Last week, Autodesk reported their earnings for Q2. Now they reported them on a Thursday which makes it difficult for me to get a post out on a Wednesday. Many times companies will report on a Thursday if the quarter is going to be bad. There is only 1 day of trading before the weekend, and the market has a bit of a short memory. Now the reporting date is a bit arbitrary. They have to wait to be sure that there is nothing the auditor is going to make them change, but they normally know what the quarter is the day after. Not the exact numbers but really, really close. So you have to think of the delay as crossing T’s and dotting I’s. They don’t want to have to recast earnings in the future – in other words, go back and issue a correction – so they delay until they are 100% sure.
But this past Thursday brought relatively good news to Autodesk. GAAP revenues were $550M and the company lost $0.44 per share. That is better than what was expected and they have reached a number of Annualized Recurring Revenue or ARR of $1.47B. That is the number that is important as it represents the subscription revenue for the business. This is where the company is heading and it is out of the lifetime product sale. This model shift has been painful to the income statement but there are two numbers off other statements that you should watch. The first is on the Balance Sheet and it is the Deferred Revenue number at $1.1B. This is the subscription revenue that has been paid for but not yet realized (explanation in the next paragraph). The second is from the Cash Flow Statement and is Net Cash from Operating Activities. This is the amount of Free Cash Generated in the Quarter by the Business. The Operating Cash Flow is important because this represents what the company is doing in the business. The Financing side has to do with debt, interest, stock buy backs and other activities that are outside the day to day operations in the firm.
Deferred Revenue is all about recognizing the money for contracts. Let’s say you sign a 1-year cell phone contract. The phone company can not take all 12 months of revenue when you sign the contract. It can only claim 1/12th of the revenue. This is because you may not pay in the future due to issues with the service, problems with your financials, or whatever. This is even true if you pre-pay the entire year. So, subscription companies end up with a lot of Deferred Revenue and as investors, we want to see that number grow as it represents the current view of the future of committed Revenue. Imagine Autodesk sold no more software licenses. Then they are “guaranteed” $1.1B more from customers under existing contracts.
So, the future is starting to look better and better at Autodesk. One cautionary note that I have talked about comes from Kirk Adams of Rosenblatt Securities. The challenge is that the way that Autodesk is describing the subscriptions makes it really hard to understand what the business is really doing in comparison to the past. On top of this, they are creating many packaged offerings and that is making it more complicated. The way we should be evaluating this (over time) is based on New Subscriptions, Churn, and ARPU. Churn is the number of people leaving subscriptions and ARPU is the Average Revenue Per User. Those are standard metrics for Subscription companies. Today, they are still reporting more as a Product based company like talking about the number of licenses sold. Hopefully, this will change over time.
Have a great day!
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