Why You Should Ride Autodesk, Inc. (NASDAQ:ADSK)’s Bet On Cloud?


Autodesk, Inc. (NASDAQ:ADSK) is swearing by the cloud for future growth. The company intends to sell its last boxed software or perpetual license by mid-2016. Going forward, Autodesk will render its products through the cloud in a rental model that attracts regular and more predictable revenues.

Can you buy Autodesk’s cloud transformation story? The best way to answer the question is to look at related companies that have attempted cloud transition and what has come of their efforts.

History teaches that cloud transition can have serious adverse impact on the financial performance of a company in the first few years. The reason is that under a subscription model, revenues are spread over a four or five-year period, which results in topline and bottom-line squeeze in the initial years. Nevertheless, despite the near-term pains, the long-term is usually attractive.

Adobe Systems Incorporated (NASDAQ:ADBE) is a great example of the impact of cloud transitions. At this point, Adobe is almost three-quarters through its transformation journey. Adobe printed consistent revenue and net income declines when it embarked on cloud transition, but the management refused to bow to short-term pressures and instead maintained focus on the bigger picture.

While Adobe’s net income numbers have yet to recover fully, topline is recovering quickly. Not only is the company generating most of its revenue from cloud subscribers nowadays, but it has also significantly been able to increase its customer base.

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Both Adobe and Autodesk, Inc. (NASDAQ:ADSK) sell design software. Although the two companies target different design market segments, Adobe is a perfect mirror of what awaits Autodesk on the other side.

Benefits of cloud subscription model

Boost to subscriber base:

The move to cloud enables a company to lower the upfront cost required to access its products. Lifting the price barrier opens the door for significantly more customers to get in, thus a steep spike in customer base over a short period of time. In the case of Adobe, the company used to sell a copy of Photoshop software at $700. However, under the rental model, the company renders the software at a monthly cost of $10, the low entry price allowed many customers to sign up for Photoshop. Adobe counted 5.33 million cloud subscribers at the end of its F3Q2015 after adding 680,000 new cloud subscribers in the quarter alone.

As such, lowering the price bar leads to a positive impact on customer base. Autodesk, Inc. (NASDAQ:ADSK) stands to reap these benefits as it moves to cloud, hoping that the management won’t come up with alienating entry-level prices.

Long-term revenue potential:

The cloud subscription model allows a company to generate revenue from a customer as long as they remain active. Additionally, there is the opportunity to upsell a customer, allowing for extracting of more value from each customer, which is not possible in perpetual license models.

Is Autodesk a candidate for cloud success?

It goes without saying that the transition to cloud comes with near-term pressures, but the long-term outlook shouldn’t be missed. However, the shift to cloud alone is not magic. A company must have compelling products that can excite its existing license customers to follow it to the cloud and also draw the interest of new customers.

Does Autodesk, Inc. (NASDAQ:ADSK) have the kind of products that can pull its existing customers and new ones to the cloud?

Autodesk’s flagship design software, AutoCAD, boasts a leading share in its market. The software is a crucial tool for designers, filmmakers and engineers, among others. Autodesk has also continued to broaden its product portfolio with 3D design software and solutions for managing workflow. The company intends to do more in the future to enrich its product offering.

As part of the efforts to deepen its play in the 3D design market, Autodesk recently acquired Germany-based design software maker Netfabb. The investment in Netfabb expands Autodesk’s play in industrial additive manufacturing. Autodesk also invested in Netfabb’s parent, called FIT Technology Group, further extending its footprint in the 3D design space.

The rise of 3D printing technology has increased interest in 3D design software and Autodesk believes it can tap incremental revenues by penetrating the 3D design market deeper.

Autodesk intends to complete the acquisition of Netfabb in F4Q2016.

Earnings guidance

Autodesk, Inc. (NASDAQ:ADSK) expects to post revenue in the range of $580 t0 $600 million in its F3Q2016. Adjusted EPS for the quarter is anticipated to come in the band of $0.05-$0.10.

For fiscal year 2016, Autodesk is looking for revenue between $2.47 billion and $2.51 billion. Adjusted EPS for the year is projected to come in the range of $0.60 to $0.72.

Autodesk generated revenue of $609.5 million in the last quarter (F2Q2016) and $2.5 billion in the last fiscal year (F2015).

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The transition to cloud is expected to put pressure on Autodesk’s financial performance in the coming few years. However, stability is expected to start to return to the company’s performance by 2020.

Understanding the opportunity

Autodesk’s CEO, Carl Bass, has in the past complained that investors still don’t appreciate the hidden value in the company. In particular, Bass says that investors have yet to recognize the ability of Autodesk to increase the value of its existing customers and attract new ones over time. The shift to account should accelerate acquisition of new customers because of the potentially lower entry price.

With Autodesk’s future in the cloud clarified, investors can look to profit from a design software leader. Because as history shows, profit spike is never far from the surface if transition to the cloud is done successfully.

Bottom line

In the shift to cloud, Autodesk, Inc. (NASDAQ:ADSK) is likely to have a smoother transition given that Adobe has already trail-blazed the path. Autodesk can learn important lessons from Adobe’s journey to avoid potential pitfalls.

Autodesk’s transformation to rental software model from legacy license sales will certainly dry earnings and disturb revenue growth, but those will be temporary pains that investors with long-term outlook can afford to stomach.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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