Carl Bass Leaves Autodesk. Now What?

A season of shock waves has us reeling. First, Donald Trump gets into the White House. Then Carl Bass leaves Autodesk. Could the two events be related?

Don’t even go there, said Carl. 

We spoke to Carl (see full interview) a week after his here-one-day/gone-the-next announcement shook up the CAD world. By this time, he was already weary of theories of why he had left. Carl's displeasure with Trump is no secret, but it wasn't Trump that sent him packing, he said. Nor was he fired by the board of directors. The answer is much simpler.

Apparently, Carl has been wanting to leave Autodesk for some time.

How It Went Down

The wheels leading to Carl's exit started turning years ago: “Two years ago, I went to the board and said, ‘It's getting time for me to step down.’ I had been doing this job a while, and it was time to hand off the reins.”

Carl talks slowly and patiently to set the record straight after everyone from front-row journalists to anyone with a Twitter account has offered their explanation—and got it wrong. “From the company perspective, it was time for a new leader. It was time for me to go do other things that I have interest in doing.”

From the picture in Carl's farewell post showing him in his Berkeley, Calif., wood shop, we can guess that will mean making things, not software. He doesn't deny it.

But in 2015, Carl’s timing was off. “We were going through a business transition,” said Carl, “and the board talked me into staying.”

The “transition” refers to a decision for which he is seen as responsible, during which Autodesk software went from selling its software to renting it, or, in other words, a transition from perpetual licensing to subscription, or term, licensing.

Carl stayed on as the business model transitioned. But as the stock price swung low and profitability suffered, “activist” shareholders emerged, caused a ruckus and managed to worm their way onto the board of directors. This was in the fall of 2016.

Carl's plans to leave were on hold again last year, said company spokesperson Clay Helm, as the board decided to have Carl stay onto talk some sense into the activist board members. Again, it was not a good time to bring in another CEO, said Carl.

“When they showed up, we collectively—meaning me, the board and the management team—thought that this was a bad time for a transition. As you look for a successor CEO, it would be difficult to attract an outside CEO to a situation in which there are activists on the board. There would be people looking over your shoulder—you are getting criticized.”

But eventually, some compromise was reached. The activists on the board would step down. Carl could leave his CEO position and stay on the board as a “special adviser.”

Should Have Seen It Coming

Carl began cashing in his chips last Christmas, exercising his stock options to the tune of almost $27 million. Stock options cannot be exercised after you leave the company.

It was all by the book, explained Carl. “I had actually put that plan in place months before. It even was triggered by the price. I’ve never woken up in the morning and called my broker, so to speak.”

But if anyone was watching the insider trading, they would have had a good clue of an impending exit.

“I still have a huge amount of Autodesk stock,” said Carl, lest he be accused of turning his back on his old company.

Why the Big Surprise?

Carl understands it surprised everyone, but that was by design. Nobody knew, except for the board. He expresses some pride that he and the board were able to keep the plan secret and maintains that it was the best way to handle it.

What Did This Have to Do With Activists?

Carl’s squabble with “activist” stockholders has been public. Back in late 2015, he blasted one investor for seeking short-term gains that would compromise Autodesk's long-term future.

“A year ago, they didn’t like the stock price. There was a lot of uncertainty. Now, they love the stock price,” he added.

It was Feb.9, 2016, when Autodesk shares hit a relative low of $41.60. They are currently at their highest ever at over $84.

“These activists take on everything from oil to retail to engineering software. They don't know much about this business. They looked at the change in the business model transition and said profitability should be higher. But over the course of the year, they basically didn't say anything.”

Coming to Terms

Carl leaves Autodesk after presiding over the biggest change ever made in the company's business model, rendering the buy-once/own-forever model familiar to millions of customers to a thing of the past. The switch to term licensing was a decision that led Autodesk down what its own people would refer to as a “bumpy road.”

“Autodesk was the first in the CAD industry to do that, right? You don't think that was a risk?” We have to know.

