Autodesk’s Q2 signals we may be on the upswing — finally

Autodesk investors are probably a pretty happy bunch today, as last night’s earnings release held mostly good news and offered an upbeat look ahead. One word: bottomed. Second word: Maybe.

Some of the details (and many more are here):

• Total revenue in FQ2 was $502 million, down 9% from a year ago (down 4% in constant currencies), as those nice big upfront payments no longer appear in a subs-only world
• Maintenance and subscription revenue was $458 million, up 21%
• Within that total, maintenance revenue was $262 million, down 6%, and subs revenue was $196 million — almost double the Q2 a year ago
• Recall that Autodesk uses a bunch of other metrics to try to describe its progress when the black and white revenue picture doesn’t tell the full story. Annualized Recurring Revenue (or ARR) takes the average of the last three months’ revenue and .. annualizes it (presumably by multiplying by 4; why can’t they just say that?!). Using that math, Subscription ARR was $784 million, an increase of 94% over last year while Maintenance ARR was $1.05 billion, down 5% year/year as buyers transition to subs from traditional maintenance agreements
• The company reports adding 270,000 subscribers to its products, enterprise agreements and cloud offerings, to reach a total of 1.59 million. Across all products and subscription types, Autodesk reports that it has 3.44 million total subscribers, a net increase of 153,000 from the first quarter
• Interestingly, it said that 63,000 subscribers migrated from maintenance plans to product subscriptions and that, in total, it has 1.85 maintenance subscribers, down 117,000 from the first quarter of fiscal 2018. So, a bit of math shows that 54,000 (117-63) subscribers were somehow lost during Q2 -whether as a normal part of businesses shedding employees and licenses, renewals not processed on time, subscribers dropping maintenance while assessing their options or defections to competitor products. In its investor call, Autodesk says this was expected and represents “a pretty normal churn rate for our maintenance plan even though the company announced a maintenance price hike during the quarter
• Also interesting: CEO Andrew Anagnost said that new customers represented around 30% of the new subscriptions added in the quarter. These are gained by converting unlicensed users, people migrating from a competitor, untapped potential in new geos or new markets.
• A bit more math: I put the total of new customers at 70,000 or so. Those new new users outnumber the 54,000 users who may have dropped off maintenance for a moment or for good. In other words, the strategy of creating a lower-priced entry point to its solutions appears to be gaining the company more customers than it has alienated by the switch. (More on that below)
• And finally, Autodesk is talking more and more like the big-software company that it is. Mr. Anagnost focused some of his remarks on enterprise business agreements or EBAs. The company (not resellers) create EBAs with its largest customers to “increase subscriptions and account value, while providing increased flexibility for our customers. This increased flexibility has led many of our EBA customers to increase their usage as they adjust to the new licensing system … [Looking at] EBA customers in June 2016, the monthly average usage for these accounts increased 10% in the last year … [leading to] on average, contract sizes increasing by over 30%.” Why does this matter? Because the world’s largest engineering companies want to deal with a global provider and because it forces Autodesk to step up and scale its offerings as never before — and because these deals are big, with Mr. Anagnost calling out 2 deals of over $10 million in Q2 alone
• By geo, revenue was down 7% in the Americas to $214 million; down 10% in EMEA to $199 million and down 12% in Asia to $89 million.
• By product family, revenue from AEC was $209 million down 18% year/year and revenue from Manufacturing was $147 million, down 17%. In contrast, revenue from AutoCAD and AutoCAD LT was $97 million, up 32% and revenue from Media and Entertainment was $38 million, up 10%
• And, the point of it all: recurring revenue now represents 91% of total revenue.

What does this all mean? Early indicators are that the worst may be over; the number of new customers outpaces the defectors (who may not all be leaving, but are not in this quarter due to timing). Customers are starting to get used to and even embrace some of the flexibility that subscriptions offer, as is the case with the EBAs cited by Mr. Anagnost. Lastly, all of this change and churn gives Autodesk and its partners plenty of reasons to call on customers and make them aware of all that’s new – Mr. Anagnost said that nearly a quarter of all maintenance renewal in Q2 migrated to subscriptions and, of those, nearly 10% upgraded from an individual product to higher value industry collections. That’s during a maintenance renewal –not a new product evaluation, with the attendant sales and signature cycles.

Worrying is the disproportionate decline in revenue from AEC and Manufacturing products. It’s hard to tell from the data given by Autodesk why this might be the case –so many moving parts to this story right now, and this may simply be a tough comparison given prior incentives to move to subs– and it bears watching,

Autodesk also gave a rosy outlook for Q3 and the rest of its fiscal 2018, For Q3, it sees revenue of $505 million to $515 million, up about 5% as this will be the first subscription-only sales comparable (but there is a bit of weirdness in the year-ago Q3 in that there was a $38 million “license backlog that rolled over from the end-of-sale of suites perpetual licenses in Q2 ‘17. ” Not sure what the means, but, still. Growth. Yay!)

For FY18, the company expects revenue of $2.03 billion to $2.05 billion, flat-ish.