accounting Standards Update No. 2016-01 ("ASU 2016-01") regarding Accounting Standards Codification ("ASC") Topic 825-10, "Financial Instruments - Overall." The amendments address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, and require equity securities to be measured at fair value, unless the measurement alternative method has been elected for equity

7



investments without readily determinable fair values ("non-marketable equity securities"), with changes in fair value recognized through net income. The amendments also simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment for impairment quarterly at each reporting period. Under the measurement alternative method, the non-marketable equity securities will be measured at cost, less any impairment, plus or minus adjustments resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, which will be recorded within the statement of operations. The determination of whether a transaction is for a similar investment will require significant management judgment including consideration of the rights and obligations between the investments and the extent to which those differences would affect the fair values of those investments with additional consideration for the stage of development of the investee company.

Autodesk prospectively adopted the amendments related to non-marketable equity securities existing as of the date of adoption. The new standard may add volatility to the Company's statements of operations in future periods, due to changes in market prices of the Company's investments in publicly held equity investments and the valuation and timing of observable price changes and impairments of its investments in non-marketable securities. See Note 5, "Financial Instruments" for more information.

Revenue from contracts with customers

Effective in the first quarter of fiscal 2019, Autodesk adopted Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” and the subsequent and related Accounting Standards Update No. 2015-14, Accounting Standards Update No. 2016-08, Accounting Standards Update No. 2016-10, Accounting Standards Update No. 2016-12, and Accounting Standard Update No. 2016-20.

Under Topic 606, the Company has concluded that the desktop software and related substantial cloud functionality that are included in the majority of its product subscription offerings and enterprise arrangements are not distinct in the context of the contract as they are considered highly interrelated and represent a single combined performance obligation that should be recognized over time. Therefore, the adoption of Topic 606 has not resulted in a material change in the timing and amount of the recognition of revenue for the majority of the Company's product subscription offerings and enterprise arrangements.

One impact of the new standard relates to product subscriptions that do not incorporate substantial cloud functionality. A limited number of Autodesk's product subscriptions do not incorporate substantial cloud functionality, and therefore are not considered highly interrelated. Under ASU 2014-09, these limited number of product subscriptions are recognized as separate and distinct license and service performance obligations. Under ASC Topic 605, licenses sold with undelivered elements without VSOE are recognized ratably over the term of the undelivered elements. Under ASC Topic 606, Autodesk is no longer required to establish VSOE to recognize software license revenue separately from the other elements and recognizes software licenses once the customer obtains control of the license, which is generally upon delivery of the license. Therefore, revenue allocated to the licenses in these offerings under Topic 606 is recognized at a point in time instead of over the contract term.

Autodesk adopted ASC Topic 606 using the modified retrospective method, with a cumulative decrease of $87.6 million to the opening balance of "Accumulated deficit" at February 1, 2018. Autodesk applied the standard only to contracts that are not completed as of the date of initial application. The comparative information has not been adjusted and continues to be reported under ASC Topic 605. The details of the quantitative impact of the adoption on the three months ended April 30, 2018, are shown below. See Note 3, "Revenue Recognition" for disclosures under the new standard.

Costs to acquire a contract from a customer

With the adoption of Topic 606, Autodesk also adopted Topic 340-40, "Other Assets and Deferred Costs—Contracts with Customers." Prior to the adoption of Topic 340-40, Autodesk previously recognized compensation paid to sales employees and certain resellers related to obtaining customer contracts in marketing and sales expense in the consolidated statements of operations when incurred. Under Topic 340-40, Autodesk capitalizes this sales compensation as contract costs when they are incremental, directly incurred to obtain a contract with a customer and expected to be recoverable. The contract costs are amortized based on the transfer of goods or services to which the contract costs relate.

Under the modified retrospective method, Autodesk booked a cumulative decrease of $90.4 million to the opening balance of "Accumulated deficit" at February 1, 2018. The comparative information has not been adjusted and continues to be reported as incurred. The details of the quantitative impact of the adoption on the three months ended April 30, 2018, are shown below. See Note 10, "Deferred Compensation" for disclosures under the new standard.


8



Quantitative effect of ASC Topic 606 and 340-40 adoption

The following table shows select line items that were materially impacted by the adoption of ASC Topics 606 and 340-40 on Autodesk’s unaudited Condensed Consolidated Statements of Operations for the three months ended April 30, 2018:

 
As Reported
 
Impact from the adoption of ASC 606 and 340-40
 
As Adjusted
Net revenue (1)
 
 
 
 
 
Subscription
$
350.4

 
$
6.3

 
$
356.7

Maintenance
181.2

 
5.4

 
186.6

Other
28.3

 
1.9

 
30.2

Cost of revenue (1)
 
 
 
 
 
Cost of maintenance and subscription revenue
50.4

 
(0.1
)
 
50.3

Cost of other revenue
12.8

 
0.3

 
13.1

Operating expenses (1):
 
 
 
 
 
Marketing and sales
276.4

 
(13.6
)
 
262.8

Provision for income taxes
(18.6
)
 
(4.6
)
 
(23.2
)
Net loss (2)
$
(82.4
)
 
$
22.4

 
$
(60.0
)
Basic net loss per share
$
(0.38
)
 
$
0.11

 
$
(0.27
)
Diluted net loss per share
$
(0.38
)
 
$
0.11

 
$
(0.27
)
____________________ 
(1)
While not shown here, gross margin, loss from operations, and loss before income taxes have consequently been effected as a result of the net effect of the adjustments noted above.
(2)
The impact on the unaudited Condensed Consolidated Statements of Comprehensive Loss is limited to the net effects of the impacts noted above on the Condensed Consolidated Statements of Operations, specifically on the line item "Net loss."

The following table shows select line item that were materially impacted by the adoption of ASC Topic 606 and 340-40 on Autodesk’s unaudited Condensed Consolidated Balance Sheet as of April 30, 2018:
 
As reported
 
Impact from the adoption of ASC 606 and 340-40
 
As Adjusted
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
        Accounts receivable, net
$
206.7

 
$
67.6

 
$
274.3

        Prepaid expenses and other current assets (1)
198.4

 
(77.2
)
 
121.2

Deferred income taxes, net
67.0

 
10.6

 
77.6

Other assets (1)
188.7

 
(21.7
)
 
167.0

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 


 
 
Current liabilities:
 
 
 
 
 
        Accrued income taxes
24.6

 
2.4

 
27.0

        Deferred revenue
1,469.2

 
103.3

 
1,572.5

        Other accrued liabilities
127.8

 
2.1

 
129.9

Long-term deferred revenue
337.2

 
33.0

 
370.2

Long-term income taxes payable
41.7

 
(0.2
)
 
41.5

Long-term deferred income taxes
84.8

 
(5.7
)
 
79.1

Accumulated deficit (2)
(1,995.8
)
 
(155.6
)
 
(2,151.4
)
____________________ 
(1)
Short term and long term "contract assets" under ASC Topic 606 are included within "Prepaid expenses and other current assets" and "Other assets", respectively, on the unaudited Condensed Consolidated Balance Sheet.
(2)
Included in the "Accumulated deficit" adjustment is $178.0 million for the cumulative effect adjustment of adopting ASC Topic 606 and 340-40 on the opening balance as of February 1, 2018.


9



Adoption of the standard had no impact to net cash (used in) or provided by operating, financing, or investing activities on the Company’s unaudited Condensed Consolidated Statements of Cash Flows.

Recently issued accounting standards not yet adopted

In February 2018, FASB issued Accounting Standards Update No. 2018-02 (“ASU 2018-02”), “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  The amendment allows entities to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings.  The amendment only impacts the income tax effect of the passage of the Tax Cuts and Jobs Act but does not affect the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations.  The amendment is effective for Autodesk's fiscal year beginning February 1, 2019, unless Autodesk elects early adoption, which Autodesk is still evaluating.  Autodesk is currently evaluating the accounting, transition, and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

In August 2017, FASB issued Accounting Standards Update No. 2017-12 ("ASU 2017-12"), "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The targeted amendments help simplify certain aspects of hedge accounting and result in a more accurate portrayal of the economics of an entity’s risk management activities in its financial statements. For cash flow and net investment hedges as of the adoption date, the guidance requires a modified retrospective approach. The amended presentation and disclosure guidance is required only prospectively. The amendments are effective for Autodesk's fiscal year beginning February 1, 2019, with early adoption permitted. Autodesk is currently evaluating the accounting, transition, and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

In June 2016, FASB issued Accounting Standards Update No. 2016-13 ("ASU 2016-13") regarding ASC Topic 326, "Financial Instruments - Credit Losses," which modifies the measurement of expected credit losses of certain financial instruments. Autodesk plans to adopt ASU 2016-13 as of the effective date which represents Autodesk’s fiscal year beginning February 1, 2020. Autodesk does not believe the ASU will have a material impact on its consolidated financial statements.

In February 2016, FASB issued Accounting Standards Update No. 2016-02 ("ASU 2016-02") regarding ASC Topic 842, "Leases." The amendments in this ASU require balance sheet recognition of lease assets and lease liabilities by lessees for leases classified as operating leases, with an optional policy election to not recognize lease assets and lease liabilities for leases with a term of 12 months or less. The amendments also require new disclosures, including qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. Autodesk plans to adopt ASU 2016-02 in Autodesk’s fiscal year beginning February 1, 2019. The amendments require a modified retrospective approach with optional practical expedients. Autodesk is currently evaluating the accounting, transition, and disclosure requirements of the standard and cannot currently estimate the financial statement impact of adoption.

3. Revenue Recognition

Revenue Recognition    

Autodesk’s revenue is divided into three categories: subscription revenue, maintenance revenue, and other revenue. Revenue is recognized when control for these offerings is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for products and services.

Our contracts with customers may include promises to transfer multiple products and services to a customer. Determining whether the products and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation may require significant judgment. Judgment is required to determine the level of integration and interdependency between individual components of software and cloud functionality. This determination influences whether the software is considered distinct and accounted for separately as a license performance obligation, or not distinct and accounted for together with the cloud functionality as a single subscription performance obligation recognized over time. Certain of our contracts with customers contain multiple performance obligations that are accounted as a single performance obligation because they are part of a series of distinct good and services that are substantially the same and have the same pattern of transfer to the customer.


10



For bundled contracts with more than one performance obligation, the transaction price is allocated among the performance obligations in an amount that depicts the relative standalone selling prices ("SSP") of each obligation. Judgment is required to determine the SSP for each distinct performance obligation. We use a range of amounts to estimate SSP when we sell each of the products and services separately and need to determine whether there is a discount that should be allocated based on the relative SSP of the various products and services. 

In instances where SSP is not directly observable, such as when we do not sell the product or service separately, we determine the SSP using information that includes market conditions and other observable inputs. We typically have more than one SSP for individual products and services due to the stratification of those products and services by customer and circumstance. In these instances, we use relevant information such as the sales channel and geographic region to determine the SSP.

Our indirect channel model includes both a two-tiered distribution structure, where Autodesk sells to distributors who subsequently sells to resellers, and a one-tiered structure where Autodesk sells directly to resellers. For these arrangements, transfer of control begins at the time access to our subscriptions is made available electronically, provided all other criteria for revenue recognition are met. Judgment is required to determine whether our distributors and resellers have the ability to honor their commitment to pay, regardless of whether they collect payment from their customers. If we were to change this assessment, it could cause a material increase or decrease in the amount of revenue that we report in a particular period.

As part of the indirect channel model, we have a partner incentive program that uses quarterly attainment of monetary rewards to motivate distributors and resellers to achieve mutually agreed upon business goals in a specified time period. Incentives related to our subscription program are recorded as a reduction to deferred revenue in the period the subscription transaction is billed, and are subsequently recognized as a reduction to subscription revenue over the contract period. A small portion of partner incentives reduce other revenue in the current period. These incentive balances do not require significant assumptions or judgments. Depending on how the payments are made, the reserves associated with the partner incentive program are recorded on the balance sheet as either contra account receivable or accounts payable.

Revenue Disaggregation

Autodesk recognizes revenue from the sale of (1) product subscriptions, cloud service offerings, and flexible enterprise business arrangements ("EBAs"), (2) renewal fees for existing maintenance plan agreements that were initially purchased with a perpetual software license, and (3) consulting, training and other goods and services. The three categories are presented as line items on Autodesk's unaudited Consolidated Statements of Operations.


11



Information regarding the components of Autodesk's net revenue from contracts with customers by geographic location, product family, and sales channel is as follows:
 
 
Three Months Ended April 30,
 
2018
 
2017
Net revenue by geographic area:
 
 
 
Americas
 
 
 
U.S.
$
195.9

 
$
179.8

Other Americas
37.6

 
30.3

Total Americas
233.5

 
210.1

Europe, Middle East and Africa
220.9

 
189.7

Asia Pacific
105.5

 
85.9

Total net revenue
$
559.9

 
$
485.7

 
 
 
 
Net revenue by product family (1):
 
 
 
Architecture, Engineering and Construction
$
221.8

 
$
185.9

Manufacturing
135.4

 
128.3

AutoCAD and AutoCAD LT
155.6

 
129.0

Media and Entertainment
41.8

 
36.5

Other
5.3

 
6.0

Total net revenue
$
559.9

 
$
485.7

 
 
 
 
Net revenue by sales channel:
 
 
 
Indirect
$
398.3

 
$
340.1

Direct
161.6

 
145.6

Total net revenue
$
559.9

 
$
485.7

____________________
(1)
Due to changes in the go-to-market offerings of our AutoCAD product subscription, prior period balances have been adjusted to conform to current period presentation.

