Autodesk Q2 revenue down, AEC investments pay off

So this is interesting: I’m watching Autodesk’s share price the morning after the company announced relatively dismal results for its second quarter — and the price is climbing. Last night, after the market closed and Autodesk released its earnings info, the price fell by 3% to 5%; this morning,  an hour after the opening, the share is up 11%. I don’t pretend to understand investor behavior but imagine this uptick is likely (as I discussed with Jeff Waters in a Life Upfront podcast) due to the company’s leadership. CEO Carl Bass and CFO Mark Hawkins seemed to acknowledge and understand the situation, have a plan for dealing with it and ways to measure if the plan is working. It doesn’t hurt that Mr. Bass have already started selling investors on the “exciting changes” and “business model evolution” coming later this year. But, you ask, what are the results? The big headline, of course, is that total revenue in Q2 was down 1% year/year (y/y) to $562 million; coming on the heels of Q1’s 3% y/y decline to $570 million, that’s not so good. There were a few bright spots, though, as AEC and Manufacturing industry revenue was up, North America was up — but revenue from many of Autodesk’s product categories declined, as did sales in other parts of the world including emerging economies. One interesting factor in the overall revenue decline was the impact of Autodesk’s decision to switch from selling to granting educational licenses (in some regions and to some institutions). Autodesk says that this change dragged down total revenue growth by about 2%, mostly in North America. Autodesk has, for decades, been the de facto vendor for engineering and design products used in vocational programs the world over. If Autodesk now has to give away what it could previously charge for, it would seem that its competitors’ educational projects are having some effect. Some of the finer points of the earnings release (look here for the complete package of material):

• Total Q2 revenue was down 1% y/y and down 2% sequentially to $562 million. Q2 2014 revenue was up 2% y/y on a constant currency (cc) basis.
• By geo, revenue from the Americas was up 2% y/y to $202 million as growth in the US was partially offset by declines in Canada and saw most of the decline due to the way educational licenses are now donated and not sold.
• Revenue from EMEA decreased 4% to $202 million y/y and was flat in cc. Like many other companies in our universe, Autodesk reported mixed results by country, weakness in southern Europe.
• Revenue from Asia Pacific was down 1% as reported in Q2, to $158 million (but up 4% in cc). Constant currency growth in Japan was “strong”.
• Autodesk continued to struggle in its “emerging economies” category. In Q1, revenue from emerging economies declined 8% as reported and 6% in cc to $75 million. There was a bit of a sequential recovery, as revenue was $86 million — but that’s still a 2% decline y/y. The company said that revenue was down in Russia and India and up in China.
• By category, license and other revenue was down 6% to $313 million (after declining 9% y/y in Q1). Subscription revenue was up 6% y/y (same as last quarter) to $249 million.
• It’s hard to tell from the reported information exactly how Autodesk’s products are doing. As you know, the company is migrating customers to suites wherever possible; that means sales of individual product decline as suite sales go up. But it’s not a 1:1 correspondence since suites are bundles, cheaper than buying the individual products alone … At any rate, revenue from suites was up 18% y/y to $193 million, 34% of total revenue in Q2 (as compared to 31% of total in Q1). Revenue from Flagship products was $289 million, down 11% due to lower sales of AutoCAD and AutoCAD Mechanical.
• By business line, revenue from the Platform Solutions and Emerging Business segment fell 9% y/y, to $197 million. Part of the decline can be ascribed to sales of suites, part to “challenging dynamics in some of the end-markets we serve.” Sales in this segment were also affected by the switch to donating educational licenses.
• Revenue from the AEC segment was up 9% y/y, to $177 million. Revenue from AEC suites grew a whopping 36% y/y; the company again highlighted demand for the Building Design Suites and Infrastructure Design Suites. Mr. Bass said that AEC grew in the Americas and Asia Pacific as “the green shoots of building and construction activity that we started to see a few quarters ago continue to grow.” Weaker areas include Southern Europe and some of the emerging economies.
• Autodesk has been in the news a lot lately for making AEC-specific tech asset acquisitions like those from Get The Point, which creates data from Revit and CAD models to drive robotic total station hardware on construction sites; from Bestech Systems, software for bridge design and analysis; and from Savoy Computing Services, software for the design of parking areas and rotaries/roundabouts. Each of these seem like little niche add-ons (and they are) but they’re critical to Autodesk’s AEC/Infrastructure future. It’s unlikely any of them contributed to Q2 results, but they keep the company in the AEC-specific headlines and generate interest that will, ultimately, lead to sales.
• Revenue from the manufacturing business segment grew 2% y/y and 4% sequentially to $144 million. Revenue from manufacturing suites was up 14%. Mr. Bass again said that progress in the automotive industry is going especially well, with ”

  significant wins with global manufacturers as well as key suppliers”.

• Revenue from the company’s Media and Entertainment business segment fell 11% from a year ago to $43 million. Autodesk’s prepared remarks again said that some of this decrease in M&E is due to “the inclusion of our M&E products in other Autodesk industry suites”.
• Mr. Bass continues to hype Autodesk’s PLM offering: “There are days I wish we were only a PLM company. In today’s environment, we’d be worth billions of dollars for just our efforts in PLM. Our PLM business is doing well,  being really well received. Most of our challenge in that part of the business is getting enough salespeople, enough consultants in place, having enough people to support our partners with the PLM business because it really is meeting the need of PLM customers and it offers all the attractiveness of what you see in many of the other cloud-based companies, Salesforce and NetSuite or Workday.”
• As for simulation, Mr. Bass said, “we have more of a mixed business there, both desktop as well as cloud-based. We’re really happy with the response to the cloud-based business … I’d say the most successful product we have in simulation right now is our CFD products … Even this quarter there were a bunch of product lines where I was seeing double-digit growth in simulation. So really, really pleased with what we’re seeing there.”
• No real details, but it appears that Autodesk direct sales picked up in Q2, as the company ”

  saw generally good major account activity, good business through our value-added resellers and the softness was in isolated portions of the world and through some of the volume channels”. Mr Hawkins said that bid deals were similar to and slightly up from a year ago.

• Mr. Bass also spoke about the consumer business, saying that “50 million users have used our consumer products more than 220 million times in the last 30 days”. I’m not sure if that’s good (it’s a lot of users, but only 4x/month on average?), but it’s not generating revenue that the company reports on.

Fine fine, you say, but what are these “exciting changes“? There weren’t any real announcements on the call, but Mr. Bass did hint at expansion of the more flexible licensing policies announced with Fusion 360. Mr. Bass hinted at possibilities like a “true-up at the end of the year based on usage as opposed to negotiations upfront”. That would be cool — a try pay-per-use model. He also said that in a “handful of years … the vast majority of our revenue will come from ratable revenue streams … The changes we’re contemplating and the plans we have in place enable us to do this across the product line”. Expect these changes to be gradual, though: “as regards to our rentals, we’re just adding to it. We’ve been entering the market on a rolling basis and we’re going to continue to do that. I don’t see any products that won’t be offered that way going forward. ” Mr. Bass made clear that he sees Autodesk’s channel partners as key — regardless of the details of the license scheme. He told investors that “Our channel partners, both the value-added resellers and the volume resellers will play an important role as we go forward. We’re not anticipating a big change in the mix between channels.” [The business is hovers at 85%-90% indirect — Ed.] Autodesk says that it sees Q3 revenue coming in at $540 million to $555 million which means Q3 will be down 1.5% to up 1.5%. The company had guided to full-year revenue growth of 3% but that’s starting to look quite difficult to make. Given the change in license options and customer adoption patterns, Autodesk has decided to hold off on giving full-year guidance until its investor event on October 2.