Autodesk: A Leader in Design
- By Christopher De Sousa, CIM® | Portfolio Manager
- 4 Min Read
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What is Autodesk?
Autodesk is a global leader in computer aided design (CAD) software for the architecture, engineering, construction, manufacturing, media and entertainment industries. Autodesk’s platforms such as AutoCAD, Revit, Maya, and BIM 360 are industry-standard CAD tools that millions of professionals rely on to design and model buildings, video games, automobiles, machinery, consumer products, movies, and much more. These tools provide companies and individuals the capability to work more quickly and effectively throughout the entire project lifecycle. As such, Autodesk’s products and services are deeply embedded into a professional’s workflow. This leads to strong customer retention and renewal rates, as well as high switching costs that give Autodesk a competitive advantage.
Autodesk expects to generate sustainable organic double-digit sales and free cash flow (FCF) growth over the next few years, as the company benefits from the following:
1) The transition from selling perpetual software licenses and maintenance plans to a cloud-based subscription revenue model that is characterized by recurring sales. The business model transition is expected to drive higher annual recurring revenue (ARR) and free cash flow potential.
2) The conversion of legacy users (e.g. non-subscribers on a license) and non-compliant users (e.g. non-paying users who are pirating or sharing licenses) to paying users to increase subscriber growth. Additionally, the monetization of Autodesk’s installed base through new cloud-based subscription offerings to increase ARR growth.
3) The investments and ongoing penetration of cloud products in key end markets that could drive subscriber growth beyond conversions (e.g. accelerating the digitization in architecture, engineering, and construction).
4) The network effects and high switching costs embedded in Autodesk’s business model resulting in high barriers to entry and strong customer retention.
Source: Investor Day 2020 [1].
As the world moved from mainframes to PCs more than thirty years ago, the software industry today is transitioning from developing and selling perpetual licenses and on-premise products to subscription models and cloud-enabled technologies. Adobe, the maker of digital content tools such as Illustrator and Photoshop, is an example of a business that transitioned from selling shrink-wrap licenses of its creative software tools to a software-as-a-service subscription model. And like most successful business transformation stories, the pivot to the new business model took time and a lot of patience. Autodesk is in the process of transitioning its business from a perpetual license and maintenance model to a subscription-based model in the same vein as Adobe.
A subscription model transition similar to Adobe should provide Autodesk the ability to forecast over a multi-year period (i.e. increasing earnings and cash flow predictability) and unlock higher customer lifetime value longer-term. In 2016, Autodesk discontinued the sale of new commercial licenses of most individual software products. In 2017, Autodesk started the maintenance-to-subscription (M2S) program to incentivize maintenance plan users (i.e. offering discounts) to move to subscription plan offerings, while increasing pricing for users that stay on maintenance plans over time.
Autodesk’s business model has become more resilient and less cyclical as a result of converting maintenance plan users to subscription plan offerings. This is evidenced by Autodesk’s strong sustainable cash flows and recurring revenue, and the reduction of financial volatility against a negative macroeconomic backdrop. Today, the majority of Autodesk’s revenue is recurring in nature with high customer retention and product engagement. Recurring revenue as a percentage of total revenue was 96% in fiscal 2020, up substantially from 40% pre-transition (see charts below).
Source: Investor Day 2020 [2].
Source: Investor Day 2020 [3].
This strong performance is attributed to the strategic shift to the subscription-based business model, for which we believe investors are willing to pay a premium. We are confident that Autodesk can execute against the secular growth trends (e.g. digitization in end markets) and long-term business drivers (e.g. transition to subscription plans and subscriber growth). In our view, Autodesk is well-positioned to benefit as the global economy restarts and construction activity starts to pick-up after the Covid-19 pandemic shock.
We continue to view Autodesk as a core holding in client portfolios.
Risk factors
1) Limited conversions of active legacy users to subscription, and limited conversions of non-compliant users (e.g. pirates) to paying users.
2) A greater-than-expected slowdown in economic activity that could lower software spending and lead customers to delay their purchase decisions on new products and services.
3) Difficulty penetrating the construction vertical.
4) Competition in the technology sector across Autodesk’s various end markets.