Autodesk’s Q4 sets the stage for a bumpy FY17

Feb 29, 2016 | Hot Topics

As you know, Autodesk is in the midst of a transition from hefty upfront fees to a steadier stream of subscription revenue. The company’s recently announced Q4 results highlight both the positives and negatives of the change — but there was also a lot of good, non-license-related news in the release that shows the company is much, much more than its business model.

First, of course, the financial stuff:

  • The company reported Q4 revenue of $648 million, down from $665 million a year ago (down 3% as reported but up 3% in constant currencies)
  • Lower revenue and shifting priorities led to a Q4 net loss of $33 million
  • For fiscal 2016, Autodesk reported a net loss of $326 million on revenue of $2.5 billion, basically flat as reported and up 4% cc

Let’s put that in perspective. Revenue topped expectations by a bit in Q4 (the company had given a range of $620 million to $640 million) and CEO Carl Bass said in the earnings call that “only a small portion of total unit volume [in Q4] was related to [the] final opportunity to purchase perpetual licenses.” Autodesk customers have, for years and years, been conditioned to wait for promotions before buying a new version or more licenses; Mr. Bass said that Q4 results show that much of the sales activity in Q4 was natural, and would have occurred even without the buy-perpetual-now-or-forever-lose-out vibe. That’s awesome, because it means the company is making products buyers want, regardless of the commercial terms.

That buyer pull comes out in many of the other Q4 and FY16 metrics:

  • Subscription momentum picked up in Q4, as 109,000 more were bought Q4 than in Q3 to bring the total to 2.58 million. That’s up a nice 344,000 for the full fiscal year.
  • What the company calls “new model subscriptions”, or subs for desktop products, its flexible enterprise license mechanism, and cloud subscriptions, grew by 62,000 from Q3 to total 427,000 for Q4
  • We’ll get to more goals below, but Autodesk expects to add 475,000 to 525,000 new subscriptions in fiscal 2017, with the majority of the growth coming from “new model”
  • In total, though, Autodesk said it sold about 650,000 units in fiscal 2016 — so adding around 500,000 seems doable
  • Like everyone else trying to explain why subscriptions are a smart fiscal move (when it looks like they just decrease overall revenue and lead to net losses), Autodesk has created the Annualized Recurring Revenue (ARR) metric to describe the value of a subscription that added little to the Q4 results but has much greater value over time. In Q4 2016, ARR was $1.38 billion, up 10% from a year ago as reported and up 12% cc. percent on a constant currency basis. “New model subscriptions” ARR was $255 million, up a whopping 68% from a year ago.
  • Why does this matter? Because the net loss is an accounting artifact, and doesn’t reflect the true picture. Autodesk reported  deferred revenue of $1.52 billion, up 31% over a year ago. Deferred revenue is committed incoming money that will hit the revenue line when it’s recognized — cash now, revenue later. Before the new fiscal year started, Autodesk had a significant portion of the new year’s revenue already on hand, lending more stability to the business
  • All that said, here are the rest of the results details — remember that comparisons to FY15 and forecasts to FY17 are difficult because of the license model switch:
  • License and other revenue was $329 million in Q4, down 7%
  • Subscription revenue in Q4 was $320 million, up 3%
  • For the year, license and other revenue was $1227 million, down 9% and subscription revenue was $1277 million, up 9%
  • For Q4, revenue from the Americas was $257 million, up 8% (up 9% cc)
  • From EMEA, $238 million, down 13% (down 4% cc) on weakness in the Middle East and Africa, which are affected by low oil and other commodity prices. It wasn’t 100% clear, but it’s possible CFO Scott Herren was speaking only about EMEA when he said that “deals greater than $1 million, [were] heavily driven by our big enterprise business agreements. We had a very strong quarter there. In fact, more than a handful of 8-figure deals there, are all ratable. And the largest manufacturing deal we’ve ever done, we just got done in Q4.”
  • From Asia, $153 million, down 1% (up 6% cc) on weak results from Japan, where demand was flat
  • Emerging economies made up 14% of total revenue for Q4, and 15% for the year. Mr. Bass said that China continues to do well but that others “tanked”
  • By segment, AEC continues to be the company’s largest vertical, with Q4 revenue of $254 million, up 5%. Autodesk’s prepared remarks said this was due to suites, up 2%, especially the Building Design Suite.
  • Manufacturing revenue was $194 million, up 2% on strength in AutoCAD Mechanical (didn’t think I’d be writing that!) while revenue from Manufacturing suites was down 11%
  • Platform Solutions revenue was $160 million, down 15%. AutoCAD and AutoCAD LT combined to record $145 million in revenue, down 12%, primarily because AutoCAD LT was already a Desktop subscription in most of APAC by the end of Q3
  • Media & Entertainment was $40 million, down 7%, due mainly to the Creative Finishing business, which Autodesk exited at the start of Q4
  • We could go into the suites vs other as a percentage of total revenue, but it’s all holding pretty constant. Flagship products continue to be 45% to 46% of total; Suites, 36% to 17%; New and Adjacent, 17% to 19%. The only truly interesting part here is that the importance of AutoCAD and LT revenue to the top line is shrinking, starting the year at 25% of total but ending in Q4 at 22% of total. Autodesk didn’t say, specifically, but it’s likely due to the change to subscription-only
  • Autodesk stopped reporting on its channel a while ago — but Mr. Bass told investors that the channel is now on board with subscriptions: In the last 4 quarters, the channel volume of desktop subscription has increased by more than 400%. In Q4, 65% of desktop subscription volume came through channel partners, up from less than 50% in Q4 last year.

