Autodesk, Inc. - Quarter Report: 2020 October (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2020
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Common Stock, par value $0.01 per share | ADSK | The Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ 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 | ☒ | 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 ☒
As of November 30, 2020, registrant had outstanding 219,889,403 shares of common stock.
AUTODESK, INC. FORM 10-Q
TABLE OF CONTENTS
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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 October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Net revenue: | |||||||||||||||||||||||
Subscription | $ | 884.4 | $ | 715.0 | $ | 2,528.6 | $ | 1,974.5 | |||||||||||||||
Maintenance | 39.8 | 91.2 | 153.1 | 306.7 | |||||||||||||||||||
Total subscription and maintenance revenue | 924.2 | 806.2 | 2,681.7 | 2,281.2 | |||||||||||||||||||
Other | 28.2 | 36.5 | 69.5 | 93.8 | |||||||||||||||||||
Total net revenue | 952.4 | 842.7 | 2,751.2 | 2,375.0 | |||||||||||||||||||
Cost of revenue: | |||||||||||||||||||||||
Cost of subscription and maintenance revenue | 60.7 | 54.2 | 176.6 | 166.9 | |||||||||||||||||||
Cost of other revenue | 15.4 | 16.9 | 47.5 | 48.6 | |||||||||||||||||||
Amortization of developed technology | 7.6 | 8.4 | 22.4 | 26.2 | |||||||||||||||||||
Total cost of revenue | 83.7 | 79.5 | 246.5 | 241.7 | |||||||||||||||||||
Gross profit | 868.7 | 763.2 | 2,504.7 | 2,133.3 | |||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||
Marketing and sales | 359.3 | 330.7 | 1,051.5 | 960.8 | |||||||||||||||||||
Research and development | 233.0 | 213.0 | 682.9 | 634.0 | |||||||||||||||||||
General and administrative | 98.8 | 99.1 | 296.8 | 299.6 | |||||||||||||||||||
Amortization of purchased intangibles | 9.6 | 9.7 | 28.8 | 29.2 | |||||||||||||||||||
Restructuring and other exit costs, net | — | 0.1 | — | 0.5 | |||||||||||||||||||
Total operating expenses | 700.7 | 652.6 | 2,060.0 | 1,924.1 | |||||||||||||||||||
Income from operations | 168.0 | 110.6 | 444.7 | 209.2 | |||||||||||||||||||
Interest and other expense, net | (11.9) | (14.2) | (69.1) | (37.7) | |||||||||||||||||||
Income before income taxes | 156.1 | 96.4 | 375.6 | 171.5 | |||||||||||||||||||
Provision for income taxes | (23.9) | (29.7) | (78.7) | (88.8) | |||||||||||||||||||
Net income | $ | 132.2 | $ | 66.7 | $ | 296.9 | $ | 82.7 | |||||||||||||||
Basic net income per share | $ | 0.60 | $ | 0.30 | $ | 1.35 | $ | 0.38 | |||||||||||||||
Diluted net income per share | $ | 0.59 | $ | 0.30 | $ | 1.34 | $ | 0.37 | |||||||||||||||
Weighted average shares used in computing basic net income per share | 219.6 | 219.7 | 219.4 | 219.6 | |||||||||||||||||||
Weighted average shares used in computing diluted net income per share | 222.3 | 221.9 | 222.1 | 222.1 |
See accompanying Notes to Condensed Consolidated Financial Statements.
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AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Net income | $ | 132.2 | $ | 66.7 | $ | 296.9 | $ | 82.7 | |||||||||||||||
Other comprehensive (loss) income, net of reclassifications: | |||||||||||||||||||||||
Net loss on derivative instruments (net of tax effect of ($0.4), $0.4, $1.5 and ($1.6), respectively) | 3.9 | (3.3) | (11.6) | (4.3) | |||||||||||||||||||
Change in net unrealized gain (loss) on available-for-sale debt securities (net of tax effect of zero, ($0.1), $0.1 and ($0.4), respectively) | 0.6 | 0.5 | 1.9 | 1.4 | |||||||||||||||||||
Change in defined benefit pension items (net of tax effect of zero, $0.3, zero and $0.8, respectively) | 0.3 | (0.1) | — | (2.5) | |||||||||||||||||||
Net change in cumulative foreign currency translation gain (loss) (net of tax effect of $0.1, $0.1, ($0.3) and $0.1, respectively) | (6.7) | 17.3 | 13.6 | (15.9) | |||||||||||||||||||
Total other comprehensive (loss) income | (1.9) | 14.4 | 3.9 | (21.3) | |||||||||||||||||||
Total comprehensive income | $ | 130.3 | $ | 81.1 | $ | 300.8 | $ | 61.4 |
See accompanying Notes to Condensed Consolidated Financial Statements.
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AUTODESK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
(Unaudited)
October 31, 2020 | January 31, 2020 | ||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 1,537.0 | $ | 1,774.7 | |||||||
Marketable securities | 78.5 | 69.0 | |||||||||
Accounts receivable, net | 540.4 | 652.3 | |||||||||
Prepaid expenses and other current assets | 183.9 | 163.3 | |||||||||
Total current assets | 2,339.8 | 2,659.3 | |||||||||
Computer equipment, software, furniture and leasehold improvements, net | 191.5 | 161.7 | |||||||||
Operating lease right-of-use assets | 426.4 | 438.8 | |||||||||
Developed technologies, net | 65.4 | 70.9 | |||||||||
Goodwill | 2,484.2 | 2,445.0 | |||||||||
Deferred income taxes, net | 44.3 | 56.4 | |||||||||
Long-term other assets | 392.9 | 347.2 | |||||||||
Total assets | $ | 5,944.5 | $ | 6,179.3 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 121.3 | $ | 83.7 | |||||||
Accrued compensation | 272.4 | 272.1 | |||||||||
Accrued income taxes | 43.2 | 21.2 | |||||||||
Deferred revenue | 2,161.5 | 2,176.1 | |||||||||
Operating lease liabilities | 64.1 | 48.1 | |||||||||
Current portion of long-term notes payable, net | — | 449.7 | |||||||||
Other accrued liabilities | 149.1 | 168.3 | |||||||||
Total current liabilities | 2,811.6 | 3,219.2 | |||||||||
Long-term deferred revenue | 771.3 | 831.0 | |||||||||
Long-term operating lease liabilities | 398.2 | 411.7 | |||||||||
Long-term income taxes payable | 20.4 | 19.1 | |||||||||
Long-term deferred income taxes | 85.1 | 82.5 | |||||||||
Long-term notes payable, net | 1,636.6 | 1,635.1 | |||||||||
Long-term other liabilities | 152.0 | 119.8 | |||||||||
Stockholders’ equity (deficit): | |||||||||||
Common stock and additional paid-in capital | 2,507.1 | 2,317.0 | |||||||||
Accumulated other comprehensive loss | (156.4) | (160.3) | |||||||||
Accumulated deficit | (2,281.4) | (2,295.8) | |||||||||
Total stockholders’ equity (deficit) | 69.3 | (139.1) | |||||||||
Total liabilities and stockholders' equity (deficit) | $ | 5,944.5 | $ | 6,179.3 |
See accompanying Notes to Condensed Consolidated Financial Statements.
6
AUTODESK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended October 31, | |||||||||||
2020 | 2019 | ||||||||||
Operating activities: | |||||||||||
Net income | $ | 296.9 | $ | 82.7 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation, amortization and accretion | 92.2 | 96.4 | |||||||||
Stock-based compensation expense | 291.5 | 257.4 | |||||||||
Deferred income taxes | 13.0 | 47.9 | |||||||||
Restructuring and other exit costs, net | — | 0.5 | |||||||||
Other | 48.6 | 10.8 | |||||||||
Changes in operating assets and liabilities | |||||||||||
Accounts receivable | 112.8 | (47.2) | |||||||||
Prepaid expenses and other assets | (61.6) | 37.6 | |||||||||
Accounts payable and other liabilities | 42.3 | (94.2) | |||||||||
Deferred revenue | (78.3) | 328.8 | |||||||||
Accrued income taxes | 22.2 | (3.8) | |||||||||
Net cash provided by operating activities | 779.6 | 716.9 | |||||||||
Investing activities: | |||||||||||
Purchases of marketable securities | (21.0) | (19.9) | |||||||||
Sales of marketable securities | — | 22.4 | |||||||||
Maturities of marketable securities | 17.0 | 5.0 | |||||||||
Capital expenditures | (67.6) | (39.2) | |||||||||
Purchases of developed technologies | (4.8) | — | |||||||||
Acquisitions, net of cash acquired | (44.8) | — | |||||||||
Other investing activities | (55.5) | (11.0) | |||||||||
Net cash used in investing activities | (176.7) | (42.7) | |||||||||
Financing activities: | |||||||||||
Proceeds from issuance of common stock, net of issuance costs | 112.9 | 91.8 | |||||||||
Taxes paid related to net share settlement of equity awards | (105.0) | (79.9) | |||||||||
Repurchases of common stock | (399.4) | (261.9) | |||||||||
Repayment of debt | (450.0) | (350.0) | |||||||||
Other financing activities | (2.5) | — | |||||||||
Net cash used in financing activities | (844.0) | (600.0) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | 3.4 | (4.0) | |||||||||
Net (decrease) increase in cash and cash equivalents | (237.7) | 70.2 | |||||||||
Cash and cash equivalents at beginning of period | 1,774.7 | 886.0 | |||||||||
Cash and cash equivalents at end of period | $ | 1,537.0 | $ | 956.2 | |||||||
Supplemental cash flow disclosure: | |||||||||||
Non-cash financing activities: | |||||||||||
Fair value of common stock issued to settle liability-classified restricted stock units | $ | 28.7 | $ | — | |||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
7
AUTODESK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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 October 31, 2020, and for the three and nine months ended October 31, 2020 and 2019, 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 March 2020, the World Health Organization declared the outbreak of a disease caused by a novel strain of the coronavirus (COVID-19) to be a pandemic. This pandemic has created and may continue to create significant uncertainty in the macroeconomic environment which, in addition to other unforeseen effects of this pandemic, may adversely impact our results of operations. As the COVID-19 pandemic continues to develop, many of our estimates could require increased judgment and carry a higher degree of variability and volatility. As events continue to evolve our estimates may change materially in future periods. In addition, the results of operations for the three and nine months ended October 31, 2020, are not necessarily indicative of the results for the entire fiscal year ending January 31, 2021, or for any other period. Further, the balance sheet as of January 31, 2020, has been derived from the audited Consolidated 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, 2020. 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, 2020, filed on March 19, 2020.
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 nine months ended October 31, 2020, that are applicable to the Company.
Accounting standards adopted
In June 2016, FASB issued ASU No. 2016-13 regarding ASC Topic 326, “Financial Instruments - Credit Losses,” which requires the measurement and recognition of expected credit losses for certain financial instruments using forward-looking information to calculate credit loss estimates. Autodesk adopted ASU 2016-13 as of the effective date which represents Autodesk’s fiscal year beginning February 1, 2020. The ASU did not have a material impact on Autodesk's consolidated financial statements at adoption.
Adoption and policy elections
Allowances for uncollectible trade receivables and contract assets are subject to impairment using the expected credit loss model. Allowances for expected credit losses are measured based upon the lifetime expected credit loss which is based on historical experience, the number of days that billings are past due, reasonable economic forecast, including revised forecast data for the current economic environment, customer payment behavior, credit reports and other customer specific information. Allowances for credit losses on trade receivables and contract assets were not material as of October 31, 2020.
Autodesk’s investments in available-for-sale debt securities are subject to a periodic impairment review. If Autodesk does not intend to sell and it is more likely than not that Autodesk will not be required to sell the available-for-sale debt security prior to recovery of its amortized cost basis, Autodesk will determine whether a decline in fair value below the amortized cost basis is due to credit-related factors. The credit loss is measured as the amount by which the debt security’s amortized cost basis exceeds the estimate of the present value of cash flows expected to be collected, up to the difference between the amortized cost basis and the fair value. Impairment will be assessed at the individual security level. Credit-related impairment is recognized as an allowance on the Condensed Consolidated Balance Sheets with a corresponding adjustment to “Interest and other
8
expense, net” on the Company's Condensed Consolidated Statements of Operations. Any impairment that is not credit-related is recognized in “Accumulated other comprehensive loss” on the Condensed Consolidated Balance Sheets.
Autodesk does not measure an allowance for credit losses on accrued interest receivables on available-for-sale debt securities separately. Autodesk writes off accrued interest receivables by reversing interest income in the period deemed uncollectible in “Interest and other expense, net” on the Company's Condensed Consolidated Statements of Operations. Any accrued interest receivable on available-for-sale debt securities is recorded in “Cash and cash equivalents”, “Prepaid expenses and other current assets,” or “Long-term other assets,” in the accompanying Condensed Consolidated Balance Sheets, as applicable.
Recently issued accounting standards not yet adopted
In March 2020, FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU No. 2020-04"), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. Autodesk will apply the expedients in ASU No. 2020-04 through December 31, 2022. Autodesk does not believe ASU No. 2020-04 will have a material impact on its consolidated financial statements.