Performance Obligations

For product subscriptions, industry collections, and EBAs in which the desktop software and related cloud functionality are highly interrelated, the combined performance obligation is recognized ratably over the contract term as a stand-ready obligation. For contracts involving distinct software licenses, the license performance obligation is satisfied at a point in time when control is transferred to the customer. For standalone maintenance subscriptions and cloud subscriptions, the performance obligation is satisfied ratably over the contract term as a stand-ready obligation. For consulting services, the performance obligation may be satisfied ratably over the contract term as a stand-ready obligation, or satisfied over a period of time as those services are delivered.

Payments for product subscriptions, industry collections, cloud subscriptions, and maintenance subscriptions are typically due up front with payment terms of 30 to 45 days. Payments on EBAs are typically due in annual installments over the contract term, with payment terms of 30 to 45 days. Autodesk does not have any material variable consideration, such as obligations for returns, refunds, or warranties as of the reporting date.

As of April 30, 2018, Autodesk had total billed and unbilled deferred revenue of $2.2 billion, which represents the total contract price allocated to undelivered performance obligations, which are generally recognized over the next three years. We expect to recognize $1.6 billion or 72% of this revenue during the next 12 months. We expect to recognize the remaining $0.6 billion or 28% of this revenue thereafter.

We expect that the amount of billed and unbilled deferred revenue will change from quarter to quarter for several reasons, including the specific timing, duration and size of large customer subscription and support agreements, varying billing cycles of such agreements, the specific timing of customer renewals, and foreign currency fluctuations.

12




Contract Balances

We receive payments from customers based on a billing schedule as established in our contracts. Contract assets relate to performance completed in advance of scheduled billings. Contract assets were not material as of April 30, 2018. Deferred revenue relates to payments received in advance of performance under the contract. The primary changes in our contract assets and deferred revenues are due to our performance under the contracts and billings.

Revenue recognized during the three months ended April 30, 2018, that was included in the deferred revenue balances at the beginning of the period, was $493.8 million. The satisfaction of performance obligations typically lags behind payments received under revenue contracts from customers, which may lead to an increase in our deferred revenue balance over time.

4. Concentration of Credit Risk
    
Autodesk places its cash, cash equivalents and marketable securities in highly liquid instruments with, and in the custody of, diversified financial institutions globally with high credit ratings and limits the amounts invested with any one institution, type of security and issuer. Autodesk’s primary commercial banking relationship is with Citigroup Inc. and its global affiliates. Citibank, N.A., an affiliate of Citigroup, is one of the lead lenders and an agent in the syndicate of Autodesk’s $400.0 million line of credit facility.

Total sales to the distributor Tech Data Corporation and its global affiliates (“Tech Data”) accounted for 34% and 30% of Autodesk’s total net revenue for the three months ended April 30, 2018 and 2017, respectively. The majority of the net revenue from sales to Tech Data is for sales made outside of the United States. In addition, Tech Data accounted for 36% and 31% of trade accounts receivable at April 30, 2018 and January 31, 2018, respectively. No other customer accounted for more than 10% of Autodesk's total net revenue or trade accounts receivable for each of the respective periods.


13



5. Financial Instruments

The following tables summarize the Company's financial instruments' amortized cost, gross unrealized gains, gross unrealized losses, and fair value by significant investment category as of April 30, 2018 and January 31, 2018:
 
 
 
 
April 30, 2018
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Cash equivalents (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
12.0

 

 

 
12.0

 

 
12.0

 

 
Commercial paper
451.9

 

 

 
451.9

 

 
451.9

 

 
Custody cash deposit
2.2

 

 

 
2.2

 
2.2

 

 

 
Municipal bonds
5.0

 

 

 
5.0

 

 
5.0

 

 
Money market funds
175.2

 

 

 
175.2

 
175.2

 

 

 
Sovereign debt
11.0

 

 

 
11.0

 

 
11.0

 

 
U.S. government securities
6.5

 

 

 
6.5

 

 
6.5

 

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset backed securities
9.2

 

 

 
9.2

 

 
9.2

 

 
 
Certificates of deposit
3.1

 

 

 
3.1

 

 
3.1

 

 
 
Corporate debt securities
83.2

 

 
(0.2
)
 
83.0

 

 
83.0

 

 
 
Municipal bonds
4.2

 

 

 
4.2

 

 
4.2

 

 
 
Sovereign debt
5.0

 

 

 
5.0

 

 
5.0

 

 
 
U.S. government securities
36.1

 

 
(0.1
)
 
36.0

 

 
36.0

 

 
Short-term trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
52.9

 
6.5

 

 
59.4

 
59.4

 

 

 
Long-term
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency bonds
13.7

 

 
(0.1
)
 
13.6

 

 
13.6

 

 
 
Asset backed securities
31.7

 

 
(0.3
)
 
31.4

 

 
31.4

 

 
 
Corporate debt securities
88.5

 
0.2

 
(0.7
)
 
88.0

 

 
88.0

 

 
 
Municipal bonds
12.0

 

 
(0.2
)
 
11.8

 

 
11.8

 

 
 
U.S. government securities
22.7

 

 
(0.2
)
 
22.5

 

 
22.5

 

 
 
Other (2)
4.2

 

 

 
4.2

 

 
4.2

 

Convertible debt securities (3)
7.5

 
1.2

 
(0.3
)
 
8.4

 

 

 
8.4

Derivative contract assets (4)
1.7

 
10.6

 
(1.0
)
 
11.3

 

 
9.8

 
1.5

Derivative contract liabilities (5)

 

 
(5.1
)
 
(5.1
)
 

 
(5.1
)
 

 
 
Total
$
1,039.5


$
18.5


$
(8.2
)

$
1,049.8


$
236.8


$
803.1


$
9.9

____________________ 
(1)
Included in “Cash and cash equivalents” in the accompanying Condensed Consolidated Balance Sheets.
(2)
Consists of certificates of deposit and sovereign debt.
(3)
Included in “Other assets” in the accompanying Condensed Consolidated Balance Sheets.
(4)
Included in “Prepaid expenses and other current assets” or “Other assets” in the accompanying Condensed Consolidated Balance Sheets.
(5)
Included in “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets.


14



 
 
 
 
January 31, 2018
 
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Cash equivalents (1):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency bonds
$
5.0

 
$

 
$

 
$
5.0

 
$
5.0

 
$

 
$

 
Certificates of deposit
17.4

 

 

 
17.4

 
17.4

 

 

 
Commercial paper
324.2

 

 

 
324.2

 

 
324.2

 

 
Corporate debt securities
5.0

 

 

 
5.0

 
5.0

 

 

 
Custody cash deposit
5.2

 

 

 
5.2

 
5.2

 

 

 
Money market funds
278.8

 

 

 
278.8

 

 
278.8

 

 
Municipal bonds
5.0

 

 

 
5.0

 
5.0

 

 

 
Sovereign debt
2.0

 

 

 
2.0

 

 
2.0

 

Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset backed securities
13.1

 

 

 
13.1

 

 
13.1

 

 
 
Commercial paper
27.5

 

 

 
27.5

 

 
27.5

 

 
 
Corporate debt securities
99.4

 

 
(0.1
)
 
99.3

 
99.3

 

 

 
 
Other (2)
9.2

 

 

 
9.2

 
7.7

 
1.5

 

 
 
U.S. government securities
37.1

 

 

 
37.1

 
37.1

 

 

 
Short-term trading securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
50.1

 
8.9

 

 
59.0

 
59.0

 

 

 
Long-term
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency bonds
13.7

 

 
(0.1
)
 
13.6

 
13.6

 

 

 
 
Asset backed securities
36.8

 

 
(0.2
)
 
36.6

 

 
36.6

 

 
 
Corporate debt securities
100.2

 
0.1

 
(0.4
)
 
99.9

 
99.9

 

 

 
 
Municipal bonds
12.7

 

 
(0.1
)
 
12.6

 
12.6

 

 

 
 
Sovereign debt
2.8

 

 

 
2.8

 

 
2.8

 

 
 
U.S. government securities
25.5

 

 
(0.2
)
 
25.3

 
25.3

 

 

Convertible debt securities (3)
7.5

 
0.5

 
(0.2
)
 
7.8

 

 

 
7.8

Derivative contract assets (4)
2.0

 
7.5

 
(1.3
)
 
8.2

 

 
7.2

 
1.0

Derivative contract liabilities (5)

 

 
(26.6
)
 
(26.6
)
 

 
(26.6
)
 

 
 
Total
$
1,080.2

 
$
17.0

 
$
(29.2
)
 
$
1,068.0

 
$
392.1

 
$
667.1

 
$
8.8

____________________ 
(1)
Included in “Cash and cash equivalents” in the accompanying Condensed Consolidated Balance Sheets.
(2)
Consists of agency bonds, certificates of deposit, sovereign debt, and municipal bonds.
(3)
Included in “Other assets” in the accompanying Condensed Consolidated Balance Sheets.
(4)
Included in “Prepaid expenses and other current assets,” “Other assets,” or “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets.
(5)
Included in “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets.
    
Autodesk classifies its marketable securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable securities with remaining maturities of up to 12 months are classified as short-term and marketable securities with remaining maturities greater than 12 months are classified as long-term. Autodesk may sell certain of its marketable securities prior to their stated maturities for strategic purposes or in anticipation of credit deterioration.

Autodesk applies fair value accounting for certain financial assets and liabilities, which consist of cash equivalents, marketable securities and other financial instruments, that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than quoted prices in active markets for

15



identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and (Level 3) unobservable inputs for which there is little or no market data, which require Autodesk to develop its own assumptions. When determining fair value, Autodesk uses observable market data and relies on unobservable inputs only when observable market data is not available. Autodesk reviews for any potential changes on a quarterly basis, in conjunction with our fiscal quarter-end close. As part of this assessment, Autodesk transferred the fair value measurement of $287.2 million between Level 1 to Level 2 and $175.2 million between Level 2 to Level 1 during the three months ended April 30, 2018. It is Autodesk's assessment that the leveling best reflects current market activity when observing the pricing information for these assets.

Autodesk's cash equivalents, marketable securities and financial instruments are primarily classified within Level 1 or Level 2 of the fair value hierarchy. Autodesk values its securities on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1) or inputs other than quoted prices that are observable either directly or indirectly in determining fair value (Level 2). Autodesk's Level 2 securities are valued primarily using observable inputs other than quoted prices in active markets for identical assets and liabilities. Autodesk's Level 3 securities consist of investments held in convertible debt securities and derivative contracts which are valued using probability weighted discounted cash flow models as some of the inputs to the models are unobservable in the market.

A reconciliation of the change in Autodesk’s Level 3 items for the three months ended April 30, 2018 follows:

 
Fair Value Measurements Using
Significant Unobservable Inputs
 
(Level 3)
 
 
Derivative Contracts
 
Convertible Debt Securities
 
Total
Balances, January 31, 2018
 
$
1.0

 
$
7.8

 
$
8.8

Purchases
 

 

 

Gains included in earnings
 
0.5

 

 
0.5

Gains included in OCI
 

 
0.6

 
0.6

Balances, April 30, 2018
 
$
1.5

 
$
8.4

 
$
9.9



The following table summarizes the estimated fair value of Autodesk's securities classified by the contractual maturity date of the security:

 
April 30, 2018
 
Cost
 
Fair Value
Due within 1 year
$
148.3

 
$
148.9

Due in 1 year through 5 years
167.9

 
166.7

Due in 5 years through 10 years
3.7

 
3.7

Due after 10 years
1.1

 
1.1

Total
$
321.0

 
$
320.4



As of April 30, 2018, and January 31, 2018, Autodesk had no material securities, individually and in the aggregate, in a continuous unrealized loss position for greater than twelve months.

There was no loss or gain for the sales or redemptions of securities during the three months ended April 30, 2018. Gains and losses resulting from the sale or redemption of securities are recorded in “Interest and other expense, net” on the Company's Condensed Consolidated Statements of Operations.

Proceeds from the sale and maturity of marketable securities for the three months ended April 30, 2018 and 2017, were $74.8 million and $382.6 million, respectively.

Non-marketable equity securities

As of April 30, 2018, and January 31, 2018, Autodesk had $114.8 million and $112.3 million, respectively, in direct investments in privately held companies. These non-marketable equity securities investments do not have readily determined

16



fair value and with the adoption of ASU 2016-01 in the three months ended April 30, 2018, Autodesk elected to use the measurement alternative to account for the adjustment to these investments in a given quarter. See "Note 2. Recently Issued Accounting Standards" for more details on the adoption.

These investments are periodically assessed for impairment based on available information such as current cash positions, earnings and cash flow positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. Autodesk does not intend to sell these investments and it is not more likely than not that Autodesk will be required to sell the investment before recovery of the amortized cost bases. If Autodesk determines that an impairment has occurred, Autodesk writes down the investment to its fair value. During the three months ended April 30, 2018, Autodesk recorded $2.0 million in impairments on its privately held investments. Therefore, Autodesk does not consider the remaining investments to be impaired at April 30, 2018. During the three months ended April 30, 2017, Autodesk recorded $0.5 million in impairments on its privately held investments.

Under the measurement alternative method, investments are measured at cost, less any impairments, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer in the current period. To determine if a transaction is for a similar investment, Autodesk considers the rights and obligations between the investments and the extent to which those differences would affect the fair values of those investments with additional consideration for the stage of development of the investee company. The fair value would then be adjusted positively or negatively based on available information such as pricing in recent rounds of financing. During the three months ended April 30, 2018, Autodesk recorded $4.6 million as a positive adjustment on certain of its privately held investments.