“Yes, but guess what? The CAD industry is a little bit behind the rest of the world,” said Carl. “I think you’ve already seen that PTC is starting to follow. They're all putting their toes in the water. Five years from now, I will be shocked if there's anybody who still sells perpetual software. It’s just a question of timing. The world is not going back. Autodesk is not going back.”

With all the software now on term licensing, a decline in revenue upfront should be made up by the same revenue—if not more—over the long term, explained Clay Helm, an Autodesk company spokesperson.

The Adobe Lesson

Autodesk looked to Adobe, as did the rest of the software industry, as a model for switching from perpetual to term licensing. Adobe, the 11^th largest software company by revenue (Autodesk is 18th), turned completely away from perpetual licensing in 2013 and revamped its business model—to the chagrin of millions of Photoshop and Illustrator users. Profit dropped, but after three years, it had climbed back up to previous levels. Last quarter, Adobe was to post record highs in revenue and profit.

Autodesk Follows

For Autodesk, the transition started a little over two years ago, first with AutoCAD LT, then followed by waves with each major product line. But although Adobe managed to stay profitable during the transition, which may have afforded its management some measure of patience from the board and investors, Autodesk was not as fortunate.By the last reported quarter, there had been six consecutive quarters of loss.

Were things starting to unravel? A picture of internal dissent and a fractious board has been painted by the San Francisco Business Times and others, suggesting the activist stockholders had gained control of the board and were able to sack the CEO. The activists had indeed secured 11.5 percent of the shares of Autodesk and planted three of their people on the board. Was Carl forced out due to a changing business model?

“You are barking up the wrong tree,” said Carl, who denies the dissent on the board and fights with investors. “The influence of the activists has not been significant.”

Term Licensing Here to Stay

With or without him, the term licensing model for Autodesk software is moving ahead, Carl insisted.

“There is seriously nobody who doubts the model. You'll see it continue with incremental changes—no dramatic changes,” said Carl. “The two things we did is we decided to change from a perpetual license post maintenance to the subscription model. Then we decided to move software to the cloud. You can talk to [the co-CEOs] Andrew [Anagnost] and Amar [Hanspal], but you'll see. I would be shocked if either of those changed.”

Users unwilling to pay for Autodesk every month or every year can keep their software and continue using it—forever. “The customer previously bought a perpetual license in the past—that license doesn’t go away,” said co-CEO Andrew Anagnost in an 2014 interview on Autodesk's blog—though this, a non–revenue-producing situation, cannot be what Autodesk wants or needs.

Autodesk Taking a Beating

For as long as recent records show, Autodesk could be counted on to deliver a profit, year after year. But in August 2014, it took a nosedive. The company announced a whopping $236 million loss for the quarter. Although the loss was tied to a “big provision for income tax,” it was also the same quarter in which seeds of the business model transition were planted. In the ensuing call, the CEO stated,“we are pleased with our results,” but took the opportunity to warn of an upcoming storm—the licensing transition was about to rain on the parade for the next few years.

“It's worth repeating that our business model transition will not be perfectly linear and that the amount of business that we transition and a number of new subscriptions will fluctuate from quarter to quarter and year to year,” Bass said in a Q2 2015 Results Earnings Conference Call. “We are expecting the transition to progress gradually in FY2015 and then ramp more significantly by the time we get to FY2017 and FY2018.”

Autodesk almost came up to the surface two quarters later with only a $33 million loss—but sank back. Last quarter (Q3 FY2016), the company posted a $143 million loss.

It was the first quarter in which the company sold nothing but subscriptions.

“We are pleased with our results for the quarter, which were driven by strong growth in product subscription,” said Carl, in a company press release. “This was the first quarter of selling only subscriptions, a significant milestone in our business model transition.”

But in the middle of the next quarter, which Carl hinted will also be a good one, he announced his departure.

In the Interim…

The CEO duties will be shared by two of Autodesk's rising stars, Amar Hanspal and Andrew Anagnost, until a new CEO is determined. Amar, once a product manager under Carol Bartz, has been given enormous responsibility with Autodesk's architecture, engineering and construction and manufacturing industry groups. Andrew rose from under Dominic Gallello's tight grip of the mechanical division to head all of Autodesk's marketing. Both flourished under Carl and were often highly visible in Autodesk's main event, Autodesk University.

