Autodesk Has Designs on New Business Model
The shift to subscription-based pricing should pay off in the long term.
After fully digesting Autodesk's (ADSK) fiscal 2014 results, we have taken a fresh look at the firm's strategic business model transition and what it ultimately means for the company over the long term. While the company's financial performance will be underwhelming (relatively speaking) in the short term given revenue recognition changes, we think Autodesk is well placed to benefit from its shift to more subscription-based, higher long-term value pricing models. We expect revenue growth to converge with 12% billings growth in fiscal 2018. Additionally, we forecast considerable operating margin expansion given the business model transition, with 30% non-GAAP operating margins in fiscal 2018, in line with guidance. In all, we have rolled our financial model forward one year, have become more confident in Autodesk's ability to migrate clients to subscription-type pricing models, and see good spending across the company's core markets. As a result, we have increased our fair value estimate to $51 per share from $38 and retain our Wide Economic Moat Rating.
Evolving With the Market Will Keep It a Leader
Autodesk is positioning itself to protect and extend its market leadership in computer-aided design. We believe the firm will remain a market leader over the long term, given its commitment to evolve to changing market trends, and its recent investments in mobile, social, suites, and cloud technology exemplify this. Autodesk also aims to expand into adjacent markets such as product lifecycle management and simulation and increase its presence in the underpenetrated government and construction sectors. As a result of its strong position and encouraging growth trends, we forecast respectable mid- to high-single-digit revenue growth.
We believe Autodesk's long-term growth depends on its ability to provide more value per customer and attract subscribers to its platforms. It has moved aggressively into the mobile and social markets through acquisitions like Socialcam, Instructables, and Pixlr. In addition, it has been an early mover into the cloud market, relative to close competitors, through its Autodesk 360 platform. The company's key growth enablers will include desktop rental, cloud services, and consumption-based pricing models. Given the premium placed on agility and the use of all-digital processes, we expect Autodesk's products to resonate well with current and future clients. Key growth segments will include simulation, consumers, and PLM. In these segments, we think Autodesk has the opportunity to disrupt incumbents with its relatively cheap and easily deployable products such as Sim 360 and PLM 360. With management's new onus on driving recurring revenue, it expects 70% of group revenue to be recurring by fiscal 2018 (from about 40% today). Financially, the recurring revenue model is attractive, as it provides more long-term revenue, financial predictability, and flexibility.
By fiscal 2018, management expects billings to grow 12% on average per year, customer value to rise 20%, subscribers to increase 50%, and non-GAAP operating margins to reach more than 30% (from about 25% today). We believe these expectations are attainable and think the company's early adoption of mobile, social, and cloud technology has positioned it aptly.
Switching Costs Dig a Wide Moat
Autodesk's wide economic moat stems from its customers' high switching costs and a large network of users. We believe the company's clients are averse to switching because of the time it takes to learn a new platform, the downtime risk to current operations, and the monetary cost associated with implementing a new CAD solution. Furthermore, Autodesk has developed a very large customer base over the past 30 years that is unlikely to deteriorate, given the aforementioned switching costs. This large network is expected to sustain Autodesk's competitive advantage over the long term. In addition, the firm actively provides educational institutions and instructors with its software, so future users are trained on its tools at an early stage. In fact, the company sponsors high school programs that combine Autodesk's 3D animation and visual effects tools with math, science, and arts courses. This grassroots approach reinforces the company's long-term relevance and appeal in the CAD industry.
Breaking Into Other Markets Could Be Difficult
While Autodesk is well positioned in the CAD industry, it does face risks. Even though the company's move into adjacent markets presents a growth opportunity, breaking into the simulation and PLM markets may be difficult. The barriers that keep others from entering Autodesk's traditional markets, such as architecture, engineering, and construction, may also prevent the firm from gaining meaningful share. For example, the dominant simulation provider, Ansys (ANSS), is likely to offer stiff competition. Meanwhile, PLM providers like Dassault (DASTY), SAP (SAP), IBM (IBM), and Siemens (SI) will provide fierce competition, too. Consolidation among its value-added resellers is another trend that could negatively affect Autodesk even though it is moving increasingly to a direct distribution model. To highlight this, Tech Data, the firm's largest distributor, acquired Mensch und Maschine, Autodesk's largest distributor in Europe/Middle East/Africa. Such a move could lead to greater bargaining power for Autodesk's distributors and create a situation where it becomes increasingly reliant on a few large distributors to generate revenue. Lastly, perceived or actual technical issues with products may damage Autodesk's reputation. Maintaining a trusted brand is vital to the company's commercial success.
Andrew Lange does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.