Derivative Financial Instruments

Under its risk management strategy, Autodesk uses derivative instruments to manage its short-term exposures to fluctuations in foreign currency exchange rates which exist as part of ongoing business operations. Autodesk's general practice is to hedge a portion of transaction exposures denominated in euros, Japanese yen, Swiss francs, British pounds, Canadian dollars and Australian dollars. These instruments have maturities between one and twelve months in the future. Autodesk does not enter into derivative instrument transactions for trading or speculative purposes.

The bank counterparties to the derivative contracts potentially expose Autodesk to credit-related losses in the event of their nonperformance. However, to mitigate that risk, Autodesk only contracts with counterparties who meet the Company's minimum requirements under its counterparty risk assessment process. Autodesk monitors ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on Autodesk's ongoing assessment of counterparty risk, the Company will adjust its exposure to various counterparties. Autodesk generally enters into master netting arrangements, which reduce credit risk by permitting net settlement of transactions with the same counterparty.  However, Autodesk does not have any master netting arrangements in place with collateral features.

Foreign currency contracts designated as cash flow hedges

Autodesk uses foreign currency contracts to reduce the exchange rate impact on a portion of the net revenue or operating expense of certain anticipated transactions. These contracts are designated and documented as cash flow hedges. The effectiveness of the cash flow hedge contracts is assessed quarterly using regression analysis as well as other timing and probability criteria. To receive cash flow hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge and the hedges are expected to be highly effective in offsetting changes to future cash flows on hedged transactions. The gross gains and losses on these hedges are included in “Accumulated other comprehensive loss” and are reclassified into earnings at the time the forecasted revenue or expense is recognized. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, Autodesk reclassifies the gain or loss on the related cash flow hedge from “Accumulated other comprehensive loss” to “Interest and other expense, net” in the Company's Condensed Consolidated Financial Statements at that time.

The net notional amounts of these contracts are presented net settled and were $574.6 million at April 30, 2018, and $619.9 million at January 31, 2018. Outstanding contracts are recognized as either assets or liabilities on the balance sheet at fair value. The majority of the net loss of $10.6 million remaining in “Accumulated other comprehensive loss” as of April 30, 2018, is expected to be recognized into earnings within the next twelve months.


17



Derivatives not designated as hedging instruments

Autodesk uses foreign currency contracts that are not designated as hedging instruments to reduce the exchange rate risk associated primarily with foreign currency denominated receivables and payables. These forward contracts are marked-to-market at the end of each fiscal quarter with gains and losses recognized as “Interest and other expense, net.” These derivative instruments do not subject the Company to material balance sheet risk due to exchange rate movements because gains and losses on these derivative instruments are intended to offset the gains or losses resulting from the settlement of the underlying foreign currency denominated receivables and payables. The net notional amounts of these foreign currency contracts are presented net settled and were $220.9 million at April 30, 2018, and $329.6 million at January 31, 2018.

In addition to these foreign currency contracts, Autodesk holds derivative instruments issued by privately held companies, which are not designated as hedging instruments. These derivatives consist of certain conversion options on the convertible debt securities held by Autodesk and an option to acquire a privately held company. These derivatives are recorded at fair value as of each balance sheet date and are recorded in “Other assets.” Changes in the fair values of these instruments are recognized in “Interest and other expense, net.”

Fair Value of Derivative Instruments

The fair values of derivative instruments in Autodesk’s Condensed Consolidated Balance Sheets were as follows as of April 30, 2018 and January 31, 2018:

 
Balance Sheet Location
 
Fair Value at
 
April 30, 2018
 
January 31, 2018
Derivative Assets
 
 
 
 
 
Foreign currency contracts designated as cash flow hedges
Prepaid expenses and other current assets
 
$
4.5

 
$
6.2

Derivatives not designated as hedging instruments
Prepaid expenses and other current assets and Other assets
 
6.8

 
2.0

Total derivative assets
 
 
$
11.3

 
$
8.2

Derivative Liabilities
 
 
 
 
 
Foreign currency contracts designated as cash flow hedges
Other accrued liabilities
 
$
3.1

 
$
18.7

Derivatives not designated as hedging instruments
Other accrued liabilities
 
2.0

 
7.9

Total derivative liabilities
 
 
$
5.1

 
$
26.6



The effects of derivatives designated as hedging instruments on Autodesk’s Condensed Consolidated Statements of Operations were as follows for the three months ended April 30, 2018 and 2017 (amounts presented include any income tax effects):

 
Foreign Currency Contracts
 
Three Months Ended April 30,
 
2018
 
2017
Amount of gain (loss) recognized in accumulated other comprehensive loss on derivatives (effective portion)
$
6.9

 
$
(2.1
)
Amount and location of (loss) gain reclassified from accumulated other comprehensive loss into (loss) income (effective portion)
 
 
 
Net revenue
$
(2.5
)
 
$
2.0

Operating expenses
3.3

 
(2.7
)
Total
$
0.8

 
$
(0.7
)
Amount and location of loss recognized in (loss) income on derivatives (ineffective portion and amount excluded from effectiveness testing)
 
 
 
Interest and other expense, net
$
(0.2
)
 
$
(0.2
)


18



The effects of derivatives not designated as hedging instruments on Autodesk’s Condensed Consolidated Statements of Operations were as follows for the three months ended April 30, 2018 and 2017 (amounts presented include any income tax effects):

 
Three Months Ended April 30,
 
2018
 
2017
Amount and location of gain (loss) recognized on derivatives in net (loss) income
 
 
 
Interest and other expense, net
$
4.6

 
$
(1.8
)



19



6. Stock-based Compensation Expense

Restricted Stock Units:

A summary of restricted stock activity for the three months ended April 30, 2018, is as follows:
 
 
Unvested
Restricted
Stock Units
 
Weighted
average grant
date fair value
per share
 
(in thousands)
 
 
Unvested restricted stock units at January 31, 2018
5,670.7

 
$
82.94

Granted
391.9

 
143.47

Vested
(712.4
)
 
82.44

Canceled/Forfeited
(279.7
)
 
80.85

        Performance Adjustment (1)
29.9

 
101.74

Unvested restricted stock units at April 30, 2018
5,100.4

 
$
88.55


 _______________
(1)
Based on Autodesk's financial results and relative total stockholder return for the fiscal 2018 performance period. The performance stock units were attained at rates ranging from 90.0% to 117.6% of the target award.

The fair value of the shares vested during the three months ended April 30, 2018 and 2017 was $96.2 million and $76.9 million, respectively.

During the three months ended April 30, 2018, Autodesk granted 0.2 million restricted stock units. Autodesk recorded stock-based compensation expense related to restricted stock units of $41.7 million and $50.0 million during the three months ended April 30, 2018 and 2017, respectively. The $50.0 million of stock-based compensation expense for the three months ended April 30, 2017, includes $3.2 million related to the acceleration of eligible restricted stock awards in conjunction with the Company's former CEO's transition agreement.

During the three months ended April 30, 2018, Autodesk granted 0.2 million performance stock units for which the ultimate number of shares earned is determined based on the achievement of performance criteria at the end of the stated service and performance period. The performance criteria for the performance stock units are based on Annualized Recurring Revenue ("ARR") and free cash flow per share goals adopted by the Compensation and Human Resource Committee, as well as total stockholder return compared against companies in the S&P Computer Software Select Index or the S&P North American Technology Software Index (“Relative TSR”). These performance stock units vest over a three-year period and have the following vesting schedule:

Up to one third of the performance stock units may vest following year one, depending upon the achievement of the performance criteria for fiscal 2019 as well as 1-year Relative TSR (covering year one).

Up to one third of the performance stock units may vest following year two, depending upon the achievement of the performance criteria for year two as well as 2-year Relative TSR (covering years one and two).

Up to one third of the performance stock units may vest following year three, depending upon the achievement of the performance criteria for year three as well as 3-year Relative TSR (covering years one, two and three).

Performance stock units are not considered outstanding stock at the time of grant, as the holders of these units are not entitled to any of the rights of a stockholder, including voting rights. Autodesk has determined the grant date fair value for these awards using stock price on the date of grant or if the awards are also subject to a market condition, a Monte Carlo simulation model. The fair value of the performance stock units is expensed using the accelerated attribution over the vesting period. Autodesk recorded stock-based compensation expense related to performance stock units of $6.5 million and $10.9 million for the three months ended April 30, 2018 and 2017, respectively. The $10.9 million of stock-based compensation expense for the three months ended April 30, 2017, includes $4.6 million related to the acceleration of eligible performance stock awards in conjunction with the Company's former CEO's transition agreement.


20



1998 Employee Qualified Stock Purchase Plan (“ESPP”)

Under Autodesk’s ESPP, which was approved by stockholders in 1998, eligible employees may purchase shares of Autodesk’s common stock at their discretion using up to 15% of their eligible compensation, subject to certain limitations, at 85% of the lower of Autodesk's closing price (fair market value) on the offering date or the exercise date. The offering period for ESPP awards consists of four, six-month exercise periods within a 24-month offering period.

A summary of the ESPP activity for three months ended April 30, 2018 and 2017, is as follows:

 
Three Months Ended April 30,
 
2018
 
2017
Issued shares
0.5

 
1.1

Average price of issued shares
$
88.45

 
$
38.34

Weighted average grant date fair value of awards granted under the ESPP (1)
$
37.64

 
$
25.13

 _______________
(1)
Calculated as of the award grant date using the Black-Scholes Merton (“BSM") option pricing model.

Stock-based Compensation Expense

The following table summarizes stock-based compensation expense for the three months ended April 30, 2018 and 2017, respectively, as follows:
 
 
Three Months Ended April 30,
 
2018
 
2017
Cost of maintenance and subscription revenue
$
2.7

 
$
2.8

Cost of other revenue
0.8

 
1.1

Marketing and sales
24.0

 
26.4

Research and development
17.8

 
21.2

General and administrative
9.1

 
15.3

Stock-based compensation expense related to stock awards and ESPP purchases
54.4

 
66.8

Tax benefit
(0.4
)
 

Stock-based compensation expense related to stock awards and ESPP purchases, net of tax
$
54.0

 
$
66.8


 
Stock-based Compensation Expense Assumptions

Autodesk determines the grant date fair value of its share-based payment awards using a BSM option pricing model or the quoted stock price on the date of grant, unless the awards are subject to market conditions, in which case Autodesk uses a binomial-lattice model (e.g., Monte Carlo simulation model). The Monte Carlo simulation model uses multiple input variables to estimate the probability that market conditions will be achieved. Autodesk uses the following assumptions to estimate the fair value of stock-based awards:
 
 
Three Months Ended April 30, 2018

Three Months Ended April 30, 2017
 
Performance Stock Unit

ESPP

Performance Stock Unit

ESPP
Range of expected volatilities
35.7%

33.5 - 37.5%

31.8%

31.4 - 33.7%
Range of expected lives (in years)
N/A

0.5 - 2.0

N/A

0.5 - 2.0
Expected dividends
—%

—%

—%

—%
Range of risk-free interest rates
2.0%

1.9 - 2.3%

1.0%

0.9 - 1.3%


Autodesk estimates expected volatility for stock-based awards based on the average of the following two measures: (1) a measure of historical volatility in the trading market for the Company’s common stock, and (2) the implied volatility of traded forward call options to purchase shares of the Company’s common stock. The expected volatility for performance stock units subject to market conditions includes the expected volatility of Autodesk's peer companies within the S&P Computer Software

21



Select Index or S&P North American Technology Software Index with a market capitalization over $2.0 billion, depending on the award type.

The range of expected lives of ESPP awards are based upon the four, six-month exercise periods within a 24-month offering period.

Autodesk does not currently pay, and does not anticipate paying in the foreseeable future, any cash dividends. Consequently, an expected dividend yield of zero is used in the BSM option pricing model and the Monte Carlo simulation model.

The risk-free interest rate used in the BSM option pricing model and the Monte Carlo simulation model for stock-based awards is the historical yield on U.S. Treasury securities with equivalent remaining lives.

Autodesk recognizes expense only for the stock-based awards that ultimately vest. Autodesk accounts for forfeitures of our stock-based awards as those forfeitures occur.

7. Income Tax

 Autodesk had an income tax expense of $18.6 million, relative to pre-tax losses of $63.8 million for the three months ended April 30, 2018, and an income tax expense of $8.2 million, relative to pre-tax losses of $121.4 million for the three months ended April 30, 2017. Income tax expense increased primarily due to the mix of increased worldwide earnings, foreign taxes, and withholding taxes. The variance between April 30, 2017, and April 30, 2018 was mainly due to reversal of foreign withholding tax accruals in April 30, 2017.

Autodesk regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, Autodesk considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, Autodesk considered cumulative losses in the United States arising from the Company's business model transition as a significant piece of negative evidence and established a valuation allowance against the Company’s U.S. deferred tax assets in fiscal 2016. Based on the positive and negative evidence as of April 30, 2018, the Company continues to maintain a valuation allowance for the U.S. deferred tax assets.

As of April 30, 2018, the Company had $341.3 million of gross unrecognized tax benefits, of which $307.9 million would reduce our valuation allowance, if recognized. The remaining $33.4 million would impact the effective tax rate. It is possible that the amount of unrecognized tax benefits will change in the next twelve months; however, an estimate of the range of the possible change cannot be made at this time.