Amar and Andrew bring more than 50 years of combined experience at Autodesk and have been working together for many years, added Clay.

The board made the choice of co-CEO, said Carl, although he concurred. “They were the two most natural people to keep things going. Andrew’s been responsible for a lot of the business model, and Amar's been responsible for products. Andrew knows a tremendous amount about products. Amar knows a tremendous amount about marketing and the business.”

Staying on in his CTO position is Jeff Kowalski, who for years has been at Carl’s right side during the main stage at Autodesk University and the Q&A that follows. One might have expected the CTO in a company that over the last 10 years had morphed into a product-first, tech-innovative company to have the pole position in the race for the next CEO. Such was the case with SOLIDWORKS. Gian Paolo Bassi came to SOLIDWORKS as a CTO and became the CEO.

“I hired Jeff right out of college, so I’ve known Jeff for a fair amount of time,” Carl said.“Jeff is a very smart and very talented guy, but I think Jeff has the perfect job for him. I don't think he has any interest in the CEO job, in a company like Autodesk. Jeff is fantastic at what he does. I think he really enjoys thinking about how things are going to be in the future, and he’s been incredibly important in leading the company through the technology changes. I think he wants to keep doing that. When you think of all the other things that are on the plate of a CEO, Jeff has no interest in them.”

A global search is underway for the next Autodesk CEO, and Carl is not ruling out that it might be still be Amar or Andrew, or someone else at Autodesk.

“There are a number of people within the company who are very capable of taking over, but it’s the obligation of the board to try to find the best person in the world to do this. We’ve hired a search firm. I think within the next few months, a decision will be made, and the new CEO will be announced.”

“Amar and Andrew are well regarded by the executive team,” said Carl. “It’ll fall on the shoulders of the entire executive team to keep things moving until the next CEO is chosen. Jeff will keep doing what Jeff does. Steve Blum will keep selling. R. Scott Herren will continue to be responsible for finance.”

Users Not Going Anywhere

Autodesk people, past and present, praise the term licensing model, indicating that it’s a certainty for the company. Autodesk has laid the groundwork for a more modern software licensing model. However, the transition has been rough. Management and the board have shown courage as they turn the ship into the wind, confident that they will emerge from the storm. It is no small feat for a company the size and age of Autodesk. If Adobe serves as an example, it will still take more time to get to previous levels of revenue and profit.

While Autodesk's user base may not all have immediately jumped on term licensing, at least they don’t seem to have jumped ship. Had there been a mass exodus as users picked up other design software, we would have heard about it. Last summer, Bentley recently threw its doors wide open for any and all Autodesk refugees of mechanical, architectural or civil persuasions with a "we're-still-here-for-you-with-our-perpetual-licensing” campaign. Media favorite Onshape would like nothing better than to receive every disgruntled Inventor and Fusion 360 user. SOLIDWORKS actively sought to tell a story with users that had switched its software.

It seems reasonable to predict that while Autodesk's competitors may dislodge a few users in the switch to term licensing, the vast majority of Autodesk users will stay put. Through decades of its existence, Autodesk has not only survived many threats, but also emerged even stronger after each one. SOLIDWORKS came out of nowhere in 1995 to threaten to overrun Autodesk's MCAD business, but the faithful Autodesk customers (mostly) stayed and waited for Autodesk to catch up. Even when every CAD company seemed to rise up against it with IntelliCAD, OpenDWG and an open-source DWG editor, they were no match for the firmly established Autodesk. Dassault Systèmes, SOLIDWORKS’ parent company, went so far as to offer DraftSight, a complete and free 2D CAD program that would work like AutoCAD and handle DWG files (licensed from Graebert). It was predicted to be an AutoCAD killer. It wasn’t. Dassault Systèmes has had to, like every CAD company still surviving, settle into peaceful coexistence with Autodesk.

So, although history suggests that users of CAD software will complain and grumble, they will stay with their existing CAD programs. And so the millions of users who count among them billions of legacy DWG files, a wealth of intellectual property that they couldn't even conceive of trusting to another program, will remain largely bound Autodesk.

