We enter the final post of Earnings Season with a look at Autodesk. The numbers are $512M in Revenue with a loss of $0.77 per share. I am sure you are expecting me to predict dire outcomes, but in fact I am not.
As you recall, Autodesk is in the process of moving from selling software to selling subscriptions to software. Some of these subscriptions will be on the desktop. Some of these subscriptions will be in the Cloud. The company is almost all the way through the process, but you will likely see ripples for a few more quarters. One of these is next quarter when all software sales end and all new sales are going to be subscriptions.
Why is this happening? Well, there is some basic good news for a company like Autodesk. The cash flow from subscription sales is much more consistent than if you are selling discrete units. Somebody’s credit card gets charged and the bills get paid every month. It is a way of running a much smoother business. There are two more bigger advantages. First, everybody gets free updates. That means that all products are up to date and you don’t have to worry about fixing older versions. It Windows XP (for example) had support in the mainstream for 8 years and special variants for 13 years. That means Microsoft had to be able to fix all this code and have people available to do so. Autodesk will eventually drop support for older product variant. The other big gain is that there is a significant amount of very old and pirated software. On the call this quarter, it was noted that a promotion brought in people that had not updated some products for 7 or 8 years. This gives Autodesk a chance to bring revenue from these customers over time.
What will this look like? Well, if the entire quarter was subscription then one would have expected about $30M less of a loss. By my best estimate, the company needs to have $674M in revenue to break even if costs remain the same. However, there was a $52M special charge this quarter and I suspect that costs should reduce slightly when the products are only available as licenses. Easier to have one model instead of two. A break even looks to be more like $590M revenue when things get to all subscription. The company has done more than that revenue in the past, so it seems likely that it will be there in the future as the current software owners become subscribers over the next few years. The company has $1.2B in cash so it looks to be some time before we have to worry on that front.
The stock has bounced back from lows right after the call. I think this makes sense as though things seem to be going well, the current financial picture is still hazy. The kind of risk one takes in investing in Autodesk makes this a challenge until the model conversion is complete and we have seen a couple of quarters after the final switch.
Have a great day!
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