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Autodesk (NASDAQ:ADSK) is going through three major operational initiatives:

  1. Since early 2011, Autodesk has shifted its marketing and sales emphasis from point products (for example Inventor, Revit) to suites (for example Product Design Suite, Building Design Suite), providing a 20% lift in per-seat ASP on average.
  2. Re-organize the sales force from a geographically organized one to an industry organized one.
  3. Taking a $50 - $60 million pre-tax restructuring charge in 2H FY13 to accelerate the move from desktop products to cloud-based solutions. The company will cut its workforce by 7% (more than 500 jobs) and recruit people who drive this platform shift.

My previous Autodesk write-up gave an overview of Autodesk and analyzed the first two initiatives - shifting from product bundle to suite and reorganizing the sales force from geography to industry. This write-up will analyze Autodesk's platform shift from perpetual license to SaaS.

What is SaaS?

  • In perpetual license, buyers obtain a license and install and maintain all necessary IT infrastructures. Under SaaS, the software vendors run and maintain all necessary hardware and software and buyers obtain access through the Internet.
  • Customers subscribe to the service to use the software for as long as they continue paying the subscription fees.
  • The company makes both major and minor updates to the software, and the customers automatically get those updates through the SaaS subscription.

Common concerns on SaaS

  • Loss of access to SaaS due to: Internet failure, remote SaaS equipment failures
  • Companies don't need/ want to pay for upgrades every year
  • Data security since companies' data is stored on the vendors' hardware and systems

Software renting vs. buying

According to "Software as a service: A look at the customer benefits" by B Waters, hardware and upfront software investments in a perpetual license increase the IT budget 80% on average. Low initial cost in software renting increases positive network effect. Increasing number of buyers increases the buzz around the product and decreases customers' search costs. Increased consumption also benefits product development, as software developers learn from feedback. Renting would fail if a customer's needs are unique and applications are complex and fragmented. In that case, customers would be difficult to be aggregated onto a uniform IT infrastructure.

What is Autodesk doing with cloud?

In Sept 2011, Autodesk introduced its first cloud offerings in Autodesk Cloud 360, which is a series of add-ons for perpetual license subscribers. Subscribers gained access to rendering and 25GB storage performed in the cloud. In June 2012, Autodesk introduced BIM 360 for cloud-based building information modeling. BIM technology supports data-driven, model-based design and construction of buildings and infrastructure. In September 2012, Autodesk rolled out the first stand-alone cloud solution in Simulation 360, accessible via the internet.

New seat license, upgrade and subscription

Currently, Autodesk sells perpetual licenses and users have the option to add annual subscription to the purchase to get the benefits of uninterrupted software upgrades and cloud. License revenue carries a gross margin of 85% and subscription revenue carries a 95% gross margin. Licenses' upgrades are priced at 50% of full license price and subscription is priced at 11% of full license price. Upgrade discount is only eligible for three years and users have to pay full license price if they decide to upgrade beyond three years. Present value of total cost of ownership over 10 years with a 10% discount rate on AutoCAD shows it is more economical for users to sign on subscription when they purchase a new seat license.

AutoCAD

NPV

YR 1

YR 2

YR 3

YR 4

YR 5

YR 6

YR 7

YR 8

YR 9

YR 10

New License + Subscription

6,855

4,690

495

495

495

495

495

495

495

495

495

New license and upgrade in last minute

7,127

4,195

0

0

2,095

0

0

2,095

0

0

2,095

Autodesk implemented the current 50% upgrade ratio in April 2010 or beginning of FY2011. The economics clearly favors subscription over discrete upgrade after that change.

A stand-alone cloud solution

The low initial cost of SaaS would help bring in new users to Autodesk. However, current economics of SaaS vs. (perpetual license plus subscription) would not give many existing users incentives to switch. The pricing of the recently introduced Autodesk Simulation 360 is used to understand the economics of a stand-alone cloud offering vs. Autodesk Inventor perpetual license:

Prices for Autodesk Simulation 360:

  • Autodesk Simulation 360: includes Mechanical and CFD capabilities, 120 jobs for $3,600/12 months.
  • Autodesk Simulation 360 Unlimited: includes Mechanical and CFD capabilities, for unlimited jobs for $7,200/12 months.
  • Autodesk Simulation 360 Ultimate: includes Mechanical, CFDD, and Moldflow capabilities, 120 jobs for $10,000/12 months.
  • Cloud Capacity Pack: 10 jobs (approximately 1 month of usage for $100).

