Autodesk subs momentum builds in FQ1

I continue to try to catch up -- and today we take a look at Autodesk's calendar Q1 results, for the three months ended April 30. Autodesk reported these back on May 19, so this isn't new news. What it is, however, is a great pointer to what Autodesk's customers think about this whole subscriptions thing. Let's get to it.

• Total revenue was $512 million, down 21% as reported and down 17% in constant currencies (cc). Remember that this is planned; subscriptions are recognized ratably rather than as a big upfront lump sum
• All of that subscription cash comes into Autodesk's coffers, though, and goes into deferred revenue, which was up 32% from a year ago to $1.52 billion
• Autodesk reports that it now has 2.71 million subscribers, up 132,000 from the prior quarter. Within that 2.71 million, Desktop, enterprise flexible license, and cloud subscriptions were 567,000, an increase of 140,000 from FQ4 that was weighted towards AutoCAD and AutoCAD LT, and boosted by promotions aimed at converting legacy customers
• Maintenance subscriptions were down 8,000 sequentially, to 2.14 million. That decline is smaller than expected (no new perpetual licenses on individual products means no new maintenance contracts on those licenses) but shows that Autodesk's renewal rates on maintenance continues to build
• Total revenue from subscriptions was $326 million, up 2%
• Revenue from license and other was $186 million, down 43% (remember, discontinued single product perpetual sales ...)
• Not surprising, the revenue decrease led to a reported net loss of $173 million. Keep in mind this is accounting -- all income and expenses in a period must be matched against one another. Look instead at deferred revenue.

If we look at the typical way we analyzed Autodesk's business, by business line and geo, it looks bad because of the comparison of 2016's subscription-heavy view to 2015's still-perpetual world:

• By geo, revenue from the Americas was $218 million, down 11% as reported and down 10% cc
• Revenue from EMEA revenue was $203 million, down 17% (down 11% cc)
• Finally, revenue from APAC was $92 million, down 42% (down 39% cc) -- yes, the license transition played a part, but Autodesk also singled out continued weakness in Japan
• Separately from the geo, Autodesk reports on revenue from emerging economies. This came in as $55 million in FQ1, down 40% as reported and cc
• Like the rest of Autodesk's picture right now, the license model transition obscures the details. CFO Scott Herren said he really hasn't seen a change in the demand environment overall. "We continue to have the biggest headwind in APAC and within that, Japan continues to be the biggest challenge for us. But beyond that, Americas looks strong. EMEA’s doing well, particularly on a constant currency basis."
• By line of business, revenue from AEC was $219 million, down 8% as reported
• Manufacturing revenue was $158 million, down 14%
• Platform Solutions and Emerging Business revenue was $100 million, down 46%
• And, finally, revenue from the Media and Entertainment segment was $35 million, down 12%

If we instead use Autodesk's metrics, that try to describe the ultimate value of these subscriptions,

• Total annualized recurring revenue (ARR) was $1.44 billion, up 9% as reported and up 12% cc
• New model (meaning Desktop, cloud, flexible enterprise) ARR was $308 million, up 71% over a year ago as reported and up 76% cc
• Maintenance ARR was $1.128 billion, down 1% as reported and up 2% cc as Autodesk discontinues perpetual product sales -- meaning that maintenance also goes away

Buried in all of the material supplied by Autodesk is perhaps the most meaningful, and the whole point of this exercise: Recurring revenue was 70% of total revenue in FQ1, up from 53% a quarter earlier and from 51% a year ago.

CEO Carl Bass called FQ1 "terrific", telling investors that the transition from perpetual licenses to subscription and cloud offerings was going according to plan. He said, "Q1 was the first quarter where customers no longer had the option to buy a perpetual license for individual products such as AutoCAD or AutoCAD LT. As a result, additions from product subscription (aka Desktop(, jumped dramatically by 125% sequentially and by nearly 350% year/year." Of course, Autodesk did all it could to push this along, including promotions aimed at converting legacy non-subscribers to new product subscriptions. This trade-in promo was "one of the most successful promotions we’ve ever run and contributed over 25,000 net new model subscriptions to the quarter ... the really interesting part was that over 50% of those taking advantage of the promotion were using versions from seven years back or older." Mr. Bass didn't elaborate on what those buyers were subscribing to, but it's likely that many had old copies of AutoCAD and AutoCAD LT, given other remarks on the call.