The Internal Revenue Service is examining the Company's U.S. consolidated federal income tax returns for fiscal years 2014 and 2015.  While it is possible that the Company's tax positions may be challenged, the Company believes its positions are consistent with the tax law, and the balance sheet reflects appropriate liabilities for uncertain federal tax positions for the years being examined.

The U.S. Tax Cuts and Jobs Act (the “Tax Act”) was signed into law on December 22, 2017, and provides broad and significant changes to the U.S. corporate income tax regime. As of April 30, 2018, Autodesk has not completed the determination of the accounting implications of the Tax Act. The provisional amounts recorded are based on Autodesk’s current interpretation and understanding of the Tax Act and may change as the Company receives additional clarification and implementation guidance and finalizes the analysis of all impacts and positions with regard to the Tax Act. There have been no material changes since January 31, 2018. As additional regulatory guidance is issued, Autodesk will continue to collect and analyze necessary data and may adjust provisional amounts previously recorded in the period in which the adjustments are made. Pursuant to Staff Accounting Bulletin 118 (“SAB 118”), Autodesk will complete the accounting for the tax effects of all provisions of the Tax Act within the required measurement period not to extend beyond one year from the enactment date.



22



8. Other Intangible Assets, Net

Other intangible assets including developed technologies, customer relationships, trade names, patents, user lists and the related accumulated amortization were as follows:

 
April 30, 2018
 
January 31, 2018
Developed technologies, at cost
$
577.2

 
$
578.5

Customer relationships, trade names, patents, and user lists, at cost (1)
370.1

 
372.5

Other intangible assets, at cost (2)
947.3

 
951.0

Less: Accumulated amortization
(900.4
)
 
(895.8
)
Other intangible assets, net
$
46.9

 
$
55.2

_______________ 
(1)
Included in “Other assets” in the accompanying Condensed Consolidated Balance Sheets.
(2)
Includes the effects of foreign currency translation.

9. Goodwill

Goodwill consists of the excess of consideration transferred over the fair value of net assets acquired in business combinations. The following table summarizes the changes in the carrying amount of goodwill for the three months ended April 30, 2018:
 
Balance as of January 31, 2018
$
1,769.4

Less: accumulated impairment losses as of January 31, 2018
(149.2
)
Net balance as of January 31, 2018
1,620.2

Effect of foreign currency translation
(15.3
)
Balance as of April 30, 2018
$
1,604.9



Autodesk operates as a single operating segment and single reporting unit. As such, when Autodesk tests goodwill for impairment annually in its fourth fiscal quarter, it is performed on the Company's single reporting unit. Autodesk performs impairment testing more often if circumstances indicate a potential impairment may exist, or if events have affected the composition of reporting units.

When goodwill is assessed for impairment, Autodesk has the option to perform an assessment of qualitative factors of impairment (“optional assessment”) prior to necessitating a quantitative impairment test. Should the optional assessment be used for any given fiscal year, qualitative factors to consider include cost factors; financial performance; legal, regulatory, contractual, political, business, or other factors; entity specific factors; industry and market considerations, macroeconomic conditions, and other relevant events and factors affecting the reporting unit. If, after assessing the totality of events or circumstances, it is more likely than not that the fair value of the reporting unit is greater than its carrying value, then performing the quantitative impairment test is unnecessary.

The quantitative impairment test is necessary when either Autodesk does not use the optional assessment or, as a result of the optional assessment, it is not more likely than not that the fair value of the reporting unit is greater than its carrying value. In situations in which an entity's reporting unit is publicly traded, the fair value of the Company may be approximated by its market capitalization, in performing the quantitative impairment test.

Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value. If impairment exists, the carrying value of the goodwill is reduced to fair value through an impairment charge recorded in our statements of operations. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. The value of Autodesk’s goodwill could also be impacted by future adverse changes such as: (i) declines in Autodesk’s actual financial results, (ii) a sustained decline in Autodesk’s market capitalization, (iii) a significant slowdown in the worldwide economy or the industries Autodesk serves, or (iv) changes in Autodesk’s business strategy.

There was no goodwill impairment during the three months ended April 30, 2018.


23



10. Deferred Compensation

At April 30, 2018, Autodesk had marketable securities totaling $371.4 million, of which $59.4 million related to investments in debt and equity securities that are held in a rabbi trust under non-qualified deferred compensation plans. The total related deferred compensation liability was $59.4 million at April 30, 2018, of which $2.9 million was classified as current and $56.5 million was classified as non-current liabilities. The total related deferred compensation liability at January 31, 2018, was $59.0 million, of which $3.4 million was classified as current and $55.6 million was classified as non-current liabilities. The securities are recorded in the Condensed Consolidated Balance Sheets under the current portion of "Marketable securities." The current and non-current portions of the liability are recorded in the Condensed Consolidated Balance Sheets under “Accrued compensation” and “Other liabilities,” respectively.

Costs to obtain a contract with a customer

Sales commissions earned by our internal sales personnel and our reseller partners are considered incremental and recoverable costs of obtaining a contract with a customer. The commission costs are capitalized and included in prepaid expenses and other current assets on our consolidated balance sheet. The deferred costs are then amortized over the period of benefit. Autodesk determined that sales commissions earned by internal sales personnel that are related to contract renewals are commensurate with sales commissions earned on the initial contract, but commissions paid to our reseller partners that are related to contract renewals are not. We determined the estimated period of benefit by taking into consideration our sales compensation plans, customer retention data, customer contracts, our technology and other factors. Deferred costs are periodically reviewed for impairment. Amortization expense is included in sales and marketing expenses in the Condensed Consolidated Statements of Operations.

The ending balance of assets recognized from costs to obtain a contract with a customer was $93.3 million as of April 30, 2018. Amortization expense related to assets recognized from costs to obtain a contract with a customer was $26.2 million during the three months ended April 30, 2018. Autodesk did not recognize any contract cost impairment losses during the three months ended April 30, 2018.

11. Computer Equipment, Software, Furniture and Leasehold Improvements, Net

Computer equipment, software, furniture, leasehold improvements and the related accumulated depreciation were as follows:
 
 
April 30, 2018
 
January 31, 2018
Computer hardware, at cost
$
211.8

 
$
217.1

Computer software, at cost
72.9

 
72.6

Leasehold improvements, land and buildings, at cost
244.9

 
228.9

Furniture and equipment, at cost
61.2

 
63.4

 
590.8


582.0

Less: Accumulated depreciation
(432.6
)
 
(437.0
)
Computer software, hardware, leasehold improvements, furniture and equipment, net
$
158.2

 
$
145.0



12. Borrowing Arrangements

In June 2017, Autodesk issued $500.0 million aggregate principal amount of 3.5% notes due June 15, 2027 (collectively, the “2017 Notes”). Net of a discount of $3.1 million and issuance costs of $4.9 million, Autodesk received net proceeds of $492.0 million from issuance of the 2017 Notes. Both the discount and issuance costs are being amortized to interest expense over the term of the 2017 Notes using the effective interest method. The proceeds of the 2017 Notes have been used for the repayment of $400.0 million of debt due December 15, 2017, and the remainder is available for general corporate purposes. Autodesk may redeem the 2017 Notes at any time, subject to a make whole premium. In addition, upon the occurrence of certain change of control triggering events, Autodesk may be required to repurchase the 2017 Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The 2017 Notes contain restrictive covenants that limit Autodesk's ability to create certain liens, to enter into certain sale and leaseback transactions and to consolidate or merge with, or convey, transfer or lease all or substantially all of its assets, subject to important qualifications and exceptions. Based on quoted market prices, the fair value of the 2017 Notes was approximately $471.6 million as of April 30, 2018.


24



In June 2015, Autodesk issued $450.0 million aggregate principal amount of 3.125% notes due June 15, 2020 and $300.0 million aggregate principal amount of 4.375% notes due June 15, 2025 (collectively, the “2015 Notes”). Net of a discount of $1.7 million and issuance costs of $6.3 million, Autodesk received net proceeds of $742.0 million from issuance of the 2015 Notes. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the 2015 Notes using the effective interest method. The proceeds of the 2015 Notes are available for general corporate purposes. Autodesk may redeem the 2015 Notes at any time, subject to a make whole premium. In addition, upon the occurrence of certain change of control triggering events, Autodesk may be required to repurchase the 2015 Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. The 2015 Notes contain restrictive covenants that limit Autodesk's ability to create certain liens, to enter into certain sale and leaseback transactions and to consolidate or merge with, or convey, transfer or lease all or substantially all of its assets, subject to important qualifications and exceptions. Based on quoted market prices, the fair value of the 2015 Notes was approximately $753.7 million as of April 30, 2018.

In December 2012, Autodesk issued $400.0 million aggregate principal amount of 1.95% notes due December 15, 2017 ("$400.0 million 2012 Notes") and $350.0 million aggregate principal amount of 3.6% notes due December 15, 2022 ("$350.0 million 2012 Notes" and collectively with the $400.0 million 2012 Notes, the “2012 Notes”). Autodesk received net proceeds of $739.3 million from issuance of the 2012 Notes, net of a discount of $4.5 million and issuance costs of $6.1 million. Both the discount and issuance costs are being amortized to interest expense over the respective terms of the 2012 Notes using the effective interest method. The proceeds of the 2012 Notes are available for general corporate purposes. On July 27, 2017, Autodesk redeemed in full the $400.0 million 2012 Notes. The redemption was completed pursuant to the optional redemption provisions of the first supplemental indenture dated December 13, 2012. To redeem the notes, Autodesk used the proceeds of the 2017 Notes to pay a redemption price of approximately $400.9 million, plus accrued and unpaid interest. Total cash repayment was $401.8 million. The Company did not incur any additional early termination penalties in connection with such redemption. Based on the quoted market price, the fair value of the $350.0 million 2012 Notes was approximately $348.1 million as of April 30, 2018.

Autodesk’s line of credit facility permits unsecured short-term borrowings of up to $400.0 million, with an option to request an increase in the amount of the credit facility by up to an additional $100.0 million, and is available for working capital or other business needs. This credit agreement contains customary covenants that could restrict the imposition of liens on Autodesk’s assets, and restrict the Company’s ability to incur additional indebtedness or make dispositions of assets if Autodesk fails to maintain the financial covenants. As the result of a forecasted inability to comply with the credit agreement's minimum interest coverage ratio in the first quarter of fiscal 2018, the Company renegotiated the credit agreement's financial covenants in April 2017. The financial covenants now consist of a maximum debt to total cash ratio, a fixed charge coverage ratio through April 30, 2018, and after April 30, 2018, a minimum interest coverage ratio.

The line of credit is syndicated with various financial institutions, including Citibank, N.A., an affiliate of Citigroup, which is one of the lead lenders and an agent. The maturity date on the line of credit is May 2020. At April 30, 2018, Autodesk was in compliance with the credit facility's covenants and had no outstanding borrowings on this line of credit.

13. Restructuring charges and other facility exit costs, net     

During the fourth quarter of fiscal 2018, the Board of Directors approved a world-wide restructuring plan (“Fiscal 2018 Plan”) to support the Company's strategic priorities of completing the subscription transition, digitizing the Company, and re-imagining manufacturing, construction, and production. Through the restructuring, Autodesk seeks to reduce its investments in areas not aligned with its strategic priorities, including in areas related to research and development and go-to-market activities. At the same time, Autodesk plans to further invest in strategic priority areas related to digital infrastructure, customer success, and construction. By re-balancing resources to better align with the Company’s strategic priorities, Autodesk is positioning itself to meet its long-term goals. This world-wide restructuring plan includes a reduction in force that will result in the termination of approximately 13% of the Company’s workforce, or approximately 1,150 employees, and the consolidation of certain leased facilities. The Company expects to substantially complete the reduction in force and the facilities consolidation by the end of fiscal 2019.

25




The following table sets forth the restructuring charges and other lease termination exit costs during the three months ended April 30, 2018:

 
Balances, January 31, 2018
 
Additions
 
Payments
 
Adjustments (1)
 
Balances, April 30, 2018
Fiscal 2018 Plan
 
 
 
 
 
 
 
 
 
Employee termination costs
$
53.0

 
$
20.7

 
$
(51.3
)
 
$
(0.6
)
 
$
21.8

Lease termination and other exit costs
2.5

 
1.8

 
(2.1
)
 
0.4

 
2.6

Total
$
55.5

 
$
22.5

 
$
(53.4
)
 
$
(0.2
)
 
$
24.4

Current portion (2)
$
55.5

 
 
 
 
 
 
 
$
24.4

Non-current portion (2)

 
 
 
 
 
 
 

Total
$
55.5

 
 
 
 
 
 
 
$
24.4

____________________
(1)
Adjustments primarily relate to the impact of foreign exchange rate changes and certain write offs related to fixed assets.
(2)
The current and non-current portions of the reserve are recorded in the Condensed Consolidated Balance Sheets under “Other accrued liabilities” and “Other liabilities,” respectively.

14. Commitments and Contingencies

Guarantees and Indemnifications

In the normal course of business, Autodesk provides indemnifications of varying scopes, including limited product warranties and indemnification of customers against claims of intellectual property infringement made by third parties arising from the use of its products or services. Autodesk accrues for known indemnification issues if a loss is probable and can be reasonably estimated. Historically, costs related to these indemnifications have not been significant, and because potential future costs are highly variable, Autodesk is unable to estimate the maximum potential impact of these indemnifications on its future results of operations.