3. Revenue Recognition
Revenue Disaggregation
Autodesk recognizes revenue from the sale of (1) product subscriptions, cloud service offerings, and enterprise business agreements (“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 Condensed Consolidated Statements of Operations.
9
Information regarding the components of Autodesk's net revenue from contracts with customers by product family, geographic location, sales channel, and product type is as follows:
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Net revenue by product family: | |||||||||||||||||||||||
Architecture, Engineering and Construction | $ | 419.4 | $ | 358.0 | $ | 1,199.1 | $ | 996.5 | |||||||||||||||
AutoCAD and AutoCAD LT | 278.8 | 245.4 | 812.9 | 689.9 | |||||||||||||||||||
Manufacturing | 194.1 | 182.2 | 562.5 | 524.3 | |||||||||||||||||||
Media and Entertainment | 54.0 | 50.6 | 159.9 | 146.9 | |||||||||||||||||||
Other | 6.1 | 6.5 | 16.8 | 17.4 | |||||||||||||||||||
Total net revenue | $ | 952.4 | $ | 842.7 | $ | 2,751.2 | $ | 2,375.0 | |||||||||||||||
Net revenue by geographic area: | |||||||||||||||||||||||
Americas | |||||||||||||||||||||||
U.S. | $ | 328.5 | $ | 287.3 | $ | 938.6 | $ | 804.3 | |||||||||||||||
Other Americas | 64.4 | 62.0 | 188.0 | 166.7 | |||||||||||||||||||
Total Americas | 392.9 | 349.3 | 1,126.6 | 971.0 | |||||||||||||||||||
Europe, Middle East and Africa | 364.3 | 329.6 | 1,063.8 | 943.0 | |||||||||||||||||||
Asia Pacific | 195.2 | 163.8 | 560.8 | 461.0 | |||||||||||||||||||
Total net revenue | $ | 952.4 | $ | 842.7 | $ | 2,751.2 | $ | 2,375.0 | |||||||||||||||
Net revenue by sales channel: | |||||||||||||||||||||||
Indirect | $ | 656.2 | $ | 586.6 | $ | 1,918.9 | $ | 1,663.2 | |||||||||||||||
Direct | 296.2 | 256.1 | 832.3 | 711.8 | |||||||||||||||||||
Total net revenue | $ | 952.4 | $ | 842.7 | $ | 2,751.2 | $ | 2,375.0 | |||||||||||||||
Net revenue by product type: | |||||||||||||||||||||||
Design | $ | 847.7 | $ | 748.3 | $ | 2,466.8 | $ | 2,126.4 | |||||||||||||||
Make | 76.5 | 57.9 | 214.9 | 154.8 | |||||||||||||||||||
Other | 28.2 | 36.5 | 69.5 | 93.8 | |||||||||||||||||||
Total net revenue | $ | 952.4 | $ | 842.7 | $ | 2,751.2 | $ | 2,375.0 | |||||||||||||||
Payments for product subscriptions, industry collections, cloud subscriptions, and maintenance subscriptions are typically due up front with payment terms of 30 to 45 days. As a result of the COVID-19 pandemic, we extended contract payment terms to 60 days through August 7, 2020, for all customers and partners for new orders and renewals placed directly with Autodesk. Payments on EBAs are typically due in annual installments over the contract term, with payment terms of 30 to 60 days. Autodesk does not have any material variable consideration, such as obligations for returns, refunds, warranties, or amounts due to customers for which significant estimation or judgment is required as of the reporting date.
Remaining performance obligations consist of total short-term, long-term, and unbilled deferred revenue. As of October 31, 2020, Autodesk had remaining performance obligations of $3.58 billion, which represents the total contract price allocated to remaining performance obligations, which are generally recognized over the next three years. We expect to recognize $2.38 billion or 67% of our remaining performance obligations as revenue during the next 12 months. We expect to recognize the remaining $1.20 billion or 33% of our remaining performance obligations as revenue thereafter.
The amount of remaining performance obligations may be impacted by the specific timing, duration, and size of customer subscription and support agreements, varying billing cycles of such agreements, the specific timing of customer renewals, and foreign currency fluctuations.
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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 October 31, 2020. Deferred revenue relates to billings 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 October 31, 2020 and 2019, that was included in the deferred revenue balances at January 31, 2020 and 2019, was $481.9 million and $398.5 million, respectively. Revenue recognized during the nine months ended October 31, 2020 and 2019, that was included in the deferred revenue balances at January 31, 2020 and 2019, was $1.91 billion and $1.58 billion, respectively. The satisfaction of performance obligations typically lags behind payments received under revenue contracts from customers.
4. Concentration of Credit Risk
Autodesk places its cash, cash equivalents, and marketable securities in highly liquid instruments with, and in the custody of, multiple 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 $650.0 million line of credit facility. See Note 14, “Borrowing Arrangements,” in the Notes to Condensed Consolidated Financial Statements for further discussion.
Total sales to the Company's largest distributor Tech Data Corporation and its global affiliates (“Tech Data”) accounted for 37% and 35% of Autodesk’s total net revenue for both the three and nine months ended October 31, 2020 and 2019, 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 22% and 31% of trade accounts receivable at October 31, 2020, and January 31, 2020, respectively. Ingram Micro Inc. ("Ingram Micro") accounted for 10% of Autodesk's total net revenue during both the three and nine months ended October 31, 2020 and 2019. No other customer accounted for more than 10% of Autodesk's total net revenue or trade accounts receivable for each of the respective periods.
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 October 31, 2020, and January 31, 2020:
October 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
(in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||
Cash equivalents (1): | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial paper | $ | 34.0 | $ | — | $ | — | $ | 34.0 | $ | — | $ | 34.0 | $ | — | |||||||||||||||||||||||||||||||||
Money market funds | 817.8 | — | — | 817.8 | 817.8 | — | — | ||||||||||||||||||||||||||||||||||||||||
Other (2) | 6.5 | — | — | 6.5 | 4.0 | 2.5 | — | ||||||||||||||||||||||||||||||||||||||||
Marketable securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Short-term available for sale | |||||||||||||||||||||||||||||||||||||||||||||||
Other (3) | 4.0 | — | — | 4.0 | — | 4.0 | — | ||||||||||||||||||||||||||||||||||||||||
Short-term trading securities | |||||||||||||||||||||||||||||||||||||||||||||||
Mutual funds (4) | 64.1 | 10.8 | (0.4) | 74.5 | 74.5 | — | — | ||||||||||||||||||||||||||||||||||||||||
Strategic investments derivative assets (5) | 1.8 | 1.5 | (0.2) | 3.1 | — | — | 3.1 | ||||||||||||||||||||||||||||||||||||||||
Derivative contract assets (5) | 0.4 | 6.4 | (0.3) | 6.5 | — | 6.5 | — | ||||||||||||||||||||||||||||||||||||||||
Derivative contract liabilities (6) | — | — | (13.7) | (13.7) | — | (13.7) | — | ||||||||||||||||||||||||||||||||||||||||
Total | $ | 928.6 | $ | 18.7 | $ | (14.6) | $ | 932.7 | $ | 896.3 | $ | 33.3 | $ | 3.1 |
____________________
(1)Included in “Cash and cash equivalents” in the accompanying Condensed Consolidated Balance Sheets. These investments are classified as debt securities with stated contractual maturities due within one year.
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(2)Consists of custody cash deposits, municipal bonds, and certificates of deposit.
(3)Consists of commercial paper and municipal bonds.
(4)See Note 12, "Deferred Compensation " for more information.
(5)Included in “Prepaid expenses and other current assets” or “Long-term other assets” in the accompanying Condensed Consolidated Balance Sheets.
(6)Included in “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets.
January 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||
(in millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||
Cash equivalents (1): | |||||||||||||||||||||||||||||||||||||||||||||||
Agency bonds | $ | 6.0 | $ | — | $ | — | $ | 6.0 | $ | — | $ | 6.0 | $ | — | |||||||||||||||||||||||||||||||||
Commercial paper | 36.8 | — | — | 36.8 | — | 36.8 | — | ||||||||||||||||||||||||||||||||||||||||
Money market funds | 1,135.5 | — | — | 1,135.5 | 1,135.5 | — | — | ||||||||||||||||||||||||||||||||||||||||
Other (2) | 2.3 | — | — | 2.3 | 1.3 | 1.0 | — | ||||||||||||||||||||||||||||||||||||||||
Marketable securities: | |||||||||||||||||||||||||||||||||||||||||||||||
Short-term trading securities | |||||||||||||||||||||||||||||||||||||||||||||||
Mutual funds (3) | 59.9 | 9.2 | (0.1) | 69.0 | 69.0 | — | — | ||||||||||||||||||||||||||||||||||||||||
Strategic investments derivative asset (4) | 0.1 | 0.5 | — | 0.6 | — | — | 0.6 | ||||||||||||||||||||||||||||||||||||||||
Derivative contract assets (4) | 1.0 | 9.2 | (1.3) | 8.9 | — | 8.9 | — | ||||||||||||||||||||||||||||||||||||||||
Derivative contract liabilities (5) | — | — | (4.7) | (4.7) | — | (4.7) | — | ||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,241.6 | $ | 18.9 | $ | (6.1) | $ | 1,254.4 | $ | 1,205.8 | $ | 48.0 | $ | 0.6 |
____________________
(1)Included in “Cash and cash equivalents” in the accompanying Condensed Consolidated Balance Sheets. These investments are classified as debt securities with stated contractual maturities due in one year.
(2)Consists of custody cash deposits and certificates of deposit.
(3)See Note 12, “Deferred Compensation “ for more information.
(4)Included in “Prepaid expenses and other current assets,” or “Long-term other assets,” in the accompanying Condensed Consolidated Balance Sheets.
(5)Included in “Other accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets.
Autodesk applies fair value accounting for certain financial assets and liabilities, which consist of cash equivalents, marketable securities, and other financial instruments, 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.
As of both October 31, 2020, and January 31, 2020, Autodesk had no material unrealized losses, individually and in the aggregate, for marketable debt securities that are in a continuous unrealized loss position for greater than 12 months. Total unrealized gains for securities with net gains in accumulated other comprehensive income were not material for the nine months ended October 31, 2020.
Autodesk monitors all marketable debt securities for potential credit losses by reviewing indicators such as current credit rating, change in credit rating, credit outlook, and default risk. There were no allowances for credit losses for the nine months ended October 31, 2020. There were no write offs of accrued interest receivables for the nine months ended October 31, 2020.
There was no realized gain or loss for the sales or redemptions of debt securities during the nine months ended October 31, 2020 and 2019. Gains and losses resulting from the sale or redemption of debt securities are recorded in “Interest and other expense, net” on the Company's Condensed Consolidated Statements of Operations.
There was $6.0 million and $17.0 million in proceeds from the sale and maturity of marketable debt securities for the three and nine months ended October 31, 2020, respectively. Autodesk did not have any proceeds from the sale and maturity of marketable securities for the three months ended October 31, 2019. Proceeds from the sale and maturity of marketable debt securities for the nine months ended October 31, 2019 was $27.4 million.
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As of October 31, 2020, Autodesk had non-marketable debt securities in privately held companies that had a fair value of $5.7 million. The amortized cost of these securities was $5.3 million and is classified as level 3 in the fair value hierarchy. There were no allowances for credit losses for the nine months ended October 31, 2020.
Strategic investment equity securities
As of October 31, 2020, and January 31, 2020, Autodesk had $134.8 million and $122.5 million in direct investments in privately held companies, respectively. These strategic investment equity securities do not have readily determined fair values, and Autodesk uses the measurement alternative to account for the adjustment to these investments in a given quarter. If Autodesk determines that an impairment has occurred, Autodesk writes down the investment to its fair value.
Adjustments to the carrying value of our strategic investment equity securities with no readily determined fair values measured using the measurement alternative were as follows:
Nine Months Ended October 31, | Cumulative Amount as of | ||||||||||||||||
(in millions) | 2020 | 2019 | October 31, 2020 | ||||||||||||||
Upward adjustments (1) | $ | 3.0 | $ | 2.5 | $ | 12.4 | |||||||||||
Negative adjustments, including impairments (1) | (36.2) | (4.3) | (45.2) | ||||||||||||||
Net adjustments | $ | (33.2) | $ | (1.8) | $ | (32.8) |
____________________
(1)Included in "Interest and other expense, net" on the Company's Condensed Consolidated Statements of Operations.
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 currency collars and forward contracts are designated and documented as cash flow hedges. The notional amounts of these contracts are presented net settled and were $1.36 billion at October 31, 2020, and $981.3 million at January 31, 2020. Outstanding contracts are recognized as either assets or liabilities on the Company's Condensed Consolidated Balance Sheet at fair value. The majority of the net loss of $3.2 million remaining in “Accumulated other comprehensive loss” as of October 31, 2020, is expected to be recognized into earnings within the next 24 months.
