We have long been positive on Autodesk's (NASDAQ:ADSK) business model transition from licenses to cloud and subscriptions, pointing out that revenue streams would become more recurring and predictable, that new paying users would join thanks to lower upfront costs and that piracy would be reduced through the use of cloud-based authentication. In all, a subscription-based model is likely to deliver higher revenues, margins and cash flows in the long run.
The new business model was in focus during Autodesk's Investor Day last week and sparked many sell-side upgrades as Autodesk provided strong metrics giving increased confidence in the transition and in the group's ability to achieve and potentially exceed its long-term guidance. As a reminder, Autodesk expects 12% billings CAGR through FY18 and a 30% operating margin in FY18 (from 15-16% in FY15).
Autodesk speeds up the transition: 100% recurring revenues in sight
As commented in our previous articles, the model transition has been performing ahead of expectations in Q1 and Q2, leading Autodesk to raise its FY15 net adds target to 200-250K from 150-200K when reporting its Q2 figures. Interestingly, the company said that 30-35% of subscribers were net new customers, confirming that the "lower cost" (see the impact on ARPU below) model was attracting new users.
It looks like the transition will now go even faster as Autodesk announced plans to phase out perpetual licenses over the next 12-24 months, starting with AutoCAD LT. Of the company's 2.9m customers that are not on a subscription plan, half of them are AutoCAD LT users and will have to migrate soon.
This, combined with marketing initiatives (product bundles available only for subscribers) and the introduction of new distribution partners (Amazon and Dell…), should enable Autodesk to approach 100% recurring revenues pretty soon (vs. 70% guidance).
Strong ARPU lift gives confidence in margin outlook
Management's comment that the annual value of AutoCAD LT subscriptions (i.e. ARPU) was currently 30% higher than perpetual licenses was probably the most encouraging data point of the Investor Day as it hints at a strong revenue growth and margin leverage over the years. While the +30% ARPU rise can appear surprisingly high, it can be explained by customers' willingness not to pay large upfront costs and to have a permanently updated version of the software.
This ARPU strength, combined with likely lower sales & marketing costs (renewal rates will probably stand above 90% vs. ~80% currently) and the traditional revenue leverage in the industry, suggests that Autodesk is on track to reach or even exceed its long-term margin target and potentially to reach it sooner than expected.
The January 2015 P/E is expensive at first sight (48x) but this is due to Autodesk's financials being distorted by the current model transition. Assuming a normative operating margin of 30%, the stock's P/E would stand slightly above 20x, which is not overly demanding for a software company with a leading position and the opportunity to play a key role in the 3-D printing revolution. We reiterate that Autodesk is a different and safer way to play the 3-D printing revolution, with valuation levels and earnings expectations much more decent than 3-D printing stocks such as 3D Systems (NYSE:DDD).
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