In connection with the purchase, sale or license of assets or businesses with third parties, Autodesk has entered into or assumed customary indemnification agreements related to the assets or businesses purchased, sold or licensed. Historically, costs related to these indemnifications have not been significant, and because potential future costs are highly variable, Autodesk is unable to estimate the maximum potential impact of these indemnifications on its future results of operations.

As permitted under Delaware law, Autodesk has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving at Autodesk’s request in such capacity. The maximum potential amount of future payments Autodesk could be required to make under these indemnification agreements is unlimited; however, Autodesk has directors’ and officers’ liability insurance coverage that is intended to reduce its financial exposure and may enable Autodesk to recover a portion of any future amounts paid. Autodesk believes the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

Legal Proceedings

Autodesk is 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. Autodesk routinely reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any matter is considered probable and the amount can be reasonably estimated, Autodesk records a liability for the estimated loss. Because of inherent uncertainties related to these legal matters, Autodesk bases its loss accruals on the best information available at the time. As additional information becomes available, Autodesk reassesses its potential liability and may revise its estimates. In the Company's opinion, resolution of pending matters is not expected to have a material adverse impact on its consolidated results of operations, cash flows, or its 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 the Company's results of operations, cash flows, or financial position in a particular period, however, based on the information known by the Company 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.

26




15. Common Stock Repurchase Program

Autodesk has a stock repurchase program that is used to offset dilution from the issuance of stock under the Company’s employee stock plans and for such other purposes as may be in the interests of Autodesk and its stockholders. Stock repurchases have the effect of returning excess cash generated from the Company’s business to stockholders. During the three months ended April 30, 2018, Autodesk repurchased and retired 0.2 million shares at an average repurchase price of $113.3 per share. Common stock and additional paid-in capital and accumulated deficit were reduced by $16.4 million and $4.6 million, respectively, during the three months ended April 30, 2018.

At April 30, 2018, 19.5 million shares remained available for repurchase under the repurchase program approved by the Board of Directors. During the three months ended April 30, 2018, Autodesk repurchased its common stock through open market purchases. The number of shares acquired and the timing of the purchases are based on several factors, including general market and economic conditions, the number of employee stock option exercises and stock issuances, the trading price of Autodesk common stock, cash on hand and available in the United States, cash requirements for acquisitions, and Company defined trading windows.

16. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, net of taxes, consisted of the following at April 30, 2018:

 
Net Unrealized Gains (Losses) on Derivative Instruments
 
Net Unrealized Gains (Losses) on Available-for-Sale Debt Securities
 
Defined Benefit Pension Components
 
Foreign Currency Translation Adjustments
 
Total
Balances, January 31, 2018
$
(16.6
)
 
$
1.3

 
$
(29.3
)
 
$
(79.2
)
 
$
(123.8
)
Other comprehensive income (loss) before reclassifications
7.6

 
0.5

 
9.0

 
(24.6
)
 
(7.5
)
Pre-tax (gains) losses reclassified from accumulated other comprehensive loss
(0.9
)
 

 
0.1

 

 
(0.8
)
Tax effects
(0.7
)
 
0.1

 
(1.4
)
 
0.3

 
(1.7
)
Net current period other comprehensive income (loss)
6.0

 
0.6

 
7.7

 
(24.3
)
 
(10.0
)
Balances, April 30, 2018
$
(10.6
)
 
$
1.9

 
$
(21.6
)
 
$
(103.5
)
 
$
(133.8
)


Reclassifications related to gains and losses on available-for-sale debt securities are included in "Interest and other expense, net." Refer to Note 5, "Financial Instruments," for the amount and location of reclassifications related to derivative instruments. Reclassifications of the defined benefit pension components are included in the computation of net periodic benefit cost. For further information, see the "Retirement Benefit Plans" note in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended January 31, 2018.
 

27



17. Net Loss Per Share

Basic net loss per share is computed using the weighted average number of shares of common stock outstanding for the period, excluding stock options and restricted stock units. Diluted net loss per share is based upon the weighted average number of shares of common stock outstanding for the period and potentially dilutive common shares, including the effect of stock options and restricted stock units under the treasury stock method. The following table sets forth the computation of the numerators and denominators used in the basic and diluted net loss per share amounts:

 
Three Months Ended April 30,
 
2018
 
2017
Numerator:
 
 
 
Net loss
$
(82.4
)
 
$
(129.6
)
Denominator:
 
 
 
Denominator for basic net loss per share—weighted average shares
218.6

 
219.9

Effect of dilutive securities (1)

 

Denominator for dilutive net loss per share
218.6

 
219.9

Basic net loss per share
$
(0.38
)
 
$
(0.59
)
Diluted net loss per share
$
(0.38
)
 
$
(0.59
)

____________________ 
(1)
The effect of dilutive securities of 3.0 million and 4.1 million shares in the three months ended April 30, 2018 and 2017, respectively, have been excluded from the calculation of diluted net loss per share as those shares would have been anti-dilutive due to the net loss incurred during those periods.

The computation of diluted net loss per share does not include shares that are anti-dilutive under the treasury stock method because their exercise prices are higher than the average market value of Autodesk’s stock during the period. For the three months ended April 30, 2018 and 2017, 0.2 million and 0.3 million potentially anti-dilutive shares were excluded from the computation of diluted net loss per share, respectively.

18. Segments

Autodesk reports segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions, allocating resources and assessing performance as the source of the Company’s reportable segments. The Company's chief operating decision maker ("CODM") allocates resources and assesses the operating performance of the Company as a whole. As such, Autodesk has one segment manager (the CODM), and one operating segment.


28



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion in our MD&A and elsewhere in this Form 10-Q contains trend analyses and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are any statements that look to future events and consist of, among other things, our business strategies, including those discussed in “Strategy” and “Overview of the Three Months Ended April 30, 2018 and 2017” below, future net revenue, operating expenses, recurring revenue, annualized recurring revenue, annualized revenue per subscription, other future financial results (by product type and geography) and subscriptions, the effectiveness of our restructuring efforts, the effectiveness of our efforts to successfully manage transitions to new business models and markets, our expectations regarding the continued transition of our business model, expectations for our maintenance plan and subscription plan subscriptions, our ability to increase our subscription base, expected market trends, including the growth of cloud and mobile computing, the effect of unemployment, the availability of credit, our expectations for our restructuring, the effects of global economic conditions, the effects of revenue recognition, the effects of recently issued accounting standards, expected trends in certain financial metrics, including expenses, the impact of acquisitions and investment activities, expectations regarding our cash needs, the effects of fluctuations in exchange rates and our hedging activities on our financial results, our ability to successfully expand adoption of our products, our ability to gain market acceptance of new businesses and sales initiatives, the impact of economic volatility and geopolitical activities in certain countries, particularly emerging economy countries, the timing and amount of purchases under our stock buy-back plan, and the effects of potential non-cash charges on our financial results and the resulting effect on our financial results. In addition, forward-looking statements also consist of statements involving expectations regarding product capability and acceptance, remediation to our controls environment, statements regarding our liquidity and short-term and long-term cash requirements, as well as statements involving trend analyses and statements including such words as “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” and similar expressions or the negative of these terms or other comparable terminology. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of a number of factors, including those set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with the U.S. Securities and Exchange Commission. We assume no obligation to update the forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made, except as required by law.

Note: A glossary of terms used in this Form 10-Q appears at the end of this Item 2.

Strategy

Autodesk makes software for people who make things. If you have ever driven a high-performance car, admired a towering skyscraper, used a smartphone, or watched a great film, chances are you have experienced what millions of Autodesk customers are doing with our software. Autodesk gives you the power to make anything.

Autodesk was founded during the platform transition from mainframe computers and engineering workstations to personal computers. We developed and sustained a compelling value proposition based upon desktop software for the personal computer. Just as the transition from mainframes to personal computers transformed the industry over 30 years ago, we believe our industry is undergoing a similar transition from the personal computer to cloud, mobile, and social computing. To address this transition, we have accelerated our move to the cloud and mobile devices and are offering more flexible licensing. Our product subscriptions currently represent a hybrid of desktop software and cloud functionality, which provides a device-independent, collaborative design workflow for designers and their stakeholders. Our SaaS offerings, for example, BIM 360, Shotgun, Fusion, and AutoCAD 360 Pro, provide tools, including mobile and social capabilities, to streamline design, collaboration, building and manufacturing and data management processes. We believe that customer adoption of these new offerings will continue to grow as customers across a range of industries begin to take advantage of the scalable computing power and flexibility provided through these new services.

Our strategy is to build an enduring relationship with our customers, delivering valuable automation and insight to their design and make processes. Industry collections provide our customers with increased access to a broader selection of Autodesk products and services that exceeds those previously available in suites - simplifying the customer ability to get access to a complete set of tools for their industry. We now offer subscriptions for individual products and industry collections, flexible enterprise business agreements ("EBAs"), and cloud service offerings (collectively referred to as "subscription plan"). These subscription plan offerings are designed to give our customers more flexibility with how they use our products and service offerings and to attract a broader range of customers, such as project-based users and small businesses.


29



With the discontinuation of the sale of most perpetual licenses, we have transitioned away from selling a mix of perpetual licenses and term-based product subscriptions toward a single subscription model. On June 15, 2017, we commenced a program to incentivize maintenance plan customers to move to subscription plan offerings. Through this program we offer discounts to those maintenance customers that move to a subscription plan, while at the same time increasing maintenance plan pricing over time for customers that remain on maintenance.

As we progress through the current stage of the business model transition, annualized recurring revenue ("ARR"), growth of billings, and total subscriptions better reflect business momentum. To analyze progress, we disaggregate our growth between the original maintenance model ("maintenance plan") and the subscription plan model. Maintenance plan subscriptions peaked in the fourth quarter of our fiscal 2016 as we discontinued selling new maintenance plan subscriptions in fiscal 2017, and we expect them to decline slowly over time as maintenance plan customers continue to convert to our subscription plans.

We sell our products and services globally, through a combination of indirect and direct channels. Our indirect channels include value added resellers, direct market resellers, distributors, computer manufacturers, and other software developers. Our direct channels include internal sales resources dedicated to selling in our largest accounts, our highly specialized products, and business transacted through our online Autodesk branded store. The following chart shows our split between indirect and direct channels for the three months ended April 30, 2018 and 2017:

chart-2e90622d97515159b61.jpg

We anticipate that our channel mix will continue to change as we scale our online Autodesk branded store business and our largest accounts shift towards direct-only business models. However, we expect our indirect channel will continue to transact and support the majority of our customers and revenue as we move beyond the business model transition. We employ a variety of incentive programs and promotions to align our direct and indirect channels with our business strategies. In addition, we have a worldwide user group organization and we have created online user communities dedicated to the exchange of information related to the use of our products.

One of our key strategies is to maintain an open-architecture design of our software products to facilitate third-party development of complementary products and industry-specific software solutions. This approach enables customers and third parties to customize solutions for a wide variety of highly specific uses. We offer several programs that provide strategic investment funding, technological platforms, user communities, technical support, forums, and events to developers who develop add-on applications for our products. For example, we have established the Autodesk Forge program to support

30



innovators that build solutions to facilitate the development of a single connected ecosystem for the future of how things are designed, made, and used as well as support ideas that push the boundaries of 3D printing.

In addition to the competitive advantages afforded by our technology, our large global network of distributors, resellers, third-party developers, customers, educational institutions, educators, and students is a key competitive advantage which has been cultivated over an extensive period of time. This network of partners and relationships provides us with a broad and deep reach into volume markets around the world. Our distributor and reseller network is extensive and provides our customers with the resources to purchase, deploy, learn, and support our products quickly and easily. We have a significant number of registered third-party developers who create products that work well with our products and extend them for a variety of specialized applications.

Autodesk is committed to helping fuel a lifelong passion for making with students of all ages. We offer free educational licenses of Autodesk software worldwide to students, educators, and accredited educational institutions. We inspire and support beginners with Tinkercad, a simple online 3D design and 3D printing tool. Through Autodesk Design Academy, we provide secondary and postsecondary school markets hundreds of standards-aligned class projects to support design-based disciplines in Science, Technology, Engineering, Digital Arts, and Math (STEAM) while using Autodesk's professional-grade 3D design, engineering and entertainment software used in industry. We also have made Autodesk Design Academy curricula available on Udemy and Coursera. Our intention is to make Autodesk software ubiquitous and the design and making software of choice for those poised to become the next generation of professional users.

Our strategy includes improving our product functionality and expanding our product offerings through internal development as well as through the acquisition of products, technology, and businesses. Acquisitions often increase the speed at which we can deliver product functionality to our customers; however, they entail cost and integration challenges and may, in certain instances, negatively impact our operating margins. We continually review these trade-offs in making decisions regarding acquisitions. We currently anticipate that we will continue to acquire products, technology, and businesses as compelling opportunities become available.

Our strategy depends upon a number of assumptions to successfully make the transition toward new cloud and mobile platforms, including: the related technology and business model shifts; making our technology available to mainstream markets; leveraging our large global network of distributors, resellers, third-party developers, customers, educational institutions, and students; improving the performance and functionality of our products; and adequately protecting our intellectual property. If the outcome of any of these assumptions differs from our expectations, we may not be able to implement our strategy, which could potentially adversely affect our business. For further discussion regarding these and related risks, see Part II, Item 1A, “Risk Factors.”