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The location and amount of gain or loss recognized in income on cash flow hedges together with the total amount of income or expense presented in the Company's Condensed Consolidated Statements of Operations where the effects of the hedge are recorded were as follows for the three and nine months ended October 31, 2020 and 2019:
Three Months Ended October 31, 2020 | ||||||||||||||||||||||||||||||||||||||
Net revenue | Cost of revenue | Operating expenses | ||||||||||||||||||||||||||||||||||||
(in millions) | Subscription revenue | Maintenance revenue | Cost of subscription and maintenance revenue | Marketing and sales | Research and development | General and administrative | ||||||||||||||||||||||||||||||||
Total amounts of income and expense line items presented in the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded | $ | 884.4 | $ | 39.8 | $ | 60.7 | $ | 359.3 | $ | 233.0 | $ | 98.8 | ||||||||||||||||||||||||||
Gain on cash flow hedging relationships in Subtopic ASC 815-20 | ||||||||||||||||||||||||||||||||||||||
Foreign exchange contracts | ||||||||||||||||||||||||||||||||||||||
Amount of (loss) gain reclassified from accumulated other comprehensive income into income | $ | (0.3) | $ | 0.1 | $ | 0.4 | $ | 1.6 | $ | 0.3 | $ | 0.7 | ||||||||||||||||||||||||||
Nine Months Ended October 31, 2020 | ||||||||||||||||||||||||||||||||||||||
Net revenue | Cost of revenue | Operating expenses | ||||||||||||||||||||||||||||||||||||
Subscription revenue | Maintenance Revenue | Cost of subscription and maintenance revenue | Marketing and sales | Research and development | General and administrative | |||||||||||||||||||||||||||||||||
Total amounts of income and expense line items presented in the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded | $ | 2,528.6 | $ | 153.1 | $ | 176.6 | $ | 1,051.5 | $ | 682.9 | $ | 296.8 | ||||||||||||||||||||||||||
Gain on cash flow hedging relationships in Subtopic ASC 815-20 | ||||||||||||||||||||||||||||||||||||||
Foreign exchange contracts | ||||||||||||||||||||||||||||||||||||||
Amount of gain reclassified from accumulated other comprehensive income into income | $ | 3.4 | $ | 0.7 | $ | 0.1 | $ | 0.3 | $ | 0.2 | $ | 0.1 |
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Three Months Ended October 31, 2019 | ||||||||||||||||||||||||||||||||||||||
Net Revenue | Cost of revenue | Operating expenses | ||||||||||||||||||||||||||||||||||||
(in millions) | Subscription Revenue | Maintenance Revenue | Cost of subscription and maintenance revenue | Marketing and sales | Research and development | General and administrative | ||||||||||||||||||||||||||||||||
Total amounts of income and expense line items presented in the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded | $ | 715.0 | $ | 91.2 | $ | 54.2 | $ | 330.7 | $ | 213.0 | $ | 99.1 | ||||||||||||||||||||||||||
Gain (loss) on cash flow hedging relationships in Subtopic ASC 815-20 | ||||||||||||||||||||||||||||||||||||||
Foreign exchange contracts | ||||||||||||||||||||||||||||||||||||||
Amount of gain (loss) reclassified from accumulated other comprehensive income into income | $ | 3.3 | $ | 1.6 | $ | (0.4) | $ | (1.0) | $ | (0.1) | $ | (0.5) | ||||||||||||||||||||||||||
Nine Months Ended October 31, 2019 | ||||||||||||||||||||||||||||||||||||||
Net revenue | Cost of revenue | Operating expenses | ||||||||||||||||||||||||||||||||||||
Subscription revenue | Maintenance Revenue | Cost of subscription and maintenance revenue | Marketing and sales | Research and development | General and administrative | |||||||||||||||||||||||||||||||||
Total amounts of income and expense line items presented in the condensed consolidated statements of operations in which the effects of cash flow hedges are recorded | $ | 1,974.5 | $ | 306.7 | $ | 166.9 | $ | 960.8 | $ | 634.0 | $ | 299.6 | ||||||||||||||||||||||||||
Gain (loss) on cash flow hedging relationships in Subtopic ASC 815-20 | ||||||||||||||||||||||||||||||||||||||
Foreign exchange contracts | ||||||||||||||||||||||||||||||||||||||
Amount of gain (loss) reclassified from accumulated other comprehensive income into income | $ | 8.7 | $ | 4.7 | $ | (0.7) | $ | (3.4) | $ | (0.6) | $ | (1.7) |
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, payables, and cash. The notional amounts of these foreign currency contracts are presented net settled and were $199.8 million at October 31, 2020, and $736.2 million at January 31, 2020.
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Fair Value of Derivative Instruments
The fair values of derivative instruments in Autodesk’s Condensed Consolidated Balance Sheets were as follows as of October 31, 2020, and January 31, 2020:
Balance Sheet Location | Fair Value at | ||||||||||||||||
(in millions) | October 31, 2020 | January 31, 2020 | |||||||||||||||
Derivative Assets | |||||||||||||||||
Foreign currency contracts designated as cash flow hedges | Prepaid expenses and other current assets | $ | 5.7 | $ | 1.0 | ||||||||||||
Derivatives not designated as hedging instruments | Prepaid expenses and other current assets and long-term other assets | 3.9 | 8.4 | ||||||||||||||
Total derivative assets | $ | 9.6 | $ | 9.4 | |||||||||||||
Derivative Liabilities | |||||||||||||||||
Foreign currency contracts designated as cash flow hedges | Other accrued liabilities | $ | 11.8 | $ | 2.8 | ||||||||||||
Derivatives not designated as hedging instruments | Other accrued liabilities | 1.9 | 1.9 | ||||||||||||||
Total derivative liabilities | $ | 13.7 | $ | 4.7 |
The effects of derivatives designated as hedging instruments on Autodesk’s Condensed Consolidated Statements of Operations were as follows for the three and nine months ended October 31, 2020 and 2019 (amounts presented include any income tax effects):
Foreign Currency Contracts | |||||||||||||||||||||||
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Amount of gain (loss) recognized in accumulated other comprehensive loss on derivatives (effective portion) | $ | 6.7 | $ | (0.4) | $ | (6.8) | $ | 2.7 | |||||||||||||||
Amount and location of gain (loss) reclassified from accumulated other comprehensive loss into income (effective portion) | |||||||||||||||||||||||
Net revenue | $ | (0.2) | $ | 4.9 | $ | 4.1 | $ | 13.4 | |||||||||||||||
Cost of revenue | 0.4 | (0.4) | 0.1 | (0.7) | |||||||||||||||||||
Operating expenses | 2.6 | (1.6) | 0.6 | (5.7) | |||||||||||||||||||
Total | $ | 2.8 | $ | 2.9 | $ | 4.8 | $ | 7.0 |
The effects of derivatives not designated as hedging instruments on Autodesk’s Condensed Consolidated Statements of Operations were as follows for the three and nine months ended October 31, 2020 and 2019 (amounts presented include any income tax effects):
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Amount and location of (loss) gain recognized on derivatives in net income | |||||||||||||||||||||||
Interest and other expense, net | $ | (0.8) | $ | 1.5 | $ | (6.2) | $ | 3.2 |
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6. Stock-based Compensation Expense
Restricted Stock Units:
A summary of restricted stock activity for the nine months ended October 31, 2020, is as follows:
Unvested restricted stock units | Weighted average grant date fair value per share | ||||||||||
(in thousands) | |||||||||||
Unvested restricted stock units at January 31, 2020 | 4,732.3 | $ | 147.24 | ||||||||
Granted | 2,215.0 | 217.27 | |||||||||
Vested | (1,976.4) | 142.82 | |||||||||
Canceled/Forfeited | (166.1) | 150.58 | |||||||||
Performance Adjustment (1) | 13.5 | 159.86 | |||||||||
Unvested restricted stock units at October 31, 2020 | 4,818.3 | $ | 181.85 |
_______________
(1)Based on Autodesk's financial results and relative total stockholder return for the fiscal 2020 performance period. The performance stock units were attained at rates ranging from 96.6% to 101.1% of the target award.
The fair value of the shares vested during the nine months ended October 31, 2020 and 2019, was $400.6 million and $277.3 million, respectively.
During the nine months ended October 31, 2020, Autodesk granted 1.9 million restricted stock units. Autodesk recorded stock-based compensation expense related to restricted stock units of $74.7 million and $73.8 million during the three months ended October 31, 2020 and 2019, respectively. Autodesk recorded stock-based compensation expense related to restricted stock units of $222.9 million and $192.4 million during the nine months ended October 31, 2020 and 2019, respectively.
During the nine months ended October 31, 2020, Autodesk settled liability-classified awards in the amount of $28.7 million. The ultimate number of shares earned was based on the Autodesk closing stock price on the vesting date. As these awards were settled in a fixed dollar amount of shares, the awards were accounted for as a liability-classified award and were expensed using the straight-line method over the vesting period.
During the nine months ended October 31, 2020, Autodesk granted 0.3 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 revenue goals adopted by the Compensation and Human Resource Committee and, as applicable, total stockholder return compared against companies in the S&P North American Technology Software Index with a market capitalization over $2.0 billion (“Relative TSR”). The fair value of the performance stock units is expensed using the accelerated attribution method over the three-year vesting 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 2021 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 recorded stock-based compensation expense related to performance stock units of $8.7 million and $6.4 million for the three months ended October 31, 2020 and 2019, respectively. Autodesk recorded stock-based compensation expense related to performance stock units of $26.2 million and $18.6 million for the nine months ended October 31, 2020 and 2019, respectively.
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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 the three and nine months ended October 31, 2020 and 2019, is as follows:
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
Issued shares (in millions) | 0.4 | 0.4 | 0.9 | 0.9 | |||||||||||||||||||
Average price of issued shares | $ | 122.93 | $ | 105.42 | $ | 122.73 | $ | 102.20 | |||||||||||||||
Weighted average grant date fair value of shares granted under the ESPP (1) | $ | 78.26 | $ | 44.77 | $ | 55.98 | $ | 47.78 |
_______________
(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 and nine months ended October 31, 2020 and 2019, respectively, as follows:
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Cost of subscription and maintenance revenue | $ | 4.5 | $ | 3.1 | $ | 12.3 | $ | 10.1 | |||||||||||||||
Cost of other revenue | 1.6 | 1.6 | 4.7 | 4.3 | |||||||||||||||||||
Marketing and sales | 45.4 | 38.7 | 129.5 | 107.2 | |||||||||||||||||||
Research and development | 35.4 | 30.8 | 103.6 | 88.3 | |||||||||||||||||||
General and administrative | 10.5 | 19.8 | 41.4 | 47.5 | |||||||||||||||||||
Stock-based compensation expense related to stock awards and ESPP purchases | 97.4 | 94.0 | 291.5 | 257.4 | |||||||||||||||||||
Tax benefit | (2.0) | (0.5) | (2.3) | (0.8) | |||||||||||||||||||
Stock-based compensation expense related to stock awards and ESPP purchases, net of tax | $ | 95.4 | $ | 93.5 | $ | 289.2 | $ | 256.6 | |||||||||||||||
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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 October 31, 2020 | Three Months Ended October 31, 2019 | ||||||||||||||||||||||
Performance Stock Units | ESPP | Performance Stock Units | ESPP | ||||||||||||||||||||
Range of expected volatilities | N/A | 41.5 - 45.0% | N/A | 32.7 - 35.9% | |||||||||||||||||||
Range of expected lives (in years) | N/A | 0.5 - 2.0 | N/A | 0.5 - 2.0 | |||||||||||||||||||
Expected dividends | N/A | — | N/A | — | |||||||||||||||||||
Range of risk-free interest rates | N/A | 0.1% | N/A | 1.7 - 1.9% | |||||||||||||||||||
Nine Months Ended October 31, 2020 | Nine Months Ended October 31, 2019 | ||||||||||||||||||||||
Performance Stock Units | ESPP | Performance Stock Units | ESPP | ||||||||||||||||||||
Range of expected volatilities | 50.7% | 39.4 - 45.8% | 36.3% | 32.7 - 39.7% | |||||||||||||||||||
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 | 0.3% | 0.1 - 0.5% | 2.5% | 1.7 - 2.5% |
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 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.
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7. Income Tax
Autodesk had income tax expense of $23.9 million, relative to pre-tax income of $156.1 million for the three months ended October 31, 2020, and income tax expense of $29.7 million, relative to pre-tax income of $96.4 million for the three months ended October 31, 2019. Autodesk had income tax expense of $78.7 million, relative to pre-tax income of $375.6 million for the nine months ended October 31, 2020, and income tax expense of $88.8 million, relative to pre-tax income of $171.5 million for the nine months ended October 31, 2019. Income tax expense for the three and nine months ended October 31, 2020, decreased as a result of the jurisdictional mix of year-to-date earnings relative to the worldwide annual effective tax rate.
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.
