Autodesk Stock Hits All-Time Highs, Driven by Subscription Transition

Josh Stinehour | August 27, 2018

Autodesk reported revenue for the second quarter of fiscal year 2019, which aligns with the three month period ending July 31, 2018.  Autodesk breaks out the revenue performance of its Media and Entertainment (M&E) business segment, which comprises visual effects and post-production solutions including Maya, Flame, and Shotgun.

Autodesk M&E revenue for the quarter was $42 million, an increase of 10% compared to the second quarter of fiscal 2018, and flat versus the preceding quarter, FQ1 2019.  M&E contributed 6.8% of Autodesk’s total sales in the quarter.  This compares to 7.6% during the year-earlier quarter and 7.5% during the preceding quarter.

Update on Business Model Transition to Subscription Business Model

Any discussion of the changing economics of the media technology sector should include a review of subscription purchase models (from the seller and buyer perspective) as well as the transition to subscription models.  We are planning to review these topic in detail during the upcoming Devoncroft Executive Summit, both as part of our initial presentation and also during the panel sessions.

Autodesk’s earnings release is an informative example of the benefits of transitioning to a subscription model.  Perhaps foremost, the Company’s stock closed Friday’s (8/24) trading session at an all-time high of $157.20.

In an interview on Bloomberg TV on Friday, Autodesk’s CEO Andrew Anagnost summed up the enthusiasm for the stock, “They love seeing the ARR (Annualized Recurring Revenue) Growth. It is up 28%.  And it is the kind of thing that they were expecting to see as we were moving into this side of the transition.  Remember when you are in front end of transition everything is going this way [points down] and now we are in the side where it is going this way [points up] and people are seeing the results they expect to see. And it is actually giving us some room to talk about what we are trying to do with the Company long-term and not just the move to subscription.”

It is interesting to note the emphasis Mr. Anagnost puts on the long-term opportunities enabled from the transition to subscription as opposed to the transition itself.

The path Autodesk braved to move from a business model of perpetual license and maintenance to one of subscription is a great data point for the broader media technology sector.  It highlights both the difficulties of the path, and the awaiting reward of transitioning to a subscription model.

The second quarter of fiscal 2017 (ending July 31, 2016) marked a milestone for Autodesk’s transition to a subscription business model, as the Company ceased selling perpetual licenses for its Suite products.  Autodesk discontinued selling perpetual licenses for individual products with the close of the fourth fiscal quarter of 2016 (ending January 31, 2016).  Beginning with August 1, 2016 Autodesk only sold its products on subscription.

Skipping to the end of the transition, Autodesk now (as of quarter end) had 3.9 million subscribers.  During the quarter, Autodesk grew its subscription plan ARR (Annualized Recurring Revenue) by 115% year-over-year.  Total ARR (subscription plus remaining maintenance) is now $2.3 billion.  Recurring revenue as a percentage of total revenue in the quarter was 96%.  Gross margins improved 350 basis points versus the year-earlier period.

These metrics are, of course, favored by investors.  Autodesk’s stock has experienced a tremendous expansion in its valuation by the market.  Since early 2016, the revenue multiple (enterprise value / trailing twelve months of revenue) of Autodesk’s stock has increased from 4.9x to 15.5x.   In other words, each incremental $1 of revenue is driving $15.5 of stock price.

Changing business models was only accomplished after enduring several quarters of challenging operating performance by traditional measures.  In the below chart I have listed the quarter year-over-year revenue growth, gross margin percentage, and net income results of Autodesk for each quarter since its fiscal 2016 first quarter (beginning on February 1, 2015).

The transition then necessitated many quarters of declining growth, lower gross margins, and significant accounting losses.  However, the visibility into the progress of the transition and appeal of subscription models was rewarded by investors in the form of a higher valuation (depicted in below with the revenue multiple) well before the current quarter.


Related Content:

Press Release: Autodesk FY Q2 2019 Financial Results

Prepared Remarks: Autodesk management FY Q2 2019 Financial Results


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