Autodesk profit took a dive. The company announced last week it had lost a whopping $171 million. Despite the enormity of the loss, there were no dire predictions of the fate of the CAD giant, no growing sense of panic from the executives and no investor mobs with pitchforks. In fact, Autodesk stock has risen over the last two years and is currently at its highest per-share price.
This can be explained by those who understand the software industry and the effect of a change in business model from perpetual licensing to subscription. SAAS models, such as the one Autodesk is putting into place, do earn lower revenue. Eventually the accounting costs fall into the right annual buckets and it works out. Smart investors know this and don't penalize the company.
Buried in the Q&A after the earnings call there lies another ray of hope. Co-CEO Andrew Anagnost refers to “one of their biggest opportunities.”
It was the conversion of “pirates” to law-abiding citizens.
“The … interesting number is the 6 million plus pirates who are actively using our software—and by the way, we know that they’re using the software because we’re able to track the pirated serial numbers and the pirate activity,” said Anagnost. “That’s a more interesting number for us long term … 4 million of those pirates are in mature markets, and about 1.2 million of them are in accounts that we know and have worked with in the past.”
Although entire continents’ populations, Asia in particular, are infamous for never paying full value for software, Anagnost seems to be saying the pirates are closer to home. Indeed, recent data from the BSA, shows that the United States, though lowest in the proportion of unlicensed software, comes up as first in the total value of pirated software. At an estimated “loss” of $9.1 billion, it is more that both China (70 percent piracy but second place in loss with $8.7 billion) and India, which has a bit more control per capita (58 percent unlicensed and about a third of the loss at $2.7 billion). One CAD CEO tells of the heartbreak of being offered his company’s software years ago for a few dollars worth of local currency in a market.
A conversion of pirated software on the scale of millions would, in it of itself, be sufficient for Autodesk to create a serious uptick in its fortunes. Being able to control the rights to use a software application by continually checking its legitimacy on central servers would be extremely effective compared to trying to control the proliferation of illegal, standalone desktop software.
Although copying software is going to get a lot more difficult with cloud based software that is term licensed, it remains to be seen how many will feel they need to migrate from perpetual licensing on desktop hardware – and how soon. One option they might consider is switching to cheap workalike applications. The market is full of AutoCAD-like CAD applications, for example. Other CAD programs, like Dassault Systèmes’ DraftSight, which can edit DWG files, are free to use.
The perpetual- to term-licensing transition had been successfully executed by Adobe, which also survived a dip in revenue, only to emerge more financially vigorous than ever. Autodesk is the first CAD, CAM or CAE company to attempt it.
Quarter Highlights
The company still has $1.2 billion of cash reserves.
Co-CEO Hanspal declared the concluding quarter of FY2016 a success, citing the growth in subscribers and subscription income.
“Cloud subscription was driven by BIM 360,” said Hanspal during the press conference, highlighting Autodesk’s BIM collaboration tool. It is followed by Fusion, its cloud-based product design and manufacturing application. But lest we get too excited, CFO Scott Herren reminds us increase in subscriptions is “good growth is off a small base.”
Fusion Ultimate, with a $1,500 annual license, was introduced last quarter and was mentioned as the CAD, CAM and CAE tool for the enterprise. It may be the high end of Autodesk’s cloud-based products.
Over 2 million customers are on maintenance subscriptions. Autodesk plans on converting these customers using “loyalty” discounts, a conversion program that expects 100 percent conversion from the maintenance program to subscription over the next three years—and one that relies on maintenance customers having to pay more to convert each year they wait.
“Spend management” is in place, per Herren. Don’t expect Autodesk to do any major acquisitions any time soon.
To help with stock buyback, Autodesk has moved $1.7 billion in offshore accounts to its foreign subsidiaries.