The Company anticipates a significant increase in U.S. taxable income in fiscal 2021 due to forecasted global earnings. We currently forecast the utilization of U.S. deferred tax assets to offset U.S. taxable income resulting from the inclusion of foreign earnings. While increased U.S. taxable income is considered positive evidence, the uncertainties around the global economy arising from COVID-19 and our cumulative losses outweigh that positive evidence. Accordingly, we have maintained the valuation allowance on our U.S. deferred tax assets.
As of October 31, 2020, the Company had $221.3 million of gross unrecognized tax benefits, of which $203.7 million would reduce our valuation allowance, if recognized. The remaining $17.7 million would impact the effective tax rate, if recognized. It is possible that the amount of unrecognized tax benefits will change in the next 12 months; however, an estimate of the range of the possible change cannot be made at this time.
8. Acquisitions
During the three and nine months ended October 31, 2020, Autodesk completed two business combinations. The acquisition-date fair value of the cash consideration transferred totaled $45.4 million. The results of operations for these acquisitions were included in the accompanying Condensed Consolidated Statement of Operations from the dates of the respective acquisitions. Pro forma results of operations have not been presented because the effects of these acquisitions were not material to Autodesk's Condensed Consolidated Financial Statements.
The acquisitions were accounted for as business combinations, and Autodesk recorded the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The fair values assigned to the identifiable intangible assets acquired were based on estimates and assumptions determined by management. Autodesk recorded the excess of consideration transferred over the aggregate fair values as goodwill. The goodwill recorded was primarily attributable to synergies expected to arise after the acquisition. There is no amount of goodwill that is deductible for U.S. income tax purposes.
The following table summarizes the fair value of the assets acquired and liabilities assumed by major class for the business combinations that were completed during the three and nine months ended October 31, 2020:
(in millions) | Aggregate Total | |||||||
Developed technologies | $ | 12.0 | ||||||
Customer relationships | 5.7 | |||||||
Trade name | 0.8 | |||||||
Goodwill | 31.4 | |||||||
Deferred revenue and long-term deferred revenue | (2.2) | |||||||
Net tangible liabilities | (2.3) | |||||||
Total | $ | 45.4 |
For the business combinations, the allocation of purchase price consideration to certain assets and liabilities is not yet finalized. For the items not yet finalized, Autodesk's estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet
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finalized are amounts for tax assets and liabilities, pending finalization of estimates and assumptions for certain tax aspects of the transaction and residual goodwill.
9. 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:
(in millions) | October 31, 2020 | January 31, 2020 | |||||||||
Developed technologies, at cost | $ | 664.8 | $ | 647.1 | |||||||
Customer relationships, trade names, patents, and user lists, at cost (1) | 539.7 | 532.2 | |||||||||
Other intangible assets, at cost (2) | 1,204.5 | 1,179.3 | |||||||||
Less: Accumulated amortization | (1,025.1) | (972.2) | |||||||||
Other intangible assets, net | $ | 179.4 | $ | 207.1 |
_______________
(1)Included in “Long-term other assets” in the accompanying Condensed Consolidated Balance Sheets.
(2)Includes the effects of foreign currency translation.
10. Cloud Computing Arrangements
Autodesk enters into certain cloud-based software hosting arrangements that are accounted for as service contracts. Costs incurred for these arrangements are capitalized for application development activities, if material, and immediately expensed for preliminary project activities and post-implementation activities. Autodesk amortizes the capitalized development costs straight-line over the fixed, non-cancellable term of the associated hosting arrangement plus any reasonably certain renewal periods. The capitalized costs are included in “Prepaid expenses and other current assets” and “Long-term other assets” on our Condensed Consolidated Balance Sheets. Capitalized costs were $56.9 million and $22.3 million at October 31, 2020, and January 31, 2020, respectively. Accumulated amortization was $3.9 million and $1.2 million at October 31, 2020, and January 31, 2020, respectively. Amortization expense for the three months ended October 31, 2020 and 2019, was $1.0 million and none, respectively. Amortization expense for the nine months ended October 31, 2020 and 2019, was $2.7 million and none, respectively.
11. Goodwill
Goodwill consists of the excess of the 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 nine months ended October 31, 2020 (in millions):
Balance as of January 31, 2020 | $ | 2,594.2 | |||
Less: accumulated impairment losses as of January 31, 2020 | (149.2) | ||||
Net balance as of January 31, 2020 | 2,445.0 | ||||
Additions arising from acquisitions during the period | 31.4 | ||||
Effect of foreign currency translation | 7.8 | ||||
Balance as of October 31, 2020 | $ | 2,484.2 |
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.
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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 Condensed Consolidated 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 and nine months ended October 31, 2020.
12. Deferred Compensation
At October 31, 2020, Autodesk had marketable securities totaling $78.5 million, of which $74.5 million is related to investments in debt and equity securities that are held in a rabbi trust under non-qualified deferred compensation plans. Of the $74.5 million related to the deferred compensation liability at October 31, 2020, $5.3 million was classified as current and $69.2 million was classified as non-current liabilities. Of the $69.0 million related to the deferred compensation liability at January 31, 2020, $5.3 million was classified as current and $63.7 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 “Long-term 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 ending balance of assets recognized from costs to obtain a contract with a customer was $89.4 million as of October 31, 2020, and $98.8 million as of January 31, 2020. Amortization expense related to assets recognized from costs to obtain a contract with a customer was $23.8 million and $70.2 million during the three and nine months ended October 31, 2020, respectively. Amortization expense related to assets recognized from costs to obtain a contract with a customer was $25.2 million and $75.4 million during the three and nine months ended October 31, 2019, respectively. Autodesk did not recognize any contract cost impairment losses during the nine months ended October 31, 2020 and 2019.
13. Computer Equipment, Software, Leasehold Improvements, and Furniture, Net
Computer equipment, software, leasehold improvements, and furniture and equipment and the related accumulated depreciation were as follows:
(in millions) | October 31, 2020 | January 31, 2020 | |||||||||
Computer hardware, at cost | $ | 150.2 | $ | 159.7 | |||||||
Computer software, at cost | 62.1 | 64.0 | |||||||||
Leasehold improvements, land and buildings, at cost | 330.4 | 284.0 | |||||||||
Furniture and equipment, at cost | 77.7 | 69.0 | |||||||||
620.4 | 576.7 | ||||||||||
Less: Accumulated depreciation | (428.9) | (415.0) | |||||||||
Computer hardware, software, leasehold improvements, and furniture and equipment, net | $ | 191.5 | $ | 161.7 |
14. Borrowing Arrangements
In January 2020, Autodesk issued $500.0 million aggregate principal amount of 2.85% notes due January 15, 2030 (“2020 Notes”). Net of a discount of $1.1 million and issuance costs of $4.8 million, Autodesk received net proceeds of $494.1 million from issuance of the 2020 Notes. Both the discount and issuance costs are being amortized to interest expense over the term of
22
the 2020 Notes using the effective interest method. The proceeds of the 2020 Notes have been used for the repayment of the $450.0 million 2015 Notes, as defined below, and the remainder is available for general corporate purposes.
In December 2018, Autodesk entered into a credit agreement by and among Autodesk, the lenders from time to time party thereto, and Citibank, N.A., as agent, which provides for an unsecured revolving loan facility in the aggregate principal amount of $650.0 million with an option, subject to customary conditions, to request an increase in the amount of the credit facility by up to an additional $350.0 million, and is available for working capital or other business needs. The credit agreement contains customary covenants that could, among other things, restrict the imposition of liens on Autodesk’s assets, and restrict Autodesk’s ability to incur additional indebtedness or make dispositions of assets if Autodesk fails to maintain compliance with the financial covenants. The credit agreement financial covenants consist of (1) a minimum interest coverage ratio of 2.50:1.0 starting with the fiscal quarter ending January 31, 2019, and increasing to 3.00:1.0 starting with the fiscal quarter ending April 30, 2019, and (2) a maximum leverage ratio of 3.50:1.0 starting with the fiscal quarter ending July 31, 2019, and dropping to 3.00:1.0 in the fiscal quarter ending January 31, 2020. At October 31, 2020, Autodesk was in compliance with the credit agreement covenants. Revolving loans under the credit agreement bear interest, at Autodesk’s option, at either (i) a floating rate per annum equal to the base rate plus a margin of between 0.000% and 0.500%, depending on Autodesk’s Public Debt Rating (as defined in the credit agreement) or (ii) a per annum rate equal to the rate at which dollar deposits are offered in the London interbank market, plus a margin of between 0.900% and 1.500%, depending on Autodesk’s Public Debt Rating. The maturity date on the credit agreement is December 2023. At October 31, 2020, Autodesk had no outstanding borrowings under the credit agreement.
In June 2017, Autodesk issued $500.0 million aggregate principal amount of 3.5% notes due June 15, 2027 (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.
In June 2015, Autodesk issued $450.0 million aggregate principal amount of 3.125% notes due June 15, 2020 (“$450.0 million 2015 Notes”) and $300.0 million aggregate principal amount of 4.375% notes due June 15, 2025 (“$300.0 million 2015 Notes”) (collectively, the “2015 Notes”). Net of a discount of $0.6 million and $1.1 million, and issuance costs of $3.8 million and $2.5 million, Autodesk received net proceeds of $445.6 million and $296.4 million from issuance of the $450.0 million 2015 Notes and $300.0 million 2015 Notes, respectively. Both the discount and issuance costs are being amortized to interest expense over the respective term of the $300.0 million 2015 Notes using the effective interest method. The proceeds of the $300.0 million 2015 Notes is available for general corporate purposes. On March 4, 2020, the proceeds of the 2020 Notes were used for the repayment of the $450.0 million 2015 Notes. Autodesk paid a redemption price of $452.1 million, plus accrued and unpaid interest to, but not including, the date of redemption.
In December 2012, Autodesk issued $350.0 million aggregate principal amount of 3.6% notes due December 15, 2022 (“2012 Notes”). Autodesk received net proceeds of $346.7 million from issuance of the 2012 Notes, net of a discount of $0.5 million and issuance costs of $2.8 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.
The 2020 Notes, 2017 Notes, $300 million 2015 Notes and the 2012 Notes may all be redeemed 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 all the aforementioned notes, at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of repurchase. All 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 the quoted market prices, the approximate fair value of the notes as of October 31, 2020, were as follows:
(in millions) | Aggregate Principal Amount | Fair value | |||||||||
2012 Notes | $ | 350.0 | $ | 369.1 | |||||||
$300 million 2015 Notes | 300.0 | 340.5 | |||||||||
2017 Notes | 500.0 | 562.2 | |||||||||
2020 Notes | 500.0 | 550.4 |
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The expected future principal payments for all borrowings as of October 31, 2020, is as follows (in millions):
Fiscal year ending | |||||
2021 (remainder) | $ | — | |||
2022 | — | ||||
2023 | 350.0 | ||||
2024 | — | ||||
2025 | — | ||||
Thereafter | 1,300.0 | ||||
Total principal outstanding | $ | 1,650.0 |
15. Leases
Autodesk has operating leases for real estate, vehicles, and certain equipment. Leases have remaining lease terms of less than 1 year to 70 years, some of which include options to extend the lease with renewal terms from 1 year to 10 years and some of which include options to terminate the leases from less than 1 year to 10 years. Options to extend the lease are included in the lease liability if they are reasonably certain of being exercised. Payments under our lease arrangements are primarily fixed; however, certain lease agreements contain variable payments, which are expensed as incurred and not included in the operating lease assets and liabilities. These amounts include payments affected by the Consumer Price Index, payments for common area maintenance that are subject to annual reconciliation, and payments for maintenance and utilities. The Company’s leases do not contain residual value guarantees or material restrictive covenants. Short-term leases are recognized in the Condensed Consolidated Statements of Operations on a straight-line basis over the lease term. Short-term lease expense was not material for the periods presented. Changes in operating lease right-of-use assets and operating lease liabilities are presented net in the “accounts payable and other liabilities” line in the Condensed Consolidated Statements of Cash Flows.
