Autodesk’s Q2 highlights that change is hard

Autodesk reported results on Thursday that highlight exactly how hard it is to predict the transition from boxes/perpetual to subscriptions/ratable. Given all the moving pieces, the Q2 results weren’t awful but the share was still down nearly 5% in Friday’s trading session. Investors were expecting a much rosier Q3 revenue forecast, as Autodesk says more customers are opting for subs that originally expected — that means reported revenue will be lower than anticipated wile deferred revenue will be higher. The problem, too, is that it still costs a lot to run Autodesk, what with R&D in cloud, Spark and other initiatives, while subscriptions mean lower recognized revenue — and, therefore, lower net income and other profit metrics. Investors like growth and profit, and sent Autodesk’s shares down.

One of the concerns in the transition to subs has been how channel partners would adapt their businesses to the changed model. Autodesk CEO Carl Bass said that “channel partners have been steadily increasing their desktop subscription business. In Q2 last year, approximately 40% of our desktop subs came through our channel partners; that has increased to approximately 60% this past quarter … Our channel partners were always very vulnerable if we [made the transition too quickly]; they are successfully transitioning their businesses and their customers through this.”

The details:

• Total revenues for the quarter was down 4% y/y to $610 million, missing consensus by $2 million or so, and was flat on a constant currency (cc) basis
• Total billings grew 7% y/y (up 15% cc) driven on higher subscription billings
• Deferred revenue increased 26% to $1.2 billion — remember that deferred revenue is cash on hand from subscriptions that hasn’t been recognized yet — nearly half of the revenue for 2015
• The number of subscriptions increased about 61,000 from the prior quarter (q/q), and total 2.39 million
• License revenue was $291 million, down 17% y/y and down 11% q/q as customer opted for subscriptions. Subscription revenue was $319 million, up 11% y/y and flat q/q
• The all-important recurring revenue metric finally tipped the scale: recurring revenue was 55% in Q2, up from 44% in Q2 a year ago
• By segment, revenues from Platform Solutions and Emerging Business (PSEB) declined 21% y/y to $164 million, on weak sales of AutoCAD and AutoCAD LT
• Revenues from the AEC business was up 7% y/y to $233 million on strong sales of Suites (up 4%)
• The Manufacturing segment reported revenue up 2% y/y to $171 million, primarily because of the addition of Delcam. Suites revenue was actually down 9% y/y
• Finally, revenue from the Media and Entertainment segment were down 6%y/y to $41 million
• Revenue from Flagship products was down 11% to $272 million as the company continues to push Suites (which usually include a Flagship or two) and weakness in the sales of AutoCAD LT. Suites revenue declined 3% to $226 million. Revenues from New and Adjacent products was up 13% to $112 million — this includes Delcam, which was acquired in February 2014, and likely accounted for $25 million or so of Q2 revenue
• By geo, revenue from the Americas was up 6% to $236 million, with performance led by the US
• Revenue from EMEA revenues was down 7% as reported (flat cc) to $226 million, pulled down by declines in Central Europe
• Revenue from APAC was down 13% as reported (down 9% cc) to $148 million, on weakness in Japan.
• Revenues in emerging economies decreased 7% (5% cc) to $92 million, and represented about 15% of total revenue — more or less where it has been for a year. In Q2 2016, growth in China, declines in the rest of the BRICs

Autodesk also announced that it plans to acquire San Francisco-based SeeControl, which markets an enterprise Internet of Things (IoT) cloud service platform. Like all IoT offerings, this “helps manufacturers and systems integrators connect, analyze, control, and manage remote products, things, and assets and create new service revenue opportunities,” according to the acquisition announcement. Autodesk says it will continue to sell and support the SeeControl platform and will incorporate the technology into design solutions for the manufacturing and building industries. Notice that last –“incorporate … into design solution”– it’s huge. By starting a design with IoT capabilities, manufacturers can avoid that whole retrofitting of sensors and transmission technology; designing it in will make it a lot smarter and more adaptable.

Autodesk says it also plans to develop a new IoT solution, based on SeeControl, that will allow companies to gain insights into how their products perform in the real worl, enabling customers to explore innovative new service models. I don’t know why the existing technology can’t do this, and will update if I learn anything — but we may not learn anything soon, since the transaction is expected to close during Q3. Terms were not disclosed. It sounds tiny, however, as it’s not expected to have any impact on Autodesk’s revenue.

The company also tweaked its outlook for the rest of fiscal 2016 (ending January 2016):  For Q3, the company expects revenue in the range of $580 million to $600 million and for fiscal 2016 revenues is now expected to be up 3% to 5% cc to around $2.5 billion. The company expects to add between 375,000 and 425,000 subscriptions for fiscal 2016.

Let’s recap what Autodesk has said it wants to do — and why the transition to subscriptions is so important that it may be worth any temporary pain: It wants to create a tighter relationship with its customers (even if a VAR is an intermediary) in order to get to a higher revenue-per-user. That means that it has to deliver more value, which it hopes will drive users to subscriptions. By many accounts, the Suites offerings and other sweeteners available only to subscribers are doing exactly that. On the negative, of course, is the fact that many users feel forced to move to subs (and other buying mechanisms are being phased out, so this is very real). Will that cause some users to switch to competitors products? TBD as the other buying mechanisms go away, but so far it doesn’t seem likely. Subscriptions also let Autodesk monetizing new cloud-based apps, which have never heard of perpetual/maintenance models, so it’s logical to create a single overall strategy for how products are sold. Finally, subscriptions are by definition flexible and cheaper as entry points, which should get Autodesk to new users. All of this is timing, though: what changes, how quickly, and how much. Investors can deal with this, but not forever.

The real problem is that this stuff is unpredictable. Some had modeled over 80,000 new subscribers in Q2, Autodesk reported 61,000 and said that this was ahead of plan; some are disappointed, others are not with the reported results. Many new subscribers were not “new new” but “new maintenance” — so really, a change in how those existing customers interact with Autodesk. But the company is starting to build experience; Mr. Bass told investors that the company stopped selling perpetual licenses for AutoCAD LT in Australia and New Zealand in Q2, and “the results were very much in line with our expectations. We experienced a surge of buying perpetual LT licenses prior to the cut-off date. Combined seat volume in perpetual LT and desktop subscription LT grew on a year-over-year basis.” He says this experiment is “a positive data point as we look ahead to the end of sale of perpetual licenses for most individual products at year end.”

We’ll see. I’m still concerned about the small shop that has 10ish licenses, and has to go from paying something like $500/seat/year in maintenance to $1,500/seat/year for a subscription — arguable for better and more modern technology — the math may simply not work.

Autodesk is hosting an investor day in September, at which Mr. Bass says, much will be explained.

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I’m off to Autodesk’s Accelerate conference, here in Boston. If it’s anything like last year’s event, we’re going to hear a little from Autodesk and a lot from customers on their PLM implementation experienced. Hope to see you there but, if not, Autodesk is live-streaming the keynotes and you can always follow along on Twitter with the #XLR8PLM, here.