Mr. Bass said that Autodesk achieved its “highest quarter for new model subs for the year, and highest ever in terms of organic new model sub adds, in the same quarter that we hit the end of sale of perpetual licenses for individual products, a remarkable achievement.” That’s a strong start, he told investors, to creating long-term value. The subs model requires Autodesk to change how it goes to market to better align costs with subscription revenue: “a significant increase in our direct-to-customer sales and marketing efforts, at the enterprise level and through e-commerce.” The goal: to improve (meaning lower) the cost structure, and to increase how effectively we serve our customers.

Part of this simplification will be Autodesk’s introduction of what it’s calling collections towards the end of this year. Mr. Bass told investors that collections will simplify the huge product portfolio and “give an incentive for the existing customers, who are on maintenance for suites, a more attractive thing to move over to. So as we said, we want to try to use the carrot as much as possible to convince our customers, our best customers, who are on maintenance subscription, to move over. That’s what we really are looking to do.”

And, of course, the cloud: “we are exploiting the cloud to deliver more compelling products to our current customers, and dramatically expand the size of our market opportunities.Our early investment in cloud-based design and engineering tools has given us a the opportunity to lead in both the construction and manufacturing software markets. Mainstream mobile and cloud technologies have opened up a market with more than 100 million potential subscribers … Let me be as clear as possible. The technology platform for the future, for all design and engineering software, really for all software, is the cloud. And the company that wins will have substantial and sustainable long-term advantages.”

Autodesk also set its targets for fiscal 2017: In Q1, the company revenue of $500 million to $520 million and, for the year, revenue of $1.95 billion to $2.05 billion. The company also forecast losses for both periods. Mr. Bass tried to guide investors to an understanding of the balancing act he’s trying to orchestrate:

Q1 will be our first quarter with only subscription offerings for individual products. We have a number of sales promotions in place to accelerate our customers’ move to desktop subscriptions. The best result for us [in Q1] would be to be higher on subscriptions and lower on revenue. This may seem counterintuitive, but in fact would result from an accelerated transition to desktop subs.

The end of Q2 will be the next major milestone of our business model transition, as we stop selling perpetual licenses for suites. We expect the dynamics will most closely resemble what we saw in Q4, with the end of sale for individual products. Q3 will be our first quarter of subscription-only sales across the board, and we’ll likely experience sequential slowdowns. And Q4 should begin to show more normal sales trends in our new subscription only model.

Later in the call, he added:

I can’t highlight enough that the next four quarters are just going to be a little bit odd. And that’s why we pointed to … volume. We think volume will be up. Look at ARR. There will be a number of metrics that are really the foundation for the business doing well, and for underlying demand.

Buckle in. It’s going to be an interesting year!