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The components of lease cost were as follows:
Three Months Ended October 31, 2020 | |||||||||||||||||||||||||||||||||||
(in millions) | Cost of subscription and maintenance revenue | Cost of other revenue | Marketing and sales | Research and development | General and administrative | Total | |||||||||||||||||||||||||||||
Operating lease cost | $ | 1.9 | $ | 0.6 | $ | 11.9 | $ | 8.6 | $ | 2.9 | $ | 25.9 | |||||||||||||||||||||||
Variable lease cost | 0.2 | 0.1 | 1.5 | 1.0 | 0.4 | 3.2 | |||||||||||||||||||||||||||||
Nine Months Ended October 31, 2020 | |||||||||||||||||||||||||||||||||||
(in millions) | Cost of subscription and maintenance revenue | Cost of other revenue | Marketing and sales | Research and development | General and administrative | Total | |||||||||||||||||||||||||||||
Operating lease cost | $ | 5.6 | $ | 1.7 | $ | 34.0 | $ | 24.3 | $ | 10.5 | $ | 76.1 | |||||||||||||||||||||||
Variable lease cost | 0.6 | 0.2 | 4.0 | 2.8 | 1.3 | 8.9 |
Three Months Ended October 31, 2019 | |||||||||||||||||||||||||||||||||||
(in millions) | Cost of subscription and maintenance revenue | Cost of other revenue | Marketing and sales | Research and development | General and administrative | Total | |||||||||||||||||||||||||||||
Operating lease cost | $ | 1.7 | $ | 0.6 | $ | 9.6 | $ | 6.6 | $ | 3.2 | $ | 21.7 | |||||||||||||||||||||||
Variable lease cost | 0.2 | 0.1 | 1.1 | 0.7 | 0.4 | 2.5 | |||||||||||||||||||||||||||||
Nine Months Ended October 31, 2019 | |||||||||||||||||||||||||||||||||||
(in millions) | Cost of subscription and maintenance revenue | Cost of other revenue | Marketing and sales | Research and development | General and administrative | Total | |||||||||||||||||||||||||||||
Operating lease cost | $ | 4.9 | $ | 1.7 | $ | 28.0 | $ | 20.1 | $ | 9.0 | $ | 63.7 | |||||||||||||||||||||||
Variable lease cost | 0.7 | 0.2 | 3.9 | 2.8 | 1.3 | 8.9 |
Supplemental operating cash flow information related to leases is as follows:
Nine Months Ended October 31, | |||||||||||
(in millions) | 2020 | 2019 | |||||||||
Cash paid for operating leases included in operating cash flows (1) | $ | 74.7 | $ | 66.4 | |||||||
Non-cash operating lease liabilities arising from obtaining operating lease right-of-use assets | $ | 50.8 | $ | 55.2 |
_______________
(1) Includes $8.9 million in variable lease payments for both the nine months ended October 31, 2020 and 2019, not included in “Operating lease liabilities” and “Long-term operating lease liabilities” on the Condensed Consolidated Balance Sheets.
The weighted average remaining lease term for operating leases is 7.3 and 7.5 years at October 31, 2020, and January 31, 2020, respectively. The weighted average discount rate was 2.79% and 3.41% at October 31, 2020, and January 31, 2020, respectively.
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Maturities of operating lease liabilities were as follows (in millions):
Fiscal year ending | |||||
2021 (remainder) | $ | 12.9 | |||
2022 | 87.5 | ||||
2023 | 91.9 | ||||
2024 | 76.6 | ||||
2025 | 57.0 | ||||
Thereafter | 182.2 | ||||
508.1 | |||||
Less imputed interest | (45.8) | ||||
Present value of operating lease liabilities | $ | 462.3 |
As of October 31, 2020, Autodesk has additional operating lease minimum lease payments of $16.9 million for executed leases that have not yet commenced, primarily for office locations.
16. 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, inquiries, and proceedings in the normal course of business including claims of alleged infringement of intellectual property rights, commercial, employment, tax, prosecution of unauthorized use, 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.
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17. Stockholders' Equity (Deficit)
Changes in stockholders' equity (deficit) by component, net of tax, as of October 31, 2020, are as follows:
(in millions, except per share data) | Common stock and additional paid-in capital | Accumulated other comprehensive loss | Accumulated deficit | Total stockholders' equity (deficit) | |||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||
Balances, January 31, 2020 | 219.4 | $ | 2,317.0 | $ | (160.3) | $ | (2,295.8) | $ | (139.1) | ||||||||||||||||||||
Common shares issued under stock plans | 1.0 | 24.3 | — | — | 24.3 | ||||||||||||||||||||||||
Stock-based compensation expense | — | 88.2 | — | — | 88.2 | ||||||||||||||||||||||||
Settlement of liability-classified restricted stock units | — | 28.7 | — | — | 28.7 | ||||||||||||||||||||||||
Post-combination expense related to equity awards assumed | — | 0.1 | — | — | 0.1 | ||||||||||||||||||||||||
Net income | — | — | — | 66.5 | 66.5 | ||||||||||||||||||||||||
Other comprehensive loss | — | — | (18.8) | — | (18.8) | ||||||||||||||||||||||||
Repurchase and retirement of common shares | (1.2) | (57.0) | — | (132.0) | (189.0) | ||||||||||||||||||||||||
Balances, April 30, 2020 | 219.2 | 2,401.3 | (179.1) | (2,361.3) | (139.1) | ||||||||||||||||||||||||
Common shares issued under stock plans | 0.2 | (4.6) | — | — | (4.6) | ||||||||||||||||||||||||
Stock-based compensation expense | — | 95.9 | — | — | 95.9 | ||||||||||||||||||||||||
Post-combination expense related to equity awards assumed | — | 0.1 | — | — | 0.1 | ||||||||||||||||||||||||
Net income | — | — | — | 98.2 | 98.2 | ||||||||||||||||||||||||
Other comprehensive income | — | — | 24.6 | — | 24.6 | ||||||||||||||||||||||||
Repurchase and retirement of common shares (1) | (0.1) | — | — | (7.8) | (7.8) | ||||||||||||||||||||||||
Balances, July 31, 2020 | 219.3 | 2,492.7 | (154.5) | (2,270.9) | 67.3 | ||||||||||||||||||||||||
Common shares issued under stock plans | 1.2 | (29.3) | — | — | (29.3) | ||||||||||||||||||||||||
Stock-based compensation expense | — | 97.0 | — | — | 97.0 | ||||||||||||||||||||||||
Post-combination expense related to equity awards assumed | — | 0.1 | — | — | 0.1 | ||||||||||||||||||||||||
Net income | — | — | — | 132.2 | 132.2 | ||||||||||||||||||||||||
Other comprehensive loss | — | — | (1.9) | — | (1.9) | ||||||||||||||||||||||||
Repurchase and retirement of common shares (1) | (0.8) | (53.4) | — | (142.7) | (196.1) | ||||||||||||||||||||||||
Balances, October 31, 2020 | 219.7 | $ | 2,507.1 | $ | (156.4) | $ | (2,281.4) | $ | 69.3 |
________________
(1)During the three and nine months ended October 31, 2020, Autodesk repurchased 0.8 million shares and 2.1 million shares at an average repurchase price of $231.26 and $185.69 per share, respectively. At October 31, 2020, 12.6 million shares remained available for repurchase under the repurchase program approved by the Board of Directors.
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Changes in stockholders' deficit by component, net of tax, as of October 31, 2019, are as follows:
Common stock and additional paid-in capital | Accumulated other comprehensive loss | Accumulated deficit | Total stockholders' deficit | ||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||
Balances, January 31, 2019 | 219.4 | $ | 2,071.5 | $ | (135.0) | $ | (2,147.4) | $ | (210.9) | ||||||||||||||||||||
Common shares issued under stock plans | 0.8 | 21.1 | — | — | 21.1 | ||||||||||||||||||||||||
Stock-based compensation expense | — | 75.2 | — | — | 75.2 | ||||||||||||||||||||||||
Post combination expense related to assumed equity | — | 0.8 | — | — | 0.8 | ||||||||||||||||||||||||
Cumulative effect of accounting changes | — | — | — | (0.7) | (0.7) | ||||||||||||||||||||||||
Net loss | — | — | — | (24.2) | (24.2) | ||||||||||||||||||||||||
Other comprehensive loss | — | — | (6.6) | — | (6.6) | ||||||||||||||||||||||||
Repurchase and retirement of common shares | (0.6) | (45.5) | — | (54.5) | (100.0) | ||||||||||||||||||||||||
Balances, April 30, 2019 | 219.6 | 2,123.1 | (141.6) | (2,226.8) | (245.3) | ||||||||||||||||||||||||
Common shares issued under stock plans | 0.2 | (2.6) | — | — | (2.6) | ||||||||||||||||||||||||
Stock-based compensation expense | — | 82.9 | — | — | 82.9 | ||||||||||||||||||||||||
Post combination expense related to assumed equity | — | 0.1 | — | — | 0.1 | ||||||||||||||||||||||||
Net income | — | — | — | 40.2 | 40.2 | ||||||||||||||||||||||||
Other comprehensive loss | — | — | (29.1) | — | (29.1) | ||||||||||||||||||||||||
Repurchase and retirement of common shares (1) | (0.3) | (2.8) | — | (37.7) | (40.5) | ||||||||||||||||||||||||
Balances, July 31, 2019 | 219.5 | 2,200.7 | (170.7) | (2,224.3) | (194.3) | ||||||||||||||||||||||||
Common shares issued under stock plans | 1.3 | (18.9) | — | — | (18.9) | ||||||||||||||||||||||||
Stock-based compensation expense | — | 84.1 | — | — | 84.1 | ||||||||||||||||||||||||
Post combination expense related to assumed equity | — | 0.2 | — | — | 0.2 | ||||||||||||||||||||||||
Net loss | — | — | — | 66.7 | 66.7 | ||||||||||||||||||||||||
Other comprehensive income | — | — | 14.4 | — | 14.4 | ||||||||||||||||||||||||
Repurchase and retirement of common shares | (0.8) | (41.0) | — | (82.7) | (123.7) | ||||||||||||||||||||||||
Balances, October 31, 2019 | 220.0 | $ | 2,225.1 | $ | (156.3) | $ | (2,240.3) | $ | (171.5) | ||||||||||||||||||||
________________
(1)During the three and nine months ended October 31, 2019, Autodesk repurchased 0.8 million shares and 1.7 million shares at an average repurchase price of $144.49 and $156.16 per share, respectively. At October 31, 2019, 15.7 million shares remained available for repurchase under the repurchase program approved by the Board of Directors.
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18. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net of taxes, consisted of the following at October 31, 2020:
(in millions) | Net Unrealized Gains (Losses) on Derivative Instruments | Net Unrealized Gains on Available-for-Sale Debt Securities | Defined Benefit Pension Components | Foreign Currency Translation Adjustments | Total | ||||||||||||||||||||||||
Balances, January 31, 2020 | $ | 8.4 | $ | 4.7 | $ | (22.8) | $ | (150.6) | $ | (160.3) | |||||||||||||||||||
Other comprehensive (loss) income before reclassifications | (8.3) | 1.7 | — | 13.9 | 7.3 | ||||||||||||||||||||||||
Pre-tax (gains) losses reclassified from accumulated other comprehensive loss | (4.8) | 0.1 | — | — | (4.7) | ||||||||||||||||||||||||
Tax effects | 1.5 | 0.1 | — | (0.3) | 1.3 | ||||||||||||||||||||||||
Net current period other comprehensive (loss) income | (11.6) | 1.9 | — | 13.6 | 3.9 | ||||||||||||||||||||||||
Balances, October 31, 2020 | $ | (3.2) | $ | 6.6 | $ | (22.8) | $ | (137.0) | $ | (156.4) |
(in millions) | 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, 2019 | $ | 15.0 | $ | 3.3 | $ | (16.3) | $ | (137.0) | $ | (135.0) | |||||||||||||||||||
Other comprehensive (loss) income before reclassifications | 4.3 | 1.8 | 0.1 | (16.0) | (9.8) | ||||||||||||||||||||||||
Pre-tax losses reclassified from accumulated other comprehensive loss | (7.0) | — | (3.4) | — | (10.4) | ||||||||||||||||||||||||
Tax effects | (1.6) | (0.4) | 0.8 | 0.1 | (1.1) | ||||||||||||||||||||||||
Net current period other comprehensive (loss) income | (4.3) | 1.4 | (2.5) | (15.9) | (21.3) | ||||||||||||||||||||||||
Balances, October 31, 2019 | $ | 10.7 | $ | 4.7 | $ | (18.8) | $ | (152.9) | $ | (156.3) |
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 of net periodic benefit cost are included in “Interest and other expense, net.”
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19. Net Income Per Share
Basic net income 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 income 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 income per share amounts:
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
(in millions, except per share data) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Numerator: | |||||||||||||||||||||||
Net income | $ | 132.2 | $ | 66.7 | $ | 296.9 | $ | 82.7 | |||||||||||||||
Denominator: | |||||||||||||||||||||||
Denominator for basic net income per share—weighted average shares | 219.6 | 219.7 | 219.4 | 219.6 | |||||||||||||||||||
Effect of dilutive securities | 2.7 | 2.2 | 2.7 | 2.5 | |||||||||||||||||||
Denominator for dilutive net income per share | 222.3 | 221.9 | 222.1 | 222.1 | |||||||||||||||||||
Basic net income per share | $ | 0.60 | $ | 0.30 | $ | 1.35 | $ | 0.38 | |||||||||||||||
Diluted net income per share | $ | 0.59 | $ | 0.30 | $ | 1.34 | $ | 0.37 |
The computation of diluted net income 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 periods. For the three and nine months ended October 31, 2020, there were 0.3 million and 0.2 million potentially anti-dilutive shares excluded from the computation of diluted net income per share, respectively. For both the three and nine months ended October 31, 2019, there were no potentially anti-dilutive shares excluded from the computation of diluted net income per share.
20. Segments
Autodesk operates in one operating segment and accordingly, all required financial segment information is included in the condensed consolidated financial statements. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision makers (“CODM”) in deciding how to allocate resources and assess performance. 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 CODM allocates resources and assesses the operating performance of the Company as a whole.