That trend is really interesting. One of the arguments against subs has long been that old software is paid for, known, a done deal. Bought on perpetual, even with lapsed maintenance, it continues to work as long as that computer/OS still runs. Something like 12,000 users decided that the price was right and the offering compelling enough to start spending money with Autodesk again. Keep in mind that these were not illegal users looking to get legit; they were perfectly legal users of old versions who now leapfrog into cloud, subs and all sorts of modern tech. If you did this, please leave a comment or use the Contact Us form; I'd love to know why you jumped on the subs bandwagon.

Another interesting nugget from the earnings call: Mr. Bass said that new cloud subscriptions were up "nearly 50% sequentially. BIM 360 and PLM 360 continued to lead the way. We are also having success with our other cloud products, such as Shotgun, A360 and Fusion 360 ...  Our newest cloud product is our IoT platform, Fusion Connect, formerly known as SeeControl, a service that helps manufacturers and system integrators connect, analyze, control, and manage things remotely, which is gaining traction. [We are] enabling our customers to easily incorporate IoT capabilities into their projects." But it's moe than these brands, said Mr. Bass: "It’s not just about making browser-based design tools, it’s about market expansion. Mobile and cloud technologies are opening up significant opportunities in areas of construction and manufacturing that are completely new to Autodesk."

Finally, the power of an e-store. Autodesk has historically seen roughly 80% of revenue from partners. In FQ1 2017, that changed (drastically, for Autodesk): Mr. Bass said that in FQ1, the number of subscriptions coming through Autodesk's eStore, more than doubled from Q1 last year. This helped total direct sales increase to 25% in the first quarter that’s up from just 15% two years ago, and "it’s still in the early days for our eStore". The channel is definitely getting squeezed, though Mr. Bass called out the partners' importance in Autodesk's transformation: "Our channel partners are fully engaged; 63% of new model subscription additions came through our channel partners compared to just 27% in Q1 last year."

OK. What does all that mean? Well, first and most obviously, that change is isn't easy -- it's hard on the company, which has laid people off to try to shrink that net loss. Hard on the buyer, who is probably confused about all of his options (and when some of them may go away). Hard on channel partners, who have to cope with a new business model (though, to be fair, they've had plenty of warning and coaching from Autodesk) and stepped-up competition from an e-store. But Mr. Bass contends that it's worth it, that company, partners and buyers will emerge better at the end -- and that all of this swirling about the business model doesn't obscure what Autodesk is all about: helping customers make stuff.

At the low end of the product spectrum, AutoCAD and LT customers seem cool with subs. We'll know more as 2016/fiscal 2017 progresses about the higher-end and suites users; they may be more inclined to keep buying perpetuals -- but all of those legacy users converting to something they actually have to pay for may signal a greater inclination towards subs than I was expecting. Or not. We shall have to come back in a couple of months and see ...

Autodesk expects FQ2 revenue to be between $500 million and $520 million, and sees total revenue for the year (fiscal 2017) to be right around $2 billion. Mr. Bass doesn't expect a "surge" of buyers for the suites at the end of FQ2, when those stop being offered as perpetual -- in part because many have already switched, he said.

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A reminder: Autodesk will stop selling perpetual licenses for suites at the end of FQ2. If you buy/have a perpetual license and keep up with your maintenance payments, nothing changes for you. New licenses bought after the end of FQ2 will be subs. Mr. Bass said that while the promo targeting legacy individual product customers was successful in FQ1, "we will not be running that promo in Q2." You might, however want to wait until Q3 if you're in a promo mood, when Mr. Bass sees them returning to combat a potential slowdown in activity.

Autodesk is also going to be selling what it calls collections in Q3, a sort of super-suite that Mr. Bass said would simplify Autodesk's huge product portfolio and be the "most convenient way for customers to access a wide selection of both desktop software and cloud services. We’re significantly reducing complexity by offering just three collections, one for AEC, one for manufacturing, and one for community. The value for our customers will exceeds the premium suites." Mr. Herren added that collections will "form the on ramp from desktop execution software to cloud software." Lots more to come on collections as they are rolled out.