Critical Accounting Policies and Estimates

Our Condensed Consolidated Financial Statements are prepared in conformity with U.S. generally accepted accounting principles ("GAAP"). In preparing our Condensed Consolidated Financial Statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our Condensed Consolidated Financial Statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments and estimates. Our significant accounting policies are described in Note 1, “Business and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements in our Form 10-K for the fiscal year ended January 31, 2018. In addition, we highlighted those policies that involve a higher degree of judgment and complexity with further discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K. There have been no material changes to our critical accounting policies and estimates during the three months ended April 30, 2018 as compared to those disclosed in our Form 10-K for the fiscal year ended January 31, 2018, except for the adoption of Accounting Standard Codification ("ASC") Topics 606 and 340-40. For changes made to our revenue recognition policy as a result of the adoption of ASC Topics 606 and 340-40, refer to Note 3, "Revenue Recognition" and Note 10, "Deferred Compensation," in the Notes to the unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q. We believe these policies are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

Overview of the Three Months Ended April 30, 2018 and 2017
 
Total net revenue was $559.9 million, an increase of 15 percent compared to the same period in the prior year.

31



Total ARR was $2.13 billion, an increase of 22 percent compared to the same period in the prior year.
Total subscriptions increased to 3.82 million.
Total spend (cost of revenue + operating expenses) increased 2 percent compared to the same period in the prior year.
We adopted ASC Topic 606 and ASC Topic 340-40 during the first quarter of 2018. Under the modified retrospective transition method, we recorded a cumulative decrease of $178.0 million to the opening balance of accumulated deficit at February 1, 2018. See discussion below for additional information regarding certain metrics that were affected by the new standards under the heading “Impact of New Revenue Accounting Standard."
Under ASC 605, deferred revenue was $1.9 billion, an increase of approximately 8 percent compared to the first quarter last year.

Revenue Analysis

Net revenue increased during the three months ended April 30, 2018, as compared to the same period in the prior fiscal year, primarily due to a 102% increase in subscription revenue, partially offset by a 31% decrease in maintenance revenue.

Further discussion of the drivers of these results are discussed below under the heading “Results of Operations.”

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”). Total sales to Tech Data accounted for 34% and 30% of Autodesk’s total net revenue for the three months ended April 30, 2018 and 2017, respectively. Our customers through Tech Data are the resellers and end users who purchase our software licenses and services. Should any of our agreements with 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. Consequently, we believe our business is not substantially dependent on Tech Data.

Recurring Revenue and Subscriptions

In order to help better understand our financial performance during and after the business model transition, we use several metrics including recurring revenue, total subscriptions, ARR, and annualized revenue per subscription ("ARPS"). ARR, ARPS, total subscriptions, and recurring revenue are performance metrics and should be viewed independently of revenue and deferred revenue as ARR, ARPS, and recurring revenue are not intended to be combined with those items. Our determination and presentation may differ from that of other companies. Please refer to the Glossary of Terms for the definitions of these metrics.


The following table outlines our recurring revenue metric for the three months ended April 30, 2018 and 2017:

(In millions, except percentage data)
Three Months Ended April 30, 2018
 
Change compared to
prior fiscal year
 
Three Months Ended April 30, 2017
 
 
$
 
%    
 
Recurring Revenue (1)
$
531.6

 
$
95.7

 
22
%
 
$
435.9

As a percentage of net revenue
95
%
 
N/A

 
N/A

 
90
%
 ________________
(1)
The acquisition of a business may cause variability in the comparison of recurring revenue in this table above and recurring revenue derived from the revenue reported in the unaudited Condensed Consolidated Statements of Operations.


32




The following table outlines our ARR, subscriptions and ARPS metrics as of April 30, 2018 and January 31, 2018. For purposes of clarifications, the ARR and ARPS balances in the following table as of April 30, 2018 are calculated under ASC Topic 606. For comparison of ARR and ARPS as of April 30, 2018 under the old revenue standard, ASC 605, refer to the table under the title "Impact of New Revenue Accounting Standard" further below.

 
Balances, April 30, 2018
 
Change compared to
prior fiscal year end
 
Balances, January 31, 2018 (1)
 
 
$
 
%    
 
ARR (in millions)
 
 
 
 
 
 
 
Subscription plan ARR
$
1,401.5

 
$
226.5

 
19
 %
 
$
1,175.0

Maintenance plan ARR
724.9

 
(154.2
)
 
(18
)%
 
879.1

Total ARR (1)
$
2,126.4

 
$
72.3

 
4
 %
 
$
2,054.1

 
 
 
 
 
 
 
 
Number of Subscriptions (in thousands)
 
 
 
 


 
 
Subscription plan
2,574.3

 
307.5

 
14
 %
 
2,266.8

Maintenance plan
1,242.6

 
(206.3
)
 
(14
)%
 
1,448.9

Total subscriptions
3,816.9

 
101.2

 
3
 %
 
3,715.7

 
 
 
 
 
 
 
 
ARPS (ARR divided by number of Subscriptions)
 
 
 
 
 
 
 
Subscription plan ARPS
$
544

 
$
26

 
5
 %
 
$
518

Maintenance plan ARPS
583

 
(24
)
 
(4
)%
 
607

Total ARPS (2)
$
557

 
$
4

 
1
 %
 
$
553

 ________________
(1)
The acquisition of a business may cause variability in the comparison of ARR reported in this table above and ARR derived from the revenue reported in the Condensed Consolidated Statement of Operations.
(2)
There are small variances between ARR and total subscriptions due in part to the inherent limitation with collecting all subscriptions information. For example, Buzzsaw and Constructware are included with ARR but not in total subscriptions due to these inherent limitations. We do not view these variances as meaningful to amounts or quarterly comparisons presented here for ARPS.

Total ARR increased 4% as of April 30, 2018 under ASC 606 as compared to the end of fiscal 2018, primarily due to a 19% increase in subscription plan ARR driven by growth in product subscription. The increase was partially offset by an 18% decrease in maintenance plan ARR driven by the migration from maintenance plan subscriptions to subscription plan subscriptions. Under ASC 605, total ARR increased 6% as of April 30, 2018 as compared to the end of fiscal 2018 primarily due to a 21% increase in subscription plan ARR, partially offset by a 15% decrease in maintenance plan ARR.

Subscription plan subscriptions increase14% or approximately 307,500 as compared to the end of fiscal 2018, driven by growth in all subscription plan types, led by new product subscriptions. Subscription plan subscriptions benefited from approximately 154,000 maintenance subscribers that were converted to product subscription under the maintenance-to-subscription program during the three months ended April 30, 2018, respectively.

Maintenance plan subscriptions decreased 14% or approximately 206,300 from the end of fiscal 2018, primarily as a result of the maintenance-to-subscription program in which approximately 154,000 maintenance plan subscriptions converted to product subscription during the three months ended April 30, 2018. The net decrease is expected and we expect to see ongoing declines in maintenance plan subscriptions going forward as part of the business model transition. The rate of decline will vary based on the number of subscriptions subject to renewal, the renewal rate, and our ability to incentivize customers to switch over to EBAs or product subscriptions.

ARPS as of April 30, 2018 was $557 under ASC 606 and $569 under ASC 605, a slight increase compared to the end of fiscal 2018 due to an increase in subscription plan ARPS. The increase in subscription plan ARPS was driven by an increase in product subscription ARPS.

When adjusted for the impact of the maintenance-to-subscription program, subscription plan ARPS and maintenance plan ARPS would have been $543 and $574, respectively.


33



Our ARPS is currently, and will continue to be, affected by various factors including the maintenance-to-subscription (M2S) program, geography and product mix, promotions, sales linearity within a quarter, pricing changes, and foreign currency. We expect to see ARPS fluctuate up or down on a quarterly basis. As we progress on our business model transition, we expect all of the impacts of these factors to stabilize.

Impact of New Revenue Accounting Standard

We adopted Accounting Standard Update No 2014-09, which codified new revenue recognition guidance under ASC Topic 606. Previously, we followed revenue accounting guidance under ASC Topic 605. The table below shows what some of our key metrics would have been under ASC Topic 605 (see Note 2, “Recently Issued Accounting Standards” for more details on our adoption and impacts):

 
Three Months Ended April 30, 2018
 
Three Months Ended April 30, 2017
(in millions except ARPS)
ASC 606
 
ASC 605
 
ASC 605
Key Income Statement Metrics
 
 
 
 
 
Subscription revenue
$
350.4

 
$
356.7

 
$
173.4

Maintenance revenue
181.2

 
186.6

 
263.6

Other revenue
28.3

 
30.2

 
48.7

Total net revenue
559.9

 
573.5

 
485.7

Gross profit
493.1

 
506.5

 
407.5

Spend
615.2

 
601.8

 
605.3

Net loss
$
(82.4
)
 
$
(60.0
)
 
$
(129.6
)
Basic and diluted net loss per share
$
(0.38
)
 
$
(0.27
)
 
$
(0.59
)
ARR
 
 
 
 
 
Subscription plan ARR
$
1,401.5

 
$
1,427.0

 
$
691.9

Maintenance plan ARR
724.9

 
746.3

 
1,051.7

Total ARR
$
2,126.4

 
$
2,173.3

 
$
1,743.6

ARPS
 
 
 
 
 
Subscription plan ARPS
$
544

 
$
554


$
524

Maintenance plan ARPS
583

 
601


534

Total ARPS
$
557

 
$
569

 
$
530

Net Revenue by Product Family
 
 
 
 
 
Architecture, Engineering and Construction ("AEC")
$
221.8

 
$
227.8

 
$
185.9

AutoCAD and AutoCAD LT ("ACAD")
155.6

 
160.2

 
129.0

Manufacturing ("MFG")
135.4

 
138.8

 
128.3

Media and Entertainment ("M&E")
41.8

 
41.7

 
36.5

Other
5.3

 
5.0

 
6.0

Total Net Revenue
$
559.9

 
$
573.5

 
$
485.7

Net Revenue by Geography
 
 
 
 
 
Americas
$
233.5

 
$
237.7

 
$
210.1

Europe, Middle East and Africa ("EMEA")
220.9

 
228.6

 
189.7

Asia Pacific ("APAC")
105.5

 
107.2

 
85.9

Total Net Revenue
$
559.9

 
$
573.5


$
485.7


The adoption of ASC 606 required a change to our reporting around deferred revenue. See discussions below under the heading "Unbilled Deferred Revenue."

34




Foreign Currency Analysis

We generate a significant amount of our revenue in the United States, Germany, Japan, the United Kingdom, and Canada.

The following table shows the impact of foreign exchange rate changes on our net revenue and total spend:

 
Three Months Ended April 30, 2018
 
Percent change compared to
prior fiscal year
 
Constant Currency percent change compared to
prior fiscal year (2)
 
Positive/Negative/Neutral impact from foreign exchange rate changes
Revenue
15
%
 
15
%
 
Neutral
Spend (1)
2
%
 
%
 
Negative
 ________________
(1)
Our total spend is defined as cost of revenue plus operating expenses.
(2)
Please refer to the Glossary of Terms for the definitions of our constant currency growth rates.

Changes in the value of the U.S. dollar may have a significant effect on net revenue, total spend, and income (loss) from operations in future periods. We use foreign currency contracts to reduce the exchange rate effect on a portion of the net revenue of certain anticipated transactions but do not attempt to completely mitigate the impact of fluctuations of such foreign currency against the U.S. dollar.

Unbilled Deferred Revenue

The adoption of ASC 606 required a change to the definition of unbilled deferred revenue and new qualitative and quantitative disclosures around our performance obligations. Unbilled deferred revenue represents contractually stated or committed orders under early renewal and multi-year billing plans for subscription, services, license and maintenance for which the associated deferred revenue has not been recognized. Under ASC 606, unbilled deferred revenue is not included as a receivable or deferred revenue on our Consolidated Balance Sheet. See Note 3, “Revenue Recognition” for more details on Autodesk's performance obligations.

 
Three Months Ended April 30, 2018
 
Three Months Ended April 30, 2017
(in millions)
ASC 606
 
ASC 605
 
ASC 605
Deferred revenue
$
1,806.4

 
$
1,942.7

 
$
1,801.5

Unbilled deferred revenue
411.5

 
336.6

 
30.0

Total deferred revenue
$
2,217.9

 
$
2,279.3

 
$
1,831.5


We expect that the amount of billed and unbilled deferred revenue will change from quarter to quarter for several reasons, including the specific timing, duration and size of large customer subscription and support agreements, varying billing cycles of such agreements, the specific timing of customer renewals, and foreign currency fluctuations.

Balance Sheet and Cash Flow Items

At April 30, 2018, we had $1.5 billion in cash and marketable securities. Our cash flow from operations decreased 137% to $(16.9) million, for the three months ended April 30, 2018 compared to $45.2 million from the three months ended April 30, 2017. We repurchased 0.2 million shares of our common stock for $21.0 million during the three months ended April 30, 2018. Comparatively, we repurchased 2.2 million shares of our common stock for $192.0 million during the three months ended April 30, 2017. Further discussion regarding the balance sheet and cash flow activities are discussed below under the heading “Liquidity and Capital Resources.”


35



Results of Operations

The revenue and spend balances included in the tables below during the three months ended April 30, 2018 are calculated under ASC Topic 606. For comparison of subscription revenue, maintenance revenue, other revenue and total spend during the three months ended April 30, 2018 under ASC 605, refer to the table within Item 2, "Overview" under the title "Impact of New Revenue Accounting Standard."

Net Revenue

Income Statement Presentation

Subscription revenue consists of our term-based product subscriptions, cloud service offerings, and flexible enterprise
business arrangements. Revenue from these arrangements is recognized ratably over the contract term. Revenue for our cloud service offerings is recognized ratably over the contract term commencing with the date our service is made available to customers and when all other revenue recognition criteria have been satisfied.