Information regarding Autodesk’s long-lived assets by geographic area is as follows:
(in millions) | October 31, 2020 | January 31, 2020 | |||||||||
Long-lived assets (1): | |||||||||||
Americas | |||||||||||
U.S. | $ | 448.0 | $ | 434.2 | |||||||
Other Americas | 30.6 | 33.2 | |||||||||
Total Americas | 478.6 | 467.4 | |||||||||
Europe, Middle East, and Africa | 90.5 | 75.8 | |||||||||
Asia Pacific | 48.8 | 57.3 | |||||||||
Total long-lived assets | $ | 617.9 | $ | 600.5 |
____________________
(1)Long-lived assets exclude deferred tax assets, marketable securities, goodwill, and other intangible assets.
21. Subsequent Events
In November 2020, Autodesk entered into a share purchase agreement to acquire all of the outstanding equity of Spacemaker AS (“Spacemaker”) in exchange for consideration of approximately $240 million, net of cash acquired. Spacemaker is a privately held company providing cloud-based artificial intelligence technology and generative design enabling architects, urban designers, and real estate developers to optimize and maximize the potential of a building site, especially
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during early-stage design and is expected to enable Autodesk’s ability to serve early-stage design market and accelerate outcome-based design capabilities. The transaction closed on November 23, 2020.
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,” “Overview of the Three and Nine Months Ended October 31, 2020 and 2019” and in “Results of Operations-Impacts of COVID-19 to Autodesk’s Business.” Examples of such forward-looking statements may relate to items such as future net revenue, operating expenses, recurring revenue, net revenue retention rate, cash flow, remaining performance obligations, and other future financial results (by product type and geography), the effectiveness of our efforts to successfully manage transitions to new markets; our ability to increase our subscription base; expected market trends, including the growth of cloud and mobile computing; the availability of credit; the effect of unemployment; the effects of global economic conditions, including from an economic downturn or recession in the United States or in other countries around the world; the effects of revenue recognition; the effects of recently issued accounting standards; expected trends in certain financial metrics, including expenses; expectations regarding our cash needs; the effects of fluctuations in exchange rates and our hedging activities on our financial results; our ability to successfully expand adoption of our products; our ability to gain market acceptance of new business and sales initiatives; the impact of past acquisitions, including our integration efforts and expected synergies; the impact of economic volatility and geopolitical activities in certain countries, particularly emerging economy countries; the timing and amount of purchases under our stock buy-back plan; and the effects of potential non-cash charges on our financial results and the resulting effect on our financial results. In addition, forward-looking statements also consist of statements involving expectations regarding product capability and acceptance, statements regarding our liquidity and short-term and long-term cash requirements, as well as statements involving trend analyses and statements including such words as “may,” “believe,” “could,” “anticipate,” “would,” “might,” “plan,” “expect,” and similar expressions or the negative of these terms or other comparable terminology. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of a number of factors, including those set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with 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. We empower innovators to achieve the new possible - enabling them to discover first-in-kind solutions to complex design challenges, deliver tangible outcomes in record time, and make data-powered decisions for sustainable outcomes.
Our strategy is to build enduring relationships with customers, delivering innovative technology that provides valuable automation and insight into their design and make process. To drive execution of our strategy, we are focused on three strategic priorities: delivering on the promise of subscription, digitizing the company, and reimagining construction, manufacturing, and production.
We equip and inspire our users with the tailored tools, services, and access they need for success today and tomorrow. At every step, we help users harness the power of data to build upon their ideas and explore new ways of imagining, collaborating, and creating to achieve better outcomes for their customers, for society, and for the world. And because creativity can’t flourish in silos, we connect what matters - from steps in a project to collaborators on a unified platform.
Autodesk was founded during the platform transition from mainframe computers and engineering workstations to personal computers. We have developed and sustained a compelling value proposition based upon desktop software for the personal computer. Just as the transition from mainframes to personal computers transformed the industry over 30 years ago, the software industry has undergone a transition from developing and selling perpetual licenses and on-premises products to subscriptions and cloud-enabled technologies.
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Product Evolution
We offer subscriptions for individual products and Industry Collections, enterprise business arrangements (“EBAs”), and cloud service offerings (collectively referred to as “subscription plan”). Subscription plans are designed to give our customers more flexibility with how they use our offerings and to attract a broader range of customers, such as project-based users and small businesses.
Our subscription plans currently represent a hybrid of desktop software and cloud functionality, which provides a device-independent, collaborative design workflow for designers and their stakeholders. Our cloud offerings, for example, BIM 360, Shotgun, AutoCAD web app, and AutoCAD mobile app, provide tools, including mobile and collaboration capabilities, to streamline design, collaboration, building and manufacturing, and data management processes. We believe that customer adoption of these latest 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 services.
Industry Collections provide our customers with access to a broader selection of Autodesk solutions and services, simplifying the customers’ ability to benefit from a complete set of tools for their industry.
We discontinued the sale of new commercial licenses of most individual software products in fiscal 2016. Additionally, in fiscal 2018, we commenced a program to incentivize maintenance plan customers to move to subscription plan offerings, maintenance-to-subscription (“M2S”), while at the same time increasing maintenance plan pricing over time for customers that remain on maintenance plans. Since launching the program, a substantial majority of maintenance plan customers have converted to subscription plan offerings. We will be retiring maintenance plan offerings as of May 7, 2021 and will allow customers to convert their remaining maintenance seats to subscription plan offerings prior to this date.
To support our strategic priority of re-imagining construction, we are strengthening the foundation of our construction solutions with both organic and inorganic investments. In fiscal 2020, we continued and expanded our investments in construction. We continued to make investments in the traditional data creation tools to support the design and pre-construction phases, while expanding our investment in the areas of site execution with process and project management construction cloud tools. To connect the phases of construction upstream with design, we invested in and announced our construction cloud project delivery platform that allows individuals, teams, and projects to be connected across all phases in a common data platform and increase efficiencies. The broadened product portfolio, the Autodesk Construction Cloud, has helped us expand our presence with sub-contractors, trades people, and building owners.
As part of our strategy in manufacturing, we continue to attract both global manufacturing leaders and disruptive startups with our generative design and cloud-based Fusion 360 technology enhancements.
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 factors in making decisions regarding acquisitions. We currently anticipate that we will continue to acquire products, technology, and businesses as compelling opportunities become available.
Global Reach
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 solutions, and business transacted through our online Autodesk branded store. See Note 3, “Revenue Recognition” in the Notes to the Condensed Consolidated Financial Statements for further detail on the results of our indirect and direct channel sales for the three and nine months ended October 31, 2020 and 2019.
We anticipate that our channel mix will continue to change as we scale our online Autodesk branded store business and our largest accounts shift towards direct-only business models. However, we expect our indirect channel will continue to transact and support the majority of our customers and revenue. We employ a variety of incentive programs and promotions to align our direct and indirect channels with our business strategies. In addition, we have a worldwide user group organization and we have created online user communities dedicated to the exchange of information related to the use of our products.
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One of our key strategies is to maintain an open-architecture design of our software products to facilitate third-party development of complementary products and industry-specific software solutions. This approach enables customers and third parties to customize solutions for a wide variety of highly specific uses. We offer several programs that provide strategic investment funding, technological platforms, user communities, technical support, forums, and events to developers who develop add-on applications for our products. For example, we have established the Autodesk Forge developer program to support innovators that build solutions to facilitate the development of a single connected ecosystem for the future of how things are designed, made, and used as well as support ideas that push the boundaries of 3D printing.
In addition to the competitive advantages afforded by our technology, our large global network of distributors, resellers, third-party developers, customers, educators, educational institutions, learning partners, and students is a key competitive advantage which has been cultivated over an extensive period. This network of partners and relationships provides us with a broad and deep reach into volume markets around the world. Our distributor and reseller network is extensive and provides our customers with the resources to purchase, deploy, learn, and support our solutions quickly and easily. We have a significant number of registered third-party developers who create products that work well with our solutions and extend them for a variety of specialized applications.
Better World
To help our customers imagine, design, and make a better world, our sustainability initiatives focus our efforts on the areas where we can have the greatest positive impact: products and support, catalyzing impact and innovation, investing in our customers’ and employees’ ability to learn and develop relevant skills for in-demand roles, and leading by example with our 100% renewable and sustainable business practices. Through our products and services, we are supporting our customers to better understand and improve the environmental performance of everything they make and mitigate the causes and effects of climate change.
Furthermore, we are committed to fulfill our vision of helping people imagine, design, and make a better world by prioritizing Diversity and Belonging (“D&B”) efforts. We have launched a project to expand our commitment through the development of a holistic, updated global D&B strategy. The initiative begins with a global listening tour across Autodesk where employees representing all levels, regions, organizations, and a rich mix of demographics, are invited to join focus groups to share their input. Autodesk is committed to continuing the hard work that is required to realize progress within the company and to support the communities where we work.
The Autodesk Foundation (the “Foundation”), a privately funded 501(c)(3) charity organization established and solely funded by us, leads our philanthropic efforts. The purpose of the Foundation is twofold: to support employees to make a better world by matching employees’ volunteer time and/or donations to nonprofit organizations; and to support organizations and individuals using design to drive positive social and environmental impact. On our behalf, the Foundation also administers a discounted software donation program to nonprofit organizations, social and environmental entrepreneurs, and others who are developing design solutions that will shape a more sustainable future.
Assumptions Behind Our Strategy
Our strategy depends upon a number of assumptions, including: making our technology available to mainstream markets; leveraging our large global network of distributors, resellers, third-party developers, customers, educators, educational institutions, learning partners, 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 evaluate our estimates and assumptions on an ongoing basis. 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. 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, 2020.
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An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. 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 and nine months ended October 31, 2020, as compared to those disclosed in our Form 10-K for the fiscal year ended January 31, 2020. We believe these policies are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.
Overview of the Three and Nine Months Ended October 31, 2020
•Total net revenue increased 13% and 16% to $952.4 million and $2,751.2 million for the three and nine months ended October 31, 2020, respectively, compared to the same periods in the prior fiscal year.
•Recurring revenue as a percentage of net revenue was 97% for both the three and nine months ended October 31, 2020, compared to 96% for both periods in the prior fiscal year.
•Net revenue retention rate (“NR3”) was within the range of 100% and 110% as of October 31, 2020, and within the range of 110% and 120% as of October 31, 2019.
•Deferred revenue was $2.93 billion, a decrease of 2% compared to the fourth quarter in the prior fiscal year.
•Remaining performance obligations (short-term and long-term deferred revenue plus unbilled deferred revenue) (“RPO”) was $3.58 billion, an increase of 1% compared to the fourth quarter in the prior fiscal year.
•Current remaining performance obligations were $2.38 billion, an increase of 1% compared to the fourth quarter in the prior fiscal year.
Revenue Analysis
Net revenue increased during the three and nine months ended October 31, 2020, as compared to the same periods in the prior fiscal year, primarily due to the respective 24% and 28% increase in subscription revenue, partially offset by a respective 56% and 50% decrease in maintenance revenue as a result of the program to migrate customers from maintenance plans to subscription plans.
For further discussion of the drivers of these results, see below under the heading “Results of Operations.”
We rely significantly upon major distributors and resellers in both the U.S. and international regions, including Tech Data Corporation and its global affiliates (collectively, “Tech Data”). Total sales to Tech Data accounted for 37% of our total net revenue for both the three and nine months ended October 31, 2020, and 35% of our total net revenue for both the three and nine months ended October 31, 2019. During both the three and nine months ended October 31, 2020 and 2019, Ingram Micro accounted for 10% of Autodesk's total net revenue. Our customers through Tech Data and Ingram Micro are the resellers and end users who purchase our software subscriptions and services. Should any of our agreements with Tech Data and Ingram Micro be terminated for any reason, we believe the resellers and end users who currently purchase our products through Tech Data and Ingram Micro would be able to continue to do so under substantially the same terms from one of our many other distributors without substantial disruption to our revenue. Consequently, we believe our business is not substantially dependent on Tech Data and Ingram Micro.
Recurring Revenue and Net Revenue Retention Rate
In order to help better understand our financial performance, we use metrics such as recurring revenue and NR3. These metrics are key performance metrics and should be viewed independently of revenue and deferred revenue as these metrics are not intended to be combined with those items. We use these metrics to monitor the strength of our recurring business. We believe these metrics are useful to investors because they can help in monitoring the long-term health of our business. Our determination and presentation of these metrics may differ from that of other companies. The presentation of these metrics is meant to be considered in addition to, not as a substitute for or in isolation from, our financial measures prepared in accordance with GAAP. Please refer to the Glossary of Terms for the definitions of these metrics.