The basic one-year subscription price, the cloud capacity pack, for Simulation 360 is about $1,000. Perpetual license users already invested in the hardware and IT infrastructure when they first bought the perpetual license. Subscriptions already gave them the benefits of cloud. The decreasing cost of computing power and the similar pricing between one-year subscription and the stand-alone cloud offering do not give existing users much incentive to switch.

The low initial cost of cloud will attract new users. In the case of customer life of 3 years, 5 years and 10 years, lifetime value of perpetual/ subscription user is 3.3x, 2.6x and 2x of the lifetime value of a stand-alone cloud user.

Autodesk Inventor Professional

NPV

YR 1

YR 2

YR 3

YR 4

YR 5

YR 6

YR 7

YR 8

YR 9

YR 10

New License + Subscription

12,365

7,295

1,095

1,095

1,095

1,095

1,095

1,095

1,095

1,095

1,095

Cloud

6,145

1,000

1,000

1,000

1,000

1,000

1,000

1,000

1,000

1,000

1,000

New License + Subscription

9,787

7,295

1,095

1,095

1,095

1,095

Cloud

3,791

1,000

1,000

1,000

1,000

1,000

New License + Subscription

8,359

7,295

1,095

1,095

Cloud

2,487

1,000

1,000

1,000

Assume there would be some discount to the stand-alone cloud solution vs. the subscription price to encourage users to switch and a five-year customer life, Autodesk would need 3-4x cloud users for every perpetual/ subscription AutoCAD Architecture user.

Autocad

NPV

YR 1

YR 2

YR 3

YR 4

YR 5

New License + Subscription

7,272

5,905

660

660

661

662

Cloud (10% discount)

2,252

594

594

594

594

594

Cloud (20% discount)

2,002

528

528

528

528

528

P&L analysis on the cloud restructuring

During the last quarter, Autodesk announced a restructuring to accelerate the progress to cloud and mobile. The restructuring involves cutting 520 jobs (7% of staff) and investing in cloud product and development. The restructuring will reduce operating expense from 6% Year/Year growth in the first half to plus/minus 2% Y/Y in the second half. Operating expense is roughly 67% of revenue. The dollar saving in 2H FY13 would be around $45 -$60 million ($770 million operating expense in 2H FY12 * 6% or 8%). The pre-tax charge in 2H FY13 would be $50 - $60 million. The restructuring charge and spending save effectively offset each other. According to the Q2 press release, "While Autodesk is reducing its overall staffing levels in the near term, the company will continue to invest in key development areas." As a result, R&D or marketing spend would likely normalize in FY14 (closer to +6% Y/Y run-rate) while consensus expects an accelerated margin expansion.

Consensus:

FY '10

FY '11

FY '12E

FY '13E

FY '14E

Sales

1,951.8

2,215.6

2,325.9

2,500.9

2,734.6

Operating Income

418.8

533.4

591.3

677.7

775.5

Net Income

310.4

405.4

448.5

509.9

582.9

Topline growth

13.5%

5.0%

7.5%

9.3%

Operating Margin

21.5%

24.1%

25.4%

27.1%

28.4%

Margin expansion

2.6%

1.3%

1.7%

1.3%

Source: FactSet

Bottom Line

Economics of stand-alone cloud product and perpetual license with subscription show that existing users have little incentive to switch. The SaaS initiative would be more about bringing in new customers. In cutting 7% of its workforce and shifting the platform focus to cloud, Autodesk risks alienating existing users and needs to compensate every loss of perpetual user with 2-4 SaaS users. It would be difficult for Autodesk to transition to a standalone cloud only software vendor. In addition, CAD data is too heavy for internet-based communications just yet. The current economics of suite and subscription are very attractive. Similar to the sales force re-org, Autodesk would most likely emerge with a hybrid model of perpetual license/ subscription and SaaS. In the meantime, there would be volatility in execution and financial results would be under downside pressure.

Source: Autodesk Goes Cloud: Analyzing The Platform Shift From Perpetual License To SaaS