Playing the Price Is Right

However, can they be expected to subscribe to a licensing model that appears to favor the CAD company and not them? It wasn’t long after subscription pricing was introduced that leading industry analyst, Monica Schnitger, raised the question in her Hot Topics blog.

“I’m still concerned about the small shop that has 10-ish licenses and has to go from paying something like $500 per seat per year in maintenance to $1,500 per seat per year for a subscription—arguable for better and more modern technology. The math may simply not work,” said Monica after Autodesk's FYE2015 Q2 report.

Autodesk watcher Ralph Grabowski, in one of the most rigorous—and popular—non-Autodesk explanations of term pricing flat out stated that it was not a good deal. An annual subscription to Autodesk becomes more expensive than a perpetual license after two and a half years, said Ralph and Owen Wengard, who contributed to the analysis done in January 2015. A monthly subscription becomes more expensive after only eight months.

Autodesk took note. “We adjusted the pricing for AutoCAD,” said Andrew.

Getting the math right will be critical for the long-term sustainability of the term licensing model. It has a direct effect on the top line—the overall revenue of Autodesk. While the current plan seems to hinge on the inertia and loyalty of existing users to break down and subscribe eventually, it remains that users eventually pay more with term licensing than with perpetual licensing.

Has the new term licensing policy created a dam for those users reluctant to switch and wanting to hang on as long as possible to what they own? Although new users would most likely embrace the lower entry cost of term licensing, millions of CAD veterans will not be as keen to switch. Why should they? The software they have is good enough and capable enough—and fully paid for. Why keep paying for it? Will we really need the features Autodesk adds in the future? For those that have used the software for years, do they really need the support that comes with paying for a subscription? We'll just hang in there with what we have till the end of this project for the foreseeable future… until we retire.

This must be frustrating for established software companies enlightened by modern software’s best practices seeing the entire industry sold on term licensing and shouting themselves hoarse trying to convince users to switch. How can they not feel victimized by their own success, facing a mass of existing users who just will not listen to reason? For them, often the gray haired, the ones set in their ways, the convenience of being able to use CAD on any computer or mobile device is lost. The benefits of keeping data or applications on the cloud only generates anxiety. The “pay-as-needed/don't-pay-when-you-don't” argument doesn't apply either. They are using it all the time.

Although Autodesk cannot reasonably hope to change the minds of the most recalcitrant— the large mass of users still with perpetual licenses that are welling up on the side of the damn—the key to breaking through will be tweaking the model so it seems right, not overpriced and not one that is clearly one-sided favoring Autodesk. Instead, it will have to be one that has clear and obvious benefits and one that appears generous.

Is Autodesk Spending Too Much?

As the transition appears to be set, the matter of continued and severe quarterly losses is something the board needed to turn around. Autodesk still has over $1.4 billion in the bank, so it can lose $121 million a quarter (last six-quarter average) for less than three years.

But even as Autodesk was making a profit (before the transition), was it enough? Financial analysts will no doubt compare Autodesk's performance to market leaders. Take Adobe and ANSYS, for example. Both company’s profit margins (ratio of profit over revenue) are considerably higher. ANSYS routinely achieves more than a 25 percent profit margin. Adobe's eked out a low profit margin (4.4 percent) during the transition but is back to over 20 percent margins. Autodesk, however, averaged less than a 4 percent profit margin in the four quarters before the transition.

Carl's approach to how he spent money may have been summed up in this one sentence, uttered during a Q4 FY2016 call: “…the company that wins will have a substantial and sustainable long-term advantage.”

Was Autodesk, under Carl, spending too much? Was Carl's long-term investment strategy just too expensive for the cost conscious and the short-term investors?