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The following table outlines our recurring revenue metric for the three and nine months ended October 31, 2020 and 2019:
Three Months Ended October 31, 2020 | Change compared to prior fiscal year | Three Months Ended October 31, 2019 | |||||||||||||||||||||
(In millions, except percentage data) | $ | % | |||||||||||||||||||||
Recurring revenue (1) | $ | 924.2 | $ | 118.0 | 15 | % | $ | 806.2 | |||||||||||||||
As a percentage of net revenue | 97 | % | N/A | N/A | 96 | % | |||||||||||||||||
Nine Months Ended October 31, 2020 | Change compared to prior fiscal year | Nine Months Ended October 31, 2019 | |||||||||||||||||||||
$ | % | ||||||||||||||||||||||
Recurring Revenue (1) | $ | 2,681.7 | $ | 400.5 | 18 | % | $ | 2,281.2 | |||||||||||||||
As a percentage of net revenue | 97 | % | N/A | N/A | 96 | % |
________________
(1)The acquisition of a business may cause variability in the comparison of recurring revenue in this table above and recurring revenue derived from the revenue reported in the Condensed Consolidated Statements of Operations.
NR3 was within the range of 100% and 110% as of October 31, 2020, and within the range of 110% and 120% as of October 31, 2019.
Foreign Currency Analysis
We generate a significant amount of our revenue in the United States, Japan, Germany, Finland, and the United Kingdom.
The following table shows the impact of foreign exchange rate changes on our net revenue and total spend:
Three Months Ended October 31, 2020 | Nine Months Ended October 31, 2020 | ||||||||||||||||||||||||||||||||||
Percent change compared to prior fiscal year | Constant Currency percent change compared to prior fiscal year (1) | Positive/Negative/Neutral impact from foreign exchange rate changes | Percent change compared to prior fiscal year | Constant Currency percent change compared to prior fiscal year (1) | Positive/Negative/Neutral impact from foreign exchange rate changes | ||||||||||||||||||||||||||||||
Net revenue | 13 | % | 14 | % | Negative | 16 | % | 17 | % | Negative | |||||||||||||||||||||||||
Total spend | 7 | % | 7 | % | Neutral | 6 | % | 7 | % | Positive |
________________
(1)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.
Remaining Performance Obligations
RPO represents deferred revenue and contractually stated or committed orders under early renewal and multi-year billing plans for subscription, services, license, and maintenance for which the associated deferred revenue has not yet been recognized. Unbilled deferred revenue is not included as a receivable or deferred revenue on our Condensed Consolidated Balance Sheets. See Note 3, “Revenue Recognition,” for more details on Autodesk's performance obligations.
(in millions) | October 31, 2020 | January 31, 2020 | |||||||||
Deferred revenue | $ | 2,932.8 | $ | 3,007.1 | |||||||
Unbilled deferred revenue | 649.6 | 549.6 | |||||||||
RPO | $ | 3,582.4 | $ | 3,556.7 |
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RPO consisted of the following:
(in millions) | October 31, 2020 | January 31, 2020 | |||||||||
Current RPO | $ | 2,382.9 | $ | 2,368.6 | |||||||
Non-current RPO | 1,199.5 | 1,188.1 | |||||||||
RPO | $ | 3,582.4 | $ | 3,556.7 |
We expect that the amount of RPO will change from quarter to quarter for several reasons, including the specific timing, duration, and size of customer subscription and support agreements, varying billing cycles of such agreements, the specific timing of customer renewals, and foreign currency fluctuations.
Balance Sheet and Cash Flow Items
At October 31, 2020, we had $1.62 billion in cash and marketable securities. Our cash flow from operations increased to $779.6 million for the nine months ended October 31, 2020, compared to $716.9 million for the nine months ended October 31, 2019. We repurchased 2.1 million shares of our common stock for $392.9 million during the nine months ended October 31, 2020. Comparatively, we repurchased 1.7 million shares of our common stock for $264.2 million during the nine months ended October 31, 2019. See further discussion regarding the balance sheet and cash flow activities under the heading “Liquidity and Capital Resources.”
Results of Operations
Impacts of COVID-19 to Autodesk’s Business
We are continuing to conduct business during the COVID-19 pandemic with substantial modifications to employee travel, employee work locations, and virtualization, postponement, or cancellation of certain sales and marketing events, among other modifications. We have observed other companies as well as many governments continuing to take precautionary and preemptive actions to address COVID-19, and they may take further actions that alter their normal business operations. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, or local authorities, or that we determine are in the best interests of our employees, customers, partners, suppliers, and stockholders.
In the quarter ended October 31, 2020, we experienced usage levels above pre-COVID-19 levels in parts of Asia and most of Europe. Usage rates in the U.S. and parts of Europe continued to remain below pre-COVID-19 levels but remained stable in the U.S. while rates in the U.K. grew sequentially during the third fiscal quarter ended October 31, 2020. Our new business was impacted by the pandemic consistent with the usage trends. Strong enterprise deal activity, improving subscription renewal rates, digital sales, and sequential improvement in new business trends contributed to our operating performance in the third fiscal quarter ended October 31, 2020. In our target markets, both Architecture, Engineering, and Construction (“AEC”) and Manufacturing (“MFG”) experienced growth as compared to the third fiscal quarter in the prior year.
We also took action to support our customers during the nine months ended October 31, 2020, and extended payment terms to 60 days through August 7, 2020, offering free commercial use of our cloud collaboration products through June 2020, and delayed the transition from multi-user licenses to named-user licenses from May 2020 to August 2020 to minimize customer disruption. Further, we deferred a 20% maintenance price increase from May 2020 to August 2020 to give customers additional time to consider a subscription agreement.
Given the evolving business environment as a result of COVID-19, we are actively managing our spending, reducing travel and entertainment expense, monitoring our hiring rate, shifting to virtual events, and rationalizing our marketing spend. We will continue to invest in critical areas such as R&D, construction, and digitizing the company to ensure our future success as we come out of the pandemic.
We believe our investment in cloud products and a subscription business model, backed by a strong balance sheet, give us a robust foundation to successfully navigate the economic challenges of COVID-19. The extent of the impact on our business in fiscal 2021 and beyond will depend on several factors, including: the full duration and the extent of the pandemic; actions taken by governments, businesses, and consumers in response to the pandemic; speed and timing of economic recovery, including in particular geographies; our billings and renewal rates including new business close rates, rate of multi-year contracts, pace of closing larger transactions, and new unit volume growth; and effect of the pandemic on margins and cash flow. All of these
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factors continue to evolve and remain uncertain at this time, and some of these factors are not within our control. Further discussion of the potential impacts of COVID-19 on our business can be found in Part II, Item 1A, “Risk Factors.”
Net Revenue
Net Revenue by Income Statement Presentation
Subscription revenue consists of our term-based product subscriptions, cloud service offerings, and flexible EBAs. Revenue from these arrangements is recognized ratably over the contract term commencing with the date our service is made available to customers and when all other revenue recognition criteria have been satisfied.
Maintenance revenue consists of renewal fees for existing maintenance plan agreements that were initially purchased with a perpetual software license. Under our maintenance plan, customers are eligible to receive unspecified upgrades, when and if available, and technical support. We recognize maintenance revenue ratably over the term of the agreements, which is generally one year.
Other revenue consists of revenue from consulting, training, and other services, and is recognized over time as the services are performed. Other revenue also includes software license revenue from the sale of products which do not incorporate substantial cloud services and is recognized up front.
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Three Months Ended | Change Compared to Prior Fiscal Year | Three Months Ended | Management comments | ||||||||||||||||||||||||||
(In millions, except percentages) | October 31, 2020 | $ | % | October 31, 2019 | |||||||||||||||||||||||||
Net Revenue: | |||||||||||||||||||||||||||||
Subscription | $ | 884.4 | $ | 169.4 | 24 | % | $ | 715.0 | Increase due to growth across all subscription types, led by product subscription renewal revenue. Also contributing to the growth was an increase in revenue from new product subscriptions and EBA offerings. | ||||||||||||||||||||
Maintenance (1) | 39.8 | (51.4) | (56) | % | 91.2 | Decrease primarily due to the migration of maintenance plan subscriptions to subscription plan subscriptions with the M2S program. | |||||||||||||||||||||||
Total subscription and maintenance revenue | 924.2 | 118.0 | 15 | % | 806.2 | ||||||||||||||||||||||||
Other | 28.2 | (8.3) | (23) | % | 36.5 | ||||||||||||||||||||||||
$ | 952.4 | $ | 109.7 | 13 | % | $ | 842.7 | ||||||||||||||||||||||
Nine Months Ended | Change compared to prior fiscal year | Nine Months Ended | Management Comments | ||||||||||||||||||||||||||
October 31, 2020 | $ | % | October 31, 2019 | ||||||||||||||||||||||||||
Net Revenue: | |||||||||||||||||||||||||||||
Subscription | $ | 2,528.6 | $ | 554.1 | 28 | % | $ | 1,974.5 | Increase due to growth across all subscription types, led by product subscription renewal revenue. Also contributing to the growth was an increase in revenue from new product subscriptions and EBA offerings. | ||||||||||||||||||||
Maintenance (1) | 153.1 | (153.6) | (50) | % | 306.7 | Decrease primarily due to the migration of maintenance plan subscriptions to subscription plan subscriptions with the M2S program. | |||||||||||||||||||||||
Total subscription and maintenance revenue | 2,681.7 | 400.5 | 18 | % | 2,281.2 | ||||||||||||||||||||||||
Other | 69.5 | (24.3) | (26) | % | 93.8 | ||||||||||||||||||||||||
$ | 2,751.2 | $ | 376.2 | 16 | % | $ | 2,375.0 |
____________________
(1)We expect maintenance revenue will slowly decline; however, the rate of decline will vary based on the number of renewals, the renewal rate, and our ability to incentivize maintenance plan customers to transition to subscription plan offerings.
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Net Revenue by Product Family
Our product offerings are focused in four primary product families: AEC, AutoCAD and AutoCAD LT, MFG, and Media and Entertainment (“M&E”).
Three Months Ended | Change compared to prior fiscal year | Three Months Ended | Management comments | ||||||||||||||||||||||||||
(In millions, except percentages) | October 31, 2020 | $ | % | October 31, 2019 | |||||||||||||||||||||||||
Net Revenue by Product Family: | |||||||||||||||||||||||||||||
AEC | $ | 419.4 | $ | 61.4 | 17 | % | $ | 358.0 | Up due to increases in revenue from AEC Collections, EBAs, BIM 360, and PlanGrid. | ||||||||||||||||||||
AutoCAD and AutoCAD LT | 278.8 | 33.4 | 14 | % | 245.4 | Up due to increases in revenue from both AutoCAD and AutoCAD LT. | |||||||||||||||||||||||
MFG | 194.1 | 11.9 | 7 | % | 182.2 | Up due to increases in revenue from MFG Collections, EBAs, and Fusion360. | |||||||||||||||||||||||
M&E | 54.0 | 3.4 | 7 | % | 50.6 | Up due to increases in revenue from M&E Collections, EBAs, Maya, and 3DS Max. | |||||||||||||||||||||||
Other | 6.1 | (0.4) | (6) | % | 6.5 | ||||||||||||||||||||||||
$ | 952.4 | $ | 109.7 | 13 | % | $ | 842.7 | ||||||||||||||||||||||
Nine Months Ended | Change compared to prior fiscal year | Nine Months Ended | |||||||||||||||||||||||||||
October 31, 2020 | $ | % | October 31, 2019 | ||||||||||||||||||||||||||
Net Revenue by Product Family: | |||||||||||||||||||||||||||||
AEC | $ | 1,199.1 | $ | 202.6 | 20 | % | $ | 996.5 | Up due to increases in revenue from AEC Collections, EBAs, BIM 360, and PlanGrid. | ||||||||||||||||||||
ACAD and AutoCAD LT | 812.9 | 123.0 | 18 | % | 689.9 | Up due to increases in revenue from both AutoCAD and AutoCAD LT. | |||||||||||||||||||||||
MFG | 562.5 | 38.2 | 7 | % | 524.3 | Up due to increases in revenue from MFG Collections, EBAs, and Fusion360. | |||||||||||||||||||||||
M&E | 159.9 | 13.0 | 9 | % | 146.9 | Up due to increases in revenue from M&E Collections, Maya, EBAs, and 3DS Max. | |||||||||||||||||||||||
Other | 16.8 | (0.6) | (3) | % | 17.4 | ||||||||||||||||||||||||
$ | 2,751.2 | $ | 376.2 | 16 | % | $ | 2,375.0 | ||||||||||||||||||||||
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Net Revenue by Geographic Area
Three Months Ended October 31, 2020 | Change compared to prior fiscal year | Constant currency change compared to prior fiscal year | Three Months Ended October 31, 2019 | ||||||||||||||||||||||||||
(In millions, except percentages) | $ | % | % | ||||||||||||||||||||||||||
Net Revenue: | |||||||||||||||||||||||||||||
Americas | |||||||||||||||||||||||||||||
U.S. | $ | 328.5 | $ | 41.2 | 14 | % | * | $ | 287.3 | ||||||||||||||||||||
Other Americas | 64.4 | 2.4 | 4 | % | * | 62.0 | |||||||||||||||||||||||
Total Americas | 392.9 | 43.6 | 12 | % | 13 | % | 349.3 | ||||||||||||||||||||||
EMEA | 364.3 | 34.7 | 11 | % | 12 | % | 329.6 | ||||||||||||||||||||||
APAC | 195.2 | 31.4 | 19 | % | 18 | % | 163.8 | ||||||||||||||||||||||
Total Net Revenue | $ | 952.4 | $ | 109.7 | 13 | % | 14 | % | $ | 842.7 | |||||||||||||||||||
Emerging Economies | $ | 114.9 | $ | 13.3 | 13 | % | 14 | % | $ | 101.6 | |||||||||||||||||||
Nine Months Ended October 31, 2020 | Change compared to prior fiscal year | Constant currency change compared to prior fiscal year | Nine Months Ended October 31, 2019 | ||||||||||||||||||||||||||
(In millions, except percentages) | $ | % | % | ||||||||||||||||||||||||||
Net Revenue: | |||||||||||||||||||||||||||||
Americas | |||||||||||||||||||||||||||||
U.S. | $ | 938.6 | $ | 134.3 | 17 | % | * | $ | 804.3 | ||||||||||||||||||||
Other Americas | 188.0 | 21.3 | 13 | % | * | 166.7 | |||||||||||||||||||||||
Total Americas | 1,126.6 | 155.6 | 16 | % | 16 | % | 971.0 | ||||||||||||||||||||||
EMEA | 1,063.8 | 120.8 | 13 | % | 16 | % | 943.0 | ||||||||||||||||||||||
APAC | 560.8 | 99.8 | 22 | % | 21 | % | 461.0 | ||||||||||||||||||||||
Total Net Revenue | $ | 2,751.2 | $ | 376.2 | 16 | % | 17 | % | $ | 2,375.0 | |||||||||||||||||||
Emerging Economies | $ | 340.0 | $ | 53.1 | 19 | % | 19 | % | $ | 286.9 |
____________________
* 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 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 or protectionism in the global market may impact our future financial results.