Maintenance revenue consists of renewal fees for existing maintenance plan agreements that were initially purchased with a perpetual software license. Under our maintenance plan, customers are eligible to receive unspecified upgrades, when and if available, and technical support. We recognize maintenance revenue over the term of the agreements, generally between one and three years.

Other revenue consists of revenue from consulting, training and other services, and is recognized over time as the services are performed. Other revenue also includes software license revenue from the sale of our discontinued perpetual licenses.

 
Three Months Ended
 
Change compared to
prior fiscal year
 
Three Months Ended
 
Management Comments
(in millions)
April 30, 2018
$    
 
%    
 
April 30, 2017
 
Net Revenue:
 
 
 
 
 
 
 
 
 
Subscription
$
350.4

 
$
177.0

 
102
 %
 
$
173.4

 
The increase in subscription revenue is primarily a result of the business model transition as maintenance plan subscriptions migrate to product subscriptions with the M2S program. We also saw growth across all subscription plan types, led by product subscriptions and EBAs.
Maintenance
181.2

 
(82.4
)
 
(31
)%
 
263.6

 
The decrease in maintenance revenue is driven by the migration of maintenance plan subscriptions to product subscriptions with the M2S program as well as the discontinuation of new maintenance agreements. We expect maintenance revenue will slowly decline; however, the rate of decline will vary based on the number of renewals, the renewal rate, and our ability to incentivize maintenance plan customers to switch over to subscription plan offerings.
     Total maintenance and subscription revenue
531.6

 
94.6

 
22
 %
 
437.0

 
 
Other (1)
28.3

 
(20.4
)
 
(42
)%
 
48.7

 
The decrease in other revenue is driven by the business model transition and the discontinuation of perpetual license sales.
 
$
559.9

 
$
74.2

 
15
 %
 
$
485.7

 
 
____________________
(1)
Previously labeled as "License and other" in prior periods.


36



Net Revenue by Product Family

Our product offerings are focused in four primary product families: AEC, MFG, ACAD, and M&E.

 
Three Months Ended
 
Change compared to
prior fiscal year
 
Three Months Ended
 
Management Comments
(in millions)
April 30, 2018
$    
 
%    
 
April 30, 2017
 
Net Revenue by Product Family (1):
 
 
 
 
 
 
 
 
 
AEC
$
221.8

 
$
35.9

 
19
 %
 
$
185.9

 
Up due to an increase in AEC collections and legacy suites driven by the discontinuation of perpetual licenses and the strong results of our M2S program. Contributing to the growth was an increase in revenue from EBAs and individual AEC product offerings driven by the respective increases in subscription additions.
ACAD
155.6

 
26.6

 
21
 %
 
129.0

 
Up due to increases in both AutoCAD LT and AutoCAD driven by increases in subscription additions.
MFG
135.4

 
7.1

 
6
 %
 
128.3

 
Up due to an increase in MFG collections and legacy suites driven by the discontinuation of perpetual licenses and the strong results of our M2S program. Contributing to the growth was an increase in revenue from EBAs driven by an increase in subscription additions.

M&E
41.8

 
5.3

 
15
 %
 
36.5

 
Up due to an increase in Animation primarily due to an increase in revenue from EBAs driven by an increase in subscription additions.
Other
5.3

 
(0.7
)
 
(12
)%
 
6.0

 
 
 
$
559.9

 
$
74.2

 
15
 %
 
$
485.7

 
 
____________________
(1)
Due to changes in the go-to-market offerings of our AutoCAD product subscription, prior period balances have been adjusted to conform to current period presentation.

Net Revenue by Geographic Area

(in millions)
Three Months Ended April 30, 2018
 
Change compared to
prior fiscal year
 
Constant Currency Change compared to prior fiscal year
 
Three Months Ended April 30, 2017
 
 
$    
 
%    
 
%    
 
Net Revenue:
 
 
 
 
 
 
 
 
 
Americas
 
 

 

 
 
 
 
U.S.
$
195.9

 
$
16.1

 
9
%
 
*

 
$
179.8

Other Americas
37.6

 
7.3

 
24
%
 
*

 
30.3

Total Americas
233.5

 
23.4

 
11
%
 
11
%
 
210.1

EMEA
220.9

 
31.2

 
16
%
 
16
%
 
189.7

APAC
105.5

 
19.6

 
23
%
 
22
%
 
85.9

Total Net Revenue (1)
$
559.9

 
$
74.2

 
15
%
 
15
%
 
$
485.7

 
 
 
 
 
 
 
 
 
 
Emerging Economies
$
65.2

 
$
14.3

 
28
%
 
27
%
 
$
50.9

____________________ 
(1)
Totals may not sum due to rounding.
* Constant currency data not provided at this level.

We believe that international revenue will continue to comprise a majority of our net revenue. Unfavorable economic conditions in the countries that contribute a significant portion of our net revenue, including in emerging economies such as

37



Brazil, Russia, India, and China, 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. Increases to the levels of political and economic unpredictability in the global market may impact our future financial results. Additionally, during the first three years of the business model transition, revenue has been impacted as more revenue is recognized ratably rather than upfront and as new product offerings generally have a lower initial purchase price. While the transition to a subscription model has had a broad impact within all markets, it has had a particular impact to emerging economies as sales of perpetual licenses have historically comprised a greater percentage of total emerging economy sales in comparison to mature markets.

Cost of Revenue and Operating Expenses

Cost of maintenance and subscription revenue includes the labor costs of providing product support to our maintenance and subscription customers, including allocated IT and facilities costs, professional services fees related to operating our network and cloud infrastructure, royalties, depreciation expense and operating lease payments associated with computer equipment, data center costs, salaries, related expenses of network operations, and stock-based compensation expense.

Cost of other revenue includes labor costs associated with product setup, costs of consulting and training services contracts, and collaborative project management services contracts. Cost of other revenue also includes stock-based compensation expense, direct material and overhead charges, allocated IT and facilities costs, professional services fees and royalties. Direct material and overhead charges include the cost associated with electronic and physical fulfillment.

Cost of revenue, at least over the near term, is affected by the volume and mix of product sales, fluctuations in consulting costs, amortization of developed technology, new customer support offerings, royalty rates for licensed technology embedded in our products and employee stock-based compensation expense.

Marketing and sales expenses include salaries, bonuses, benefits and stock-based compensation expense for our marketing and sales employees, the expense of travel, entertainment and training for such personnel, the costs of programs aimed at increasing revenue, such as advertising, trade shows and expositions, and various sales and promotional programs. Marketing and sales expenses also include labor costs associated with sales and order management, sales and dealer commissions, payment processing fees, the cost of supplies and equipment, gains and losses on our operating expense cash flow hedges, and allocated IT and facilities costs.

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, professional services such as fees paid to software development firms and independent contractors, gains and losses on our operating expense cash flow hedges, and allocated IT and facilities costs.

General and administrative expenses include salaries, bonuses, transition costs, benefits and stock-based compensation expense for our CEO, finance, human resources and legal employees, as well as professional fees for legal and accounting services, certain foreign business taxes, gains and losses on our operating expense cash flow hedges, expense of travel, entertainment and training, net IT and facilities costs, and the cost of supplies and equipment.


38



 
Three Months Ended
 
Change compared to
prior fiscal year
 
Three Months Ended
 
Management comments
(in millions)
April 30, 2018
$    
 
%    
 
April 30, 2017
 
Cost of revenue:
 
 
 
 
 
 
 
 
 
Maintenance and subscription
$
50.4

 
$
(4.5
)
 
(8
)%
 
$
54.9

 
Down primarily due to a decrease in employee-related costs driven by decreased headcount associated with the Fiscal 2018 Plan restructuring.
Other (1)
12.8

 
(5.8
)
 
(31
)%
 
18.6

 
Down primarily due to a decrease in employee-related costs driven by decreased headcount associated with the Fiscal 2018 Plan restructuring.
Amortization of developed technology
3.6

 
(1.1
)
 
(23
)%
 
4.7

 
Down as previously acquired developed technologies continue to become fully amortized while fewer assets are acquired compared to the prior year.
Total cost of revenue
$
66.8

 
$
(11.4
)
 
(15
)%
 
$
78.2

 
 
 
 
 


 


 
 
 
 
Operating expenses:
 
 


 


 
 
 
 
Marketing and sales
$
276.4

 
$
20.7

 
8
 %
 
$
255.7

 
Up due to increased commissions expense, as a result of our adoption of ASC Topic 340-40, and increased employee-related costs from higher headcount.
Research and development
172.8

 
(14.9
)
 
(8
)%
 
187.7

 
Down primarily due to a decrease in employee-related costs driven by decreased headcount associated with the Fiscal 2018 Plan restructuring.
General and administrative
72.9

 
(5.4
)
 
(7
)%
 
78.3

 
Down due to a decrease in stock-based compensation expense driven by awards that were accelerated as part of the CEO transition during the first quarter of the prior year.
Amortization of purchased intangibles
3.8

 
(1.9
)
 
(33
)%
 
5.7

 
Down as previously acquired intangible assets continue to become fully amortized and fewer assets are acquired compared to the prior year.
Restructuring and other facility exit costs, net (2)
22.5

 
22.8

 
*

 
(0.3
)
 
Driven by the Fiscal 2018 Plan to re-balance resources to better align with the Company's strategic priorities and position itself to meet long-term goals. Costs associated with the Fiscal 2018 Plan are principally from employee termination benefits, lease termination costs and other exit costs.
Total operating expenses
$
548.4

 
$
21.3

 
4
 %
 
$
527.1

 
 
____________________
(1)
Previously labeled as "License and other" in prior periods.
(2)
See Note 13, "Restructuring charges and other facility exit costs, net" in the Notes to Condensed Consolidated Financial Statements for additional information.
* Percentage is not meaningful.

The following table highlights our expectation for the absolute dollar change and percent of revenue change between the second quarter of fiscal 2019, as compared to the second quarter of fiscal 2018:

 
Absolute dollar impact
 
Percent of net revenue impact
Cost of Revenue
Decrease
 
Decrease
Marketing and sales
Increase
 
Decrease
Research and development
Decrease
 
Decrease
General and administrative
Slight Decrease
 
Decrease
Amortization of purchased intangibles
Decrease
 
Relatively Flat


39



Interest and Other Expense, Net

The following table sets forth the components of interest and other expense, net:
 
 
Three Months Ended April 30,
(in millions)
2018
 
2017
Interest and investment expense, net
$
(13.2
)
 
$
(6.9
)
Gain (loss) on foreign currency
2.1

 
(1.0
)
Gain on strategic investments and dispositions
2.7

 
5.7

Other (expense) income
(0.1
)
 
0.4

Interest and other expense, net
$
(8.5
)
 
$
(1.8
)

Interest and other expense, net increased $6.7 million during the three months ended April 30, 2018, as compared to the same period in the prior fiscal year, primarily driven by mark to market losses on deferred compensation plans and increased interest expense resulting from our June 2017 issuance of $500.0 million aggregate principal amount of 3.5% notes due June 15, 2027.

Interest expense and investment income fluctuates based on average cash, marketable securities and debt balances, average maturities and interest rates.

Gains and losses on foreign currency are primarily due to the impact of re-measuring foreign currency transactions and net monetary assets into the functional currency of the corresponding entity. The amount of the gain or loss on foreign currency is driven by the volume of foreign currency transactions and the foreign currency exchange rates for the period.

Provision for Income Taxes

We account for income taxes and the related accounts under the liability method. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted rates expected to be in effect during the year in which the basis differences reverse.

Autodesk had an income tax expense of $18.6 million, relative to pre-tax losses of $63.8 million for the three months ended April 30, 2018, and an income tax expense of $8.2 million, relative to pre-tax losses of $121.4 million for the three months ended April 30, 2017. Income tax expense increased primarily due to the mix of increased worldwide earnings, foreign taxes, and withholding taxes. The variance between April 30, 2017, and April 30, 2018, was mainly due to reversal of foreign withholding tax accruals in April 30, 2017.

A valuation allowance is recorded to reduce deferred tax assets when management cannot conclude that it is more likely than not that the net deferred tax asset will be recovered. The valuation allowance is determined by assessing both positive and negative evidence to determine whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction-by-jurisdiction basis. Significant judgment is required in determining whether the valuation allowance should be recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence including past operating results and estimates of future taxable income. Beginning in the second quarter of fiscal 2016, we considered recent cumulative losses in the United States arising from the Company's business model transition as a significant source of negative evidence. Considering this negative evidence and the absence of sufficient positive objective evidence that we would generate sufficient taxable income in our United States tax jurisdiction to realize the deferred tax assets, we determined that it was not more likely than not that the Company would realize the U.S. federal and state deferred tax assets and recorded a full valuation allowance. As we continually strive to optimize our overall business model, tax planning strategies may become feasible whereby management may determine that it is more likely than not that the federal and state deferred tax assets will be realized; as a result, we will continue to evaluate the realizability of our net deferred tax assets each quarter, both in the U.S. and in foreign jurisdictions, based on all available evidence, both positive and negative.

As of April 30, 2018, we had $341.3 million of gross unrecognized tax benefits, of which $307.9 million represents the amount of unrecognized tax benefits that would reduce our valuation allowance, if recognized. The remaining $33.4 million would impact the effective tax rate. It is possible that the amount of unrecognized tax benefits will change in the next twelve months; however, an estimate of the range of the possible change cannot be made at this time.


