Autodesk reported results last night that highlighted how tough the economy is, and perhaps will be for a bit longer than earlier-reporting companies had hoped. Until now, just about everyone pointed to tepid demand that got worse as we moved from January into February and March. That seems to have worsened in April, as CEO Carl Bass said that Autodesk’s “weak April led to a disappointing finish to the quarter”. If April continued the weak streak, how will that affect everyone’s Q2 results? We’ll have to wait and see but let’s take a look at what happened during Autodesk’s quarter ended April 30, 2013.
The big headline, of course, is that total revenue in Q1 was $570 million, a drop of 3% percent year/year, and at the very bottom end of earlier guidance of revenue between $570 million and $590 million (and below the analysts’ consensus of $584 million). In February, Autodesk had guided to overall revenue growth of about 6% for fiscal 2014; last night, that was pulled back to 3% growth. As CEO Carl Bass told investors, “The macro sentiment was just tougher in general [in Q1, it was] just a tougher selling environment.”
He didn’t say that Autodesk is seeing anything unusual in a competitive way, but did say that customers are starting to think about how they buy software: “The news from Adobe during the quarter about ending perpetual licenses, and the lead-up to that, certainly has our customers asking questions about it. There’s clearly a decline in desktop PCs but, on the other hand, our customers still need workstation-quality devices in order to do their day jobs. They continue to buy software and hardware to do it. But I think there is some doubt about the business models, the delivery models, and the platforms going forward. It’s too early for me to declare that this is an ongoing thing, but I do think there are a number of points in there like that.”
Some of the earnings details (look here for the complete package of material):
- Total Q1 revenue was down 3% year/year (y/y) and down 6% sequentially to $570 million. Remember that promotions in Q4 pulled about $24 million from Q1 into Q4 (one wonders if this is ever a good idea, that whole “robbing Peter to pay Paul” thing). Q1 2014 revenue was flat y/y on a constant currency (cc) basis.
- By geo, revenue from the Americas was down 3% y/y to $202 million with flat revenue in the US and declines in “most other countries”. Last quarter, Mr. Bass riffed on the US sequester; it turns out that it wasn’t a major factor in Q1. Mr. Bass and CFO Mark Hawkins said that Autodesk’s direct business with the US government is small, but grew y/y. On the other hand, “contractors who provide services to the government said that ‘things got hung up’ so the question is how much is postponed versus canceled. In talking to our infrastructure customers, there’s no doubt that money’s dried up, which affects the private sector that’s associated with the public sector work.”
- Revenue from EMEA decreased 4% to $216 million but was up 1% in cc. Like many other companies in our universe, Autodesk reported mixed results by country, weakness in southern Europe and good large deal activity in Norther Europe.
- Asia Pacific had been particularly strong in Q4 but also dropped 3% in Q1, to $152 million (but up 1% in cc). Constant currency growth in Japan wasn’t able to offset declines in “most other countries”.
- Analysts on the earnings call did try to pin down the “most other countries”-types of qualifiers, but Autodesk wasn’t budging.
- Autodesk has been highlighting emerging economies to showcase its reach to new customers. Lately, that hasn’t been going so well; in Q1 revenue from emerging economies declined 8% as reported and 6% in cc to $75 million. That’s the lowest total since early 2011. Mr. Bass said that there are three factors at play here, that serve to stall growth: these customers aren’t buying suites, the individual economies are more volatile and Autodesk’s ability to grow there is “tempered by the piracy. Piracy rates are somewhere north of 80% in these emerging economies, which means the availability of software that you don’t have to pay for. That’s just a difficult environment, and we do the best we can against that backdrop. But as economies weaken, or as governments let up on their compliance efforts, companies see it as an opportunity to contribute to their bottom line rather than ours.”
- By category, license and other revenue declined 9% to $324 million. Subscription revenue (which includes maintenance for perpetual licenses as well as true subscriptions but is at this point mostly maintenance) was up 6% to $247 million.
- Revenue from suites was $176 million, 31% of total revenue in Q1 (as compared to 30% of total in Q4). Mr. Bass said that suites will continue to drive Autodesk’s growth: “Suites did well. They do just seem to do well enough to offset some of the short comings in individual products” and CFO Mark Hawkins added that the renewal rate on suites is higher than the renewal rate on average for the company. My take: suites will grow revenue from new and repeat subscribers and will add stability because of the higher renewal rate.