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Net Revenue by Sales Channel
Three Months Ended | Change compared to prior fiscal year | Three Months Ended | Management Comments | ||||||||||||||||||||||||||
(In millions, except percentages) | October 31, 2020 | $ | % | October 31, 2019 | |||||||||||||||||||||||||
Net Revenue by Sales Channel: | |||||||||||||||||||||||||||||
Indirect | $ | 656.2 | $ | 69.6 | 12 | % | $ | 586.6 | Up due to an increase in subscription revenue offset by lower maintenance plan subscriptions as we continue to migrate customers to subscriptions through the M2S program. | ||||||||||||||||||||
Direct | 296.2 | 40.1 | 16 | % | 256.1 | Up due to an increase in EBAs and our online Autodesk branded store. | |||||||||||||||||||||||
Total Net Revenue | $ | 952.4 | $ | 109.7 | 13 | % | $ | 842.7 | |||||||||||||||||||||
Nine Months Ended | Change compared to prior fiscal year | Nine Months Ended | Management Comments | ||||||||||||||||||||||||||
October 31, 2020 | $ | % | October 31, 2019 | ||||||||||||||||||||||||||
Net Revenue by Sales Channel: | |||||||||||||||||||||||||||||
Indirect | $ | 1,918.9 | $ | 255.7 | 15 | % | $ | 1,663.2 | Up due to an increase in subscription revenue offset by lower maintenance plan subscriptions as we continue to migrate customers to subscriptions through the M2S program. | ||||||||||||||||||||
Direct | 832.3 | 120.5 | 17 | % | 711.8 | Up due to an increase in EBAs and our online Autodesk branded store. | |||||||||||||||||||||||
Total Net Revenue | $ | 2,751.2 | $ | 376.2 | 16 | % | $ | 2,375.0 | |||||||||||||||||||||
Net Revenue by Product Type
Three Months Ended October 31, 2020 | Change compared to prior fiscal year | Three Months Ended October 31, 2019 | |||||||||||||||||||||||||||
(In millions, except percentages) | $ | % | Management Comments | ||||||||||||||||||||||||||
Net Revenue: | |||||||||||||||||||||||||||||
Design | $ | 847.7 | $ | 99.4 | 13 | % | $ | 748.3 | Increase is due to growth in AEC & MFG collections, AutoCAD Family, AutoCAD LT, and EBA offerings. | ||||||||||||||||||||
Make | 76.5 | 18.6 | 32 | % | 57.9 | Increase primarily due to growth in revenue from BIM Family, Plangrid, and Fusion products. | |||||||||||||||||||||||
Other | 28.2 | (8.3) | (23) | % | 36.5 | ||||||||||||||||||||||||
Total Net Revenue | $ | 952.4 | $ | 109.7 | 13 | % | $ | 842.7 | |||||||||||||||||||||
Nine Months Ended October 31, 2020 | Change compared to prior fiscal year | Nine Months Ended October 31, 2019 | |||||||||||||||||||||||||||
(In millions, except percentages) | $ | % | Management Comments | ||||||||||||||||||||||||||
Net Revenue: | |||||||||||||||||||||||||||||
Design | $ | 2,466.8 | $ | 340.4 | 16 | % | $ | 2,126.4 | Increase is due to growth in AEC & MFG collections, AutoCAD Family, AutoCAD LT, and EBA offerings. | ||||||||||||||||||||
Make | 214.9 | 60.1 | 39 | % | 154.8 | Increase primarily due to growth in revenue from BIM Family, Plangrid, and Fusion products. | |||||||||||||||||||||||
Other | 69.5 | (24.3) | (26) | % | 93.8 | ||||||||||||||||||||||||
Total Net Revenue | $ | 2,751.2 | $ | 376.2 | 16 | % | $ | 2,375.0 | |||||||||||||||||||||
41
Cost of Revenue and Operating Expenses
Cost of subscription and maintenance revenue includes the labor costs of providing product support to our subscription and maintenance customers, including allocated IT and facilities costs, professional services fees related to operating our network and cloud infrastructure, royalties, depreciation expense and operating lease payments associated with computer equipment, data center costs, salaries, related expenses of network operations, stock-based compensation expense, and gains and losses on our operating expense cash flow hedges.
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, overhead charges, allocated IT and facilities costs, professional services fees, and gains and losses on our operating expense cash flow hedges.
Cost of revenue, at least over the near term, is affected by labor costs, the volume and mix of product sales, fluctuations in consulting costs, amortization of developed technology, new customer support offerings, royalty rates for licensed technology embedded in our products, stock-based compensation expense, and gains and losses on our operating expense cash flow hedges.
Marketing and sales expenses include salaries, bonuses, benefits, and stock-based compensation expense for our marketing and sales employees, the expense of travel, entertainment, and training for such personnel, sales and dealer commissions, and the costs of programs aimed at increasing revenue, such as advertising, trade shows and expositions, and various sales and promotional programs. Marketing and sales expenses also include payment processing fees, the cost of supplies and equipment, gains and losses on our operating expense cash flow hedges, allocated IT and facilities costs, and labor costs associated with sales and order management.
Research and development expenses, which are expensed as incurred, consist primarily of salaries, bonuses, benefits, and stock-based compensation expense for research and development employees, the expense of travel, entertainment, and training for such personnel, professional services such as fees paid to software development firms and independent contractors, gains and losses on our operating expense cash flow hedges, and allocated IT and facilities costs.
General and administrative expenses include salaries, bonuses, 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, acquisition-related transition costs, and the cost of supplies and equipment.
Three Months Ended | Change compared to prior fiscal year | Three Months Ended | Management comments | ||||||||||||||||||||||||||
(In millions, except percentages) | October 31, 2020 | $ | % | October 31, 2019 | |||||||||||||||||||||||||
Cost of revenue: | |||||||||||||||||||||||||||||
Subscription and maintenance | $ | 60.7 | $ | 6.5 | 12 | % | $ | 54.2 | Increase primarily due to an increase in cloud hosting costs as well as an increase employee-related costs driven by higher headcount. | ||||||||||||||||||||
Other | 15.4 | (1.5) | (9) | % | 16.9 | Decrease primarily due to a decrease in travel and entertainment expenses as well as a decrease in professional fees. | |||||||||||||||||||||||
Amortization of developed technology | 7.6 | (0.8) | (10) | % | 8.4 | Decrease primarily due to previously acquired developed technologies continuing to become fully amortized partially offset by amortization from recently acquired developed technology. | |||||||||||||||||||||||
Total cost of revenue | $ | 83.7 | $ | 4.2 | 5 | % | $ | 79.5 | |||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||
Marketing and sales | $ | 359.3 | $ | 28.6 | 9 | % | $ | 330.7 | Increase primarily due to an increase in employee-related costs driven by higher headcount, an increase in cloud hosting costs, as well as an increase in stock-based compensation expense partially offset by lower travel and entertainment expenses. |
42
Research and development | 233.0 | 20.0 | 9 | % | 213.0 | Increase primarily due to an increase in employee-related costs driven by higher headcount, an increase in cloud hosting costs, as well as an increase in stock-based compensation expense partially offset by lower travel and entertainment expense. | |||||||||||||||||||||||
General and administrative | 98.8 | (0.3) | — | % | 99.1 | Decrease primarily due to a decrease in stock-based compensation expense and lower travel and entertainment expenses partially offset by an increase in employee-related costs driven by higher headcount. | |||||||||||||||||||||||
Amortization of purchased intangibles | 9.6 | (0.1) | (1) | % | 9.7 | Decrease as previously acquired purchased intangibles continue to become fully amortized partially offset by amortization from recently acquired purchased intangibles. | |||||||||||||||||||||||
Restructuring and other exit costs, net | — | (0.1) | * | 0.1 | |||||||||||||||||||||||||
Total operating expenses | $ | 700.7 | $ | 48.1 | 7 | % | $ | 652.6 | |||||||||||||||||||||
Nine Months Ended | Change compared to prior fiscal year | Nine Months Ended | Management comments | ||||||||||||||||||||||||||
October 31, 2020 | $ | % | October 31, 2019 | ||||||||||||||||||||||||||
Cost of revenue: | |||||||||||||||||||||||||||||
Subscription and maintenance | $ | 176.6 | $ | 9.7 | 6 | % | $ | 166.9 | Increase primarily due to an increase in cloud hosting costs as well as an increase in stock-based compensation expense. | ||||||||||||||||||||
Other | 47.5 | (1.1) | (2) | % | 48.6 | Decrease primarily due to lower travel and entertainment expense partially offset by an increase in employee-related costs driven by higher headcount. | |||||||||||||||||||||||
Amortization of developed technology | 22.4 | (3.8) | (15) | % | 26.2 | Decrease primarily due to previously acquired developed technologies continuing to become fully amortized partially offset by amortization from recently acquired developed technology. | |||||||||||||||||||||||
Total cost of revenue | $ | 246.5 | $ | 4.8 | 2 | % | $ | 241.7 | |||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||
Marketing and sales | $ | 1,051.5 | $ | 90.7 | 9 | % | $ | 960.8 | Increase primarily due to increased employee-related costs driven by higher headcount, an increase in stock-based compensation expense, as well as an increase in cloud hosting costs partially offset by a decrease in travel and entertainment expenses. | ||||||||||||||||||||
Research and development | 682.9 | 48.9 | 8 | % | 634.0 | Increase primarily due to increased employee-related costs driven by higher headcount, an increase in stock-based compensation expense, as well as an increase in cloud hosting costs partially offset by a decrease in travel and entertainment expenses. | |||||||||||||||||||||||
General and administrative | 296.8 | (2.8) | (1) | % | 299.6 | Decrease primarily due to lower stock-based compensation expense and a decrease in travel and entertainment expenses partially offset by increased employee-related costs driven by higher headcount and an increase in cloud hosting costs. | |||||||||||||||||||||||
Amortization of purchased intangibles | 28.8 | (0.4) | (1) | % | 29.2 | Decrease as previously acquired purchased intangibles continue to become fully amortized partially offset by recently acquired purchased intangibles. | |||||||||||||||||||||||
Restructuring and other exit costs, net | — | (0.5) | * | 0.5 | |||||||||||||||||||||||||
Total operating expenses | $ | 2,060.0 | $ | 135.9 | 7 | % | $ | 1,924.1 |
____________________
* Percentage is not meaningful.
43
The following table highlights our expectation for the absolute dollar change and percent of revenue change between the fourth quarter of fiscal 2021, as compared to the fourth quarter of fiscal 2020:
Absolute dollar impact | Percent of net revenue impact | ||||||||||
Cost of revenue | Increase | Flat | |||||||||
Marketing and sales | Increase | Flat | |||||||||
Research and development | Increase | Flat | |||||||||
General and administrative | Decrease | Decrease | |||||||||
Amortization of purchased intangibles | Flat | Flat |
Interest and Other Expense, Net
The following table sets forth the components of interest and other expense, net:
Three Months Ended October 31, | Nine Months Ended October 31, | ||||||||||||||||||||||
(in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
Interest and investment expense, net | $ | (14.6) | $ | (13.9) | $ | (44.9) |