For my last post of earnings season, I will focus my attention on Autodesk. I will do so in a subjective analysis and a lot less about numbers than you would like. The reason is pretty simple. Autodesk is in the middle of a massive business shift. This is a fascinating case study for business owners who want to change their business. Autodesk is changing how it sells its products. In fact, it is going to stop selling its product altogether. They are replacing this model with a rental model. This is very similar to the way much software is going with the advent of Cloud Technologies and Software as a Service. Think about it. In the old days, I would buy a copy of Microsoft Office for a few hundred dollars. I could use it as long as I liked. Today, I have a domain and a subscription to Office 365. Because of that, I no longer need to buy a copy. I rent a version of office with my domain. Of course, I need to keep renting the software on an ongoing basis.
From a financial standpoint, companies that are in this business have a significant change in how things look on their statements. When you sell a copy of software, you take the revenue immediately (or just about immediately). The same is true when you walk into a grocery store and buy a can of Coke. The store recognizes revenue when you make your purchase. Now how about your cell phone? Many of you have signed a 2 year plan that means you will be paying $100 a month (for example) for 2 years. That is $2,400 in total contract value. But companies are not allowed to put $2,400 on their revenue line for a quarter. When you sign the contract, they will put $300 of revenue in that quarter and have a Deferred Revenue of $2,100. Deferred Revenue shows up on the Balance Sheet not on the Income Statement. The reason is that future revenue is an Asset. This is a bill that a customer owes you at some point in the future. This seems a lot like Accounts Receivable. In fact, it is. But this Asset is not currently receivable (the customer does not owe money to us yes).
So, why is this a big deal from a stock standpoint. Well, Autodesk is in the middle of the transition. Some customers have the bought version of the software. Some customers have the rented version. It is hard to compare past versions of Autodesk’s finances with the current version. The same will be true of future versions. When the transition is almost complete, their will be a much more stable revenue flow as customers provide rental payments on an ongoing basis. The reason that customers will go for this transition is that this kind of software came with Maintenance contracts. The rental versions will build this cost in, so that customers are already on the latest version of the software. On top of that, they will have some rights in customer service.
What all this means that Autodesk can waive their hands and say pretty much anything they want to about their progress in the transition. There is no way to manage the transition that will make sense on their statements. What analysts and investors want to know are the answers to two questions:
– What percentage of existing customers are going to switch to the new model of business?
– How will this new model attract new customers?
These questions are not going to be answered until things settle out. What this does is that it adds risk to investors as they can’t get a handle on how things are going by comparing to past periods. This does not mean that Autodesk is a bad company or at risk of going out of business. What it means is really simple. You can not analyze Autodesk results and figure out what they mean for the future. The change in model makes sense for Autodesk if done properly. We will have to evaluate future quarters to see how things are done. For now, caution is a great way to look at Autodesk stock.
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