Autodesk (ADSK US)

Autodesk (ADSK US)

Elimination of Perpetual Pricing Feb 1, 2016 Is a Material Positive

Today Autodesk unveiled the second phase of the subscription transition with the announcement that perpetual pricing for most of its software products will be eliminated February 1, 2016. Instead, only subscription options will be available after this date, and this will drive recurring revenue that is growing 14% this year on the back of eliminating upgrade pricing on February 1, 2015. 

·        Two phase approach.  Recall that ADSK announced in its October 2013 analyst day that it would eliminate upgrade pricing on its products starting February 1, 2015 that went into effect three days ago. During the October 2014 analyst day, management then went a step further, announcing that it would eliminate perpetual license purchase options sometime in the next two years. We had been modeling that change to go into effect in October 2016, but today’s announcement brings forward that change to February 1, 2016.

·         Subscriber growth driven by subscription changes.Before the start of the move to subscription-only, about a third of ADSK users were on any type of subscription maintenance program. With the impending elimination of upgrade pricing announced, ADSK has added 284,000 additional subscribers in anticipation of the change. We expect the elimination of the perpetual option will drive additional purchasing leading up to the deadline and will cause more customers to become subscribers.

·        Recurring revenue means better lifetime value and cash flow.  Traditionally, the bulk of ADSK customers tend to purchase anywhere from every two years to every four years, but migrating the customer base over to subscription programs will drive recurring revenue ultimately to be the majority of revenue. That consistent yearly spend will lead to much higher customer lifetime values and higher cash flow, which we think is not currently reflected in the stock. These changes are the basis for why ADSK is one of our favorite names for 2015.