The answer depends on who you ask. There’s no such thing as spending too much for talent, say the well-compensated employees and executives. To get the top talent in tech-hot San Francisco, the Stanford and Berkeley grads, you need to load up with the most perks, the highest pay and the best digs. Prospective candidates led around a company's One Market Street office can’t help but be seduced with gorgeous views of the San Francisco Bay. Can you invest in too much leading-edge technology? Never, say the media, who lust for the latest story and all that’s bleeding edge. Definitely not, say the developers and product managers, who want nothing more than to light up the tech world with 3D scanning and printing and the latest in virtual reality—a far cry from pushing around 20-year-old AutoCAD code.

We asked Carl, too, a little over a year ago, if he thought he was spending too much. Carl downplayed the spending on high-visibility projects like the Gallery and Pier 9, but fully recognized that the people cost was substantial.

“We continue to be a company, like most technology, software or cloud companies, in which close to 80 percent of it is tied to people. It’s our salaries, benefits and the real estate that we sit in.”

Carl must have battled with activist investors, fighting on the side of long-term goals. Examples of investing in the long term at Autodesk are many and may have been too visible, leaving him vulnerable at a time where profit, or the lack of it, comes into focus. Housing thousands of talented people in dream workspaces may work for Google, Facebook, Uber and others, but is Autodesk punching above its weight? There’s the Pier 9 shop, the most glamourous machine shop ever made that overlooks the bay, and its artist in residence program. Its always-sold-out monthly party, Design Night (now scaled back to every two months), opens up Autodesk's gallery to the public. Autodesk University, the largest gathering of CAD users in the world, to which Autodesk flies in hundreds of its own, must cost millions of dollars. Autodesk gives six-week-paid sabbaticals to every employee every four years.

Carl is understandably proud of the new Autodesk as a workplace. “We were selected for Fortune's World's 25 Best Multinational Workplaces, Fortune's 100 Best Companies To Work For, and we are in the top five of Fortune's Most Admired Software Companies.” He says in the Q4 FY206 call.

Autodesk has, over the last 10 years, made itself into a technology leader. It has seven research centers, with many projects that chase the latest in tech, like virtual reality, for the joy of it, without the pressure to productize or monetize.

Chasing new users, many of them too young (students) or too broke (makers), is also a long-term play.

Jumping on the cloud, where all modern apps live and where today's users are comfortable—rather than to keep milking the old cow of desktop suites for upgrade income—was an expensive and courageous breakaway for a well-established CAD company.

Even entire divisions of Autodesk may be at risk under a cost-conscious CEO. Ralph speculated on the future of Autodesk's media and entertainment division, which suffers from declining sales in recent years:“Autodesk keeps it around for all the Oscars that the software wins, but activist investors might be inclined to sell it off, because the poor sales are likely weighing down the ADSK share price.”

Lesson Learned: Who's Keeping Score?

With Autodesk, we may have seen the pendulum swing to technology and now come back towards the business side. If a supremely cost-conscious CEO be installed, one that panders to short-term investors, the company risks unraveling 10 years of cultural and strategic change that have combined to make Autodesk a CAD, CAM and CAE leader, one that could affect the way products and buildings—the man-made world—is made for the next 10 years and beyond.

Yet, there must have been others: the unseen and uncounted, for whom Autodesk was too far out there, too far from its basics, had turned its back on, those who had bought its products or were trying to sell them, and those who had invested in it. The ones who may have signed off on the expenses, but returned to their spreadsheets to check the totals. Or those who don’t know what CAD and CAM stands for, but understand EBITDA and GAAP—those who surface every few months to react to what landed in their bank accounts.

Lesson learned: Any business model must be favorable to the investors—and sooner rather than later. As if technology is too important to be left to technologists. Business people rule. It’s about bottom lines, dividends, share prices and profits. Such are the realities of a for-profit corporation. The board tolerates a tech-savvy, product-first, friendly and popular CEO with a long-term view and even publicly endorses those qualities, but we need to see the payoff. It can be small for now. It can be in the distance, maybe. We will tolerate less profit for a couple of years (though losses make us see red). Once those conditions are met, a long-term view is tolerable. The technology play. The long-term investment. Okay, we’ll trust you. You know the field (we don't). We'll let you play. We'll applaud your skills. The fancy footwork on the pitch, but in the end, we'll just count the goals you score, thank you.