40



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 APAC 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. 

The Internal Revenue Service is examining the Company's U.S. consolidated federal income tax returns for fiscal years 2014 and 2015.  While it is possible that the Company's tax positions may be challenged, the Company believes its positions are consistent with the tax law, and the balance sheet reflects appropriate liabilities for uncertain federal tax positions for the years being examined.

The Tax Act was enacted on December 22, 2017, and provides broad and significant changes to the U.S. tax code and how the U.S. imposes income tax on multinational corporations. The Tax Act requires complex computations to be performed that were not previously provided for in the U.S. tax law. These computations require significant judgments to be made regarding the interpretation of the provisions within the Tax Act, along with preparation and analysis of information not previously required. In conjunction with the Tax Act, the SEC issued SAB 118 that allows us to record provisional amounts until a final assessment can be made within a period not to exceed one year from the date of enactment, which would be during our quarter ending October 31, 2018.

We have not completed our determination of the accounting implications of the Tax Act on our results of operation. There have been no material changes to the Tax Act since January 31, 2018. As additional regulatory guidance is issued and we continue to collect and analyze necessary data, we may make adjustments to provisional amounts previously recorded. We do not anticipate these adjustments to materially impact our provision for income taxes in the period in which the adjustments are made since we are in a full valuation allowance in the U.S.


41



Other Financial Information

In addition to our results determined under GAAP discussed above, we believe the following non-GAAP measures are useful to investors in evaluating our operating performance. For the three months ended April 30, 2018 and 2017, our gross profit, gross margin, income (loss) from operations, operating margin, net income (loss), diluted net income (loss) per share and diluted shares used in per share calculation on a GAAP and non-GAAP basis were as follows (in millions except for gross margin, operating margin, and per share data):

 
Three Months Ended April 30,
 
2018
 
2017
 
(Unaudited)
Gross profit
$
493.1

 
$
407.5

Non-GAAP gross profit
$
500.2

 
$
416.1

Gross margin
88
 %
 
84
 %
Non-GAAP gross margin
89
 %
 
86
 %
Loss from operations
$
(55.3
)
 
$
(119.6
)
Non-GAAP income (loss) from operations
$
29.0

 
$
(39.5
)
Operating margin
(10
)%
 
(25
)%
Non-GAAP operating margin
5
 %
 
(8
)%
Net loss
$
(82.4
)
 
$
(129.6
)
Non-GAAP net income (loss)
$
14.4

 
$
(34.8
)
GAAP diluted net loss per share (1)
$
(0.38
)
 
$
(0.59
)
Non-GAAP diluted net income (loss) per share (1)
$
0.06

 
$
(0.16
)
GAAP diluted shares used in per share calculation
218.6

 
219.9

Non-GAAP diluted weighted average shares used in per share calculation
221.6

 
219.9

_______________
(1)
Net income (loss) per share was computed independently for each of the periods presented; therefore the sum of the net loss per share amount for the quarters may not equal the total for the year.

For our internal budgeting and resource allocation process and as a means to evaluate period-to-period comparisons, we use non-GAAP measures to supplement our condensed consolidated financial statements presented on a GAAP basis. These non-GAAP measures do not include certain items that may have a material impact upon our reported financial results. We also use non-GAAP measures in making operating decisions because we believe those measures provide meaningful supplemental information regarding our earning potential and performance for management by excluding certain expenses and charges that may not be indicative of our core business operating results. For the reasons set forth below, we believe these non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business. This allows investors and others to better understand and evaluate our operating results and future prospects in the same manner as management, compare financial results across accounting periods and to those of peer companies and to better understand the long-term performance of our core business. We also use some of these measures for purposes of determining company-wide incentive compensation.

There are limitations in using non-GAAP financial measures because non-GAAP financial measures are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. The non-GAAP financial measures included above are limited in value because they exclude certain items that may have a material impact upon our reported financial results. In addition, they are subject to inherent limitations as they reflect the exercise of judgments by management about which charges are excluded from the non-GAAP financial measures. We compensate for these limitations by analyzing current and future results on a GAAP basis as well as a non-GAAP basis and also by providing GAAP measures in our public disclosures. The presentation of non-GAAP financial information is meant to be considered in addition to, not as a substitute for or in isolation from, the directly comparable financial measures prepared in accordance with GAAP. We urge investors to review the reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures included below, and not to rely on any single financial measure to evaluate our business.


42



Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures

(In millions except for gross margin, operating margin, and per share data): 

 
Three Months Ended April 30,
 
2018
 
2017
 
(Unaudited)
Gross profit
$
493.1

 
$
407.5

Stock-based compensation expense
3.5

 
3.9

Amortization of developed technologies
3.6

 
4.7

Non-GAAP gross profit
$
500.2

 
$
416.1

Gross margin
88
 %
 
84
 %
Stock-based compensation expense
1
 %
 
1
 %
Amortization of developed technologies
1
 %
 
1
 %
Non-GAAP gross margin (2)
89
 %
 
86
 %
Loss from operations
$
(55.3
)
 
$
(119.6
)
Stock-based compensation expense
54.4

 
59.0

Amortization of developed technologies
3.6

 
4.7

Amortization of purchased intangibles
3.8

 
5.7

CEO transition costs (1)

 
11.0

Restructuring and other facility exit costs, net
22.5

 
(0.3
)
Non-GAAP income (loss) from operations
$
29.0

 
$
(39.5
)
Operating margin
(10
)%
 
(25
)%
Stock-based compensation expense
10
 %
 
12
 %
Amortization of developed technologies
1
 %
 
1
 %
Amortization of purchased intangibles
1
 %
 
1
 %
CEO transition costs (1)
 %
 
2
 %
Restructuring and other facility exit costs, net
4
 %
 
 %
Non-GAAP operating margin (2)
5
 %
 
(8
)%
Net loss
$
(82.4
)
 
$
(129.6
)
Stock-based compensation expense
54.4

 
59.0

Amortization of developed technologies
3.6

 
4.7

Amortization of purchased intangibles
3.8

 
5.7

CEO transition costs (1)

 
11.0

Restructuring and other facility exit costs, net
22.5

 
(0.3
)
Gain on strategic investments and dispositions
(2.7
)
 
(5.7
)
Discrete tax items

 
(7.6
)
Income tax effect of non-GAAP adjustments
15.2

 
28.0

Non-GAAP net income (loss)
$
14.4

 
$
(34.8
)


43



 
Three Months Ended April 30,
 
2018
 
2017
 
(Unaudited)
GAAP diluted net loss per share (3)
$
(0.38
)
 
$
(0.59
)
Stock-based compensation expense
0.25

 
0.27

Amortization of developed technologies
0.02

 
0.02

Amortization of purchased intangibles
0.02

 
0.03

CEO transition costs (1)

 
0.04

Restructuring and other facility exit costs, net
0.09

 

Gain on strategic investments and dispositions
(0.01
)
 
(0.03
)
Discrete tax items

 
(0.03
)
Income tax effect of non-GAAP adjustments
0.07

 
0.13

Non-GAAP diluted net income (loss) per share (3)
$
0.06

 
$
(0.16
)
____________________ 
(1)
CEO transition costs include stock-based compensation of $7.8 million related to the acceleration of eligible stock awards in the three months ended April 30, 2017.
(2)
Totals may not sum due to rounding.
(3)
Net income (loss) per share was computed independently for each of the periods presented; therefore the sum of the net loss per share amount for the quarters may not equal the total for the year.

Our non-GAAP financial measures may exclude the following:

Stock-based compensation expenses.  We exclude stock-based compensation expenses from non-GAAP measures primarily because they are non-cash expenses and management finds it useful to exclude certain non-cash charges to assess the appropriate level of various operating expenses to assist in budgeting, planning and forecasting future periods. Moreover, because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use under FASB ASC Topic 718, we believe excluding stock-based compensation expenses allows investors to make meaningful comparisons between our recurring core business operating results and those of other companies.

Amortization of developed technologies and purchased intangibles.  We incur amortization of acquisition-related developed technology and purchased intangibles in connection with acquisitions of certain businesses and technologies. Amortization of developed technologies and purchased intangibles is inconsistent in amount and frequency and is significantly affected by the timing and size of our acquisitions. Management finds it useful to exclude these variable charges from our cost of revenues to assist in budgeting, planning and forecasting future periods. Investors should note that the use of intangible assets contributed to our revenues earned during the periods presented and will contribute to our future period revenues as well. Amortization of developed technologies and purchased intangible assets will recur in future periods.

CEO transition costs. We exclude amounts paid to the Company's former CEOs upon departure under the terms of their transition agreements, including severance payments, acceleration of restricted stock units, and continued vesting of performance stock units, and legal fees incurred with the transition. Also excluded from our non-GAAP measures are recruiting costs related to the search for a new CEO. These costs represent non-recurring expenses and are not indicative of our ongoing operating expenses. We further believe that excluding the CEO transition costs from our non-GAAP results is useful to investors in that it allows for period-over-period comparability.

Goodwill impairment.  This is a non-cash charge to write-down goodwill to fair value when there was an indication that the asset was impaired. As explained above, management finds it useful to exclude certain non-cash charges to assess the appropriate level of various operating expenses to assist in budgeting, planning and forecasting future periods.

Restructuring and other facility exit costs, net.  These expenses are associated with realigning our business strategies based on current economic conditions. In connection with these restructuring actions or other exit actions, we recognize costs related to termination benefits for former employees whose positions were eliminated, the closure of facilities and cancellation of certain contracts. We exclude these charges because these expenses are not reflective of ongoing business and operating results. We believe it is useful for investors to understand the effects of these items on our total operating expenses.

Loss (gain) on strategic investments and dispositions. We exclude gains and losses related to our strategic investments and dispositions from our non-GAAP measures primarily because management finds it useful to exclude these variable gains

44



and losses on these investments and dispositions in assessing our financial results. Included in these amounts are non-cash unrealized gains and losses on the derivative components, realized gains and losses on the sales or losses on the impairment of these investments and dispositions. We believe excluding these items is useful to investors because these excluded items do not correlate to the underlying performance of our business and these losses or gains were incurred in connection with strategic investments and dispositions which do not occur regularly.

Discrete tax items. We exclude the GAAP tax provision, including discrete items, from the non-GAAP measure of net (loss) income, and include a non-GAAP tax provision based upon the projected annual non-GAAP effective tax rate. Discrete tax items include income tax expenses or benefits that do not relate to ordinary income from continuing operations in the current fiscal year, unusual or infrequently occurring items, or the tax impact of certain stock-based compensation. Examples of discrete tax items include, but are not limited to, certain changes in judgment and changes in estimates of tax matters related to prior fiscal years, certain costs related to business combinations, certain changes in the realizability of deferred tax assets or changes in tax law. Management believes this approach assists investors in understanding the tax provision and the effective tax rate related to ongoing operations. We believe the exclusion of these discrete tax items provides investors with useful supplemental information about our operational performance.

Establishment of a valuation allowance on certain net deferred tax assets.  This is a non-cash charge to record a valuation allowance on certain deferred tax assets. As explained above, management finds it useful to exclude certain non-cash charges to assess the appropriate level of various cash expenses to assist in budgeting, planning and forecasting future periods.

Income tax effects on the difference between GAAP and non-GAAP costs and expenses. The income tax effects that are excluded from the non-GAAP measures relate to the tax impact on the difference between GAAP and non-GAAP expenses, primarily due to stock-based compensation, amortization of purchased intangibles and restructuring charges and other facilities exit costs (benefits) for GAAP and non-GAAP measures.

Liquidity and Capital Resources

Our primary source of cash is from the sale of our software and related services. Our primary use of cash is payment of our operating costs, which consist primarily of employee-related expenses, such as compensation and benefits, as well as general operating expenses for marketing, facilities and overhead costs. In addition to operating expenses, we also use cash to fund our stock repurchase program and invest in our growth initiatives, which include acquisitions of products, technology and businesses. See further discussion of these items below.

At April 30, 2018, our principal sources of liquidity were cash, cash equivalents and marketable securities totaling $1.5 billion and net accounts receivable of $206.7 million.

As of April 30, 2018, we have $1.6 billion aggregate principal amount of Notes outstanding (see Note 12, "Borrowing Arrangements," in the Notes to Condensed Consolidated Financial Statements for further discussion). In addition, we have a line of credit facility that permits unsecured short-term borrowings of up to $400.0 million with a May 2020 maturity date, with an option to request an increase in the amount of the credit facility by up to an additional $100.0 million. This credit agreement contains customary covenants that could restrict the imposition of liens on our assets, and restrict the Company’s ability to incur additional indebtedness or make dispositions of assets if we fail to maintain the financial covenants. The financial covenants consist of a maximum debt to total cash ratio, a fixed charge coverage ratio through April 30, 2018, and after April 30, 2018, a minimum interest coverage ratio. As of June 8, 2018, we have no amounts outstanding under the credit facility. If we are unable to remain in compliance with the covenants, we will not be able to draw on our credit facility. Borrowings under the credit facility and the net proceeds from the offering of the 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 Citigroup and its global affiliates. In addition, Citibank N.A., an affiliate of Citigroup, is one of the lead lenders and agent in the syndicate of our $400.0 million line of credit.

Long-term cash requirements for items other than normal operating expenses are anticipated for the following: repayment of debt; common stock repurchases; the acquisition of businesses, software products, or technologies complementary to our business; and capital expenditures, including the purchase and implementation of internal-use software applications.

In connection with the company’s closure of certain offices and reduction of workforces worldwide, the co