- By business line, revenue from the Platform Solutions and Emerging Business segment fell 6% y/y, to $213 million, in part because customers are increasingly opting for suites and not standalone products like AutoCAD and AutoCAD LT.
- Revenue from the AEC segment was up 4% y/y, to $172 million. Revenue from AEC suites increased 14% y/y; the company highlighted demand for the Building Design Suites and Infrastructure Design Suites. Mr. Bass said that AEC grew in all 3 major geographies amid signs of a recovery in the commercial construction market.
- Revenue from the manufacturing business segment fell 4% y/y to $139 million. Revenue from manufacturing suites, especially the Product Design Suite, was up 8% but could not offset the declines in revenue from standalone products. Mr. Bass said that “the global manufacturing market has been more influenced by the downward pressures”, presumably reflecting consumer caution. He also said that Autodesk has had several multi-million dollar transactions over the past few quarters with automotive companies that he believes will lead to added sales in those companies’ ecosystems (like PTC’s Domino strategy from a couple of years ago) but didn’t give details.
- Revenue from the company’s Media and Entertainment business segment fell 8% from a year ago to $47 million. Autodesk’s prepared remarks said that some of this decrease in M&E is due to “the inclusion of our M&E products in other Autodesk industry suites”; it would be interesting to know if that was material to the growth reported in the other parts of the business.
- The cloud offering came up, but not as often as in the past. Mr. Bass said that Autodesk PLM 360 and Simulation 360 “continue to gain momentum” and that PLM 360 now has over 10,000 users — but “billings and revenue contribution are still immaterial, [although] the trajectory is encouraging”. He said that adoption of the cloud services that are attached to the desktop products will be a really good indication of how customers perceive the value of the web services that come along with the Suites.
- The move to subscription licensing was more top-of-mind for analysts on the call, especially following Adobe’s announcement earlier this month. Autodesk will roll out rentals of its suites this year but Mr. Bass does not anticipate these changing the business model for fiscal 2014. Indeed, he said that “I don’t think the ending of perpetual licenses abruptly is such a good idea. It’s certainly not what our customers are asking for. So I think the rate of that transition for us will be slower, because we’re going to still offer that choice to our customers … We’re going to end up in a similar place to Adobe over the long term, but how we get there will probably be different”.
- No details, but Autodesk’s channel performed better in major accounts in Q1 than did direct sales, “the opposite of what it’s been for the majority of the last six quarters”, according to Mr. Bass.
- One investor asked about Autodesk’s consumer business, which isn’t broken out in any of the financials. Mr. Bass said that “The consumer business kind of doubled in size on a small base. The consumer business is a distinct part of our business that doesn’t interfere with the operations of the rest. It has been a wildly successful marketing engine for us. We are learning a tremendous amount by serving consumers. We’re also learning a tremendous amount about new ways to monetize. As we’ve continued to work this year, the goals have shifted from the experimental towards turning it into revenue, and we’re finding the ability to do that.”
Autodesk is taking “what we saw in April [and] don’t try to assume that things are going to get better. We think it’s more prudent to plan with what we see” and now forecasts revenue of $550 million to $570 million; for the year, a 3% increase would be about $2,380 million.
All of this presumes a stronger-than-normal second half, which CFO Mark Hawkins says is possible because of relatively weak comparables to last year, growth from Suites and LT and the focus on subscription. Mr. Bass added that the company’s major account business is becoming increasingly back-end loaded, “not a characteristic I particularly love, it just happens to be a fact. It has somewhat to do with our end of year, and our customers’ end of year spend”.
Performance in Q1 and that outlook are sure to drag the stock down at the opening bell this morning (it’s down 6% as I write this at 7AM ET). But mitigating the forecast are improvements in the company’s sales execution and other reactions to the Q1 results. The company had been talking about changes it had made that caused confusion and lowered productivity. Mr. Bass told investors that the after-effects of these changes are “diminishing … we probably saw slightly more effect from overall macro and less from our internal sales things, but there’s probably still some lingering effects”. Too, Mr. Bass said, “we’re not particularly pleased with the results this quarter, and we put in a bunch of plans already to rectify it. So, we see kind of small incremental improvements we can make to drive better results for the rest of the year, and so, we will continue to tweak those.”
What does it all mean? Some teeth-gnashing, as we all wait for governments to get their finances in order, industrial demand to pick back up, and nerves to steady. But it’ll smooth back out. Autodesk is taking risks to position itself on the cutting edge of both user experience and tech platform — but they’re measured risks that are likely to pay off once customers resume more normal buying habits.