Autodesk Battens Down the Hatches
Was it the economy or has Autodesk been its own worst enemy?
By Martyn Day, editor CADserver
A company-wide
communiqué from Autodesk's CEO Carol Bartz recently appeared on the irreverent
fuckedcompany.com website. It's only a guess but I think this was probably not the news-distribution mechanism that Bartz had in mind! The letter outlined the current tough economic climate
at Autodesk and the lack of "positive economic signs."
Describing the current climate as a "serious
situation" with little prospect for an upturn, Bartz highlights the need for prudence at Autodesk, with controlled spending and
expense reduction. Bartz announced a 20 percent pay cut in her $841,667 salary and a
10 percent cut for vice presidents and senior vice presidents for the remaining two quarters (August-January).
Nor were the rank and file exempt -- a company-wide pay freeze
is in effect, and Autodesk employees were also encouraged to take any accrued vacation, as it shows up as a liability.
On the face of things, I'd have to agree with Bartz on today's
global financial situation. It certainly looks bleak. The combination of September 11th, Enron and continued creative accountancy have placed the stock market in a tailspin. Investors are shying away from stocks. Autodesk's potential and existing CAD customers are operating in very tight markets and therefore controlling their own expenditures on software and technology. That said, I think Autodesk may also have been its own
worst enemy.
Upgrading revenues
In the AutoCAD world, it's a widely held belief that the majority of users upgrade every other release. This is usually every three years. 2001 was such an upgrade year. Those users
of the extremely popular R14 were told that they had to upgrade to the next release or have to pay the full price for a new copy to upgrade past a certain deadline date. At last estimate, 70% of users upgraded, swelling the Autodesk coffers and providing Autodesk with a good year. Users who contacted me weren't so happy with the
"deal" but this is the way Autodesk has come to operate what it terms product
"obits" (obituaries).
In an effort to be not seen as a one-product company, Autodesk only publicly attributes
30 percent of its business to AutoCAD. Products that are based upon or work on top of
AutoCAD -- such as AutoCAD LT, Architectural Desktop, Mechanical Desktop, AutoCAD Mechanical, Autodesk Map, Autodesk Survey, Autodesk Civil Design, AutoCAD Raster
Design and Land Development Desktop -- are not included in this
30 percent figure. Wall Street seems to have soaked up the diversification message but the reality is that Autodesk still relies heavily on AutoCAD and AutoCAD-related
revenue; I'd suggest that 60 to 70 percent is still entwined, in some way, with the company's flagship product.
So while last year was good because it was upgrade time, this year doesn’t
hold similar prospects. On CNET earlier this year, I listened to Autodesk's then CFO, Steve Cakebread, being interviewed about the company's performance;
he attribute last year's good billings to selling
"collaboration," a new technology that its customers were allegedly adopting and buying into. I watch Autodesk very closely
and I know that the company has no globally available collaboration
products. It doesn't even do document management! I can only guess that because Autodesk holds to
its line that "only 30 percent of business being AutoCAD
reliant," Cakebread couldn't say the results were actually
the result of users upgrading their foundation and vertical AutoCADs;
admitting this would make the "AutoCAD is only 30 percent of our
business" story look highly suspect.
Beyond AutoCAD
Autodesk's other non-AutoCAD ventures are taking a little while to
gain favor. Inventor, Autodesk's stunning mid-range modeler, has tough competition from SolidWorks;
also, the mechanical engineering market is currently slow. To fend off SolidWorks from its installed base, Autodesk recently upgraded most users for a minimum fee to something it calls the Inventor Series - Mechanical Desktop (MDT) plus Inventor in the same box. Here MDT customers would need a very good reason to move from Autodesk to SolidWorks, as they were pretty much given the companies Inventor modeling tool as part of their product's upgrade process. It was both a defensive and aggressive move by Autodesk and I have to say it was pretty smart,
although it does limit future revenue potential from MDT
upgrades. In addition to this, the digital content market has been soft for a while, reducing Discreet's contribution to Autodesk's bottom line.
Autodesk has some impressive products and technology up its sleeve, although I can't see them adding substantial revenue within the next two quarters. The three key products will be Revit (recent AEC acquisition), Architectural Studio (conceptual/sketching designer) and Streamline (a
"collaboration" back-office for Inventor). Revit is an impressive parametric AEC modeling tool which at the moment is probably causing more confusion amongst existing Architectural Desktop customers than excitement, but I expect Autodesk to get on top of this towards the end of this year. Architectural Studio and Streamline appear to have been limited to the US for now, causing some frustration with Autodesk satellite offices outside of the US.
Beyond its boxed products, Autodesk has high hopes for its subscription
service. But it has taken longer to implement the back-office system than originally planned. Here, for a fixed fee customers can sign up for frequent feature bundles, instead of waiting for AutoCAD
"release obits" (as has just happened with R14). The benefit to Autodesk is that it gets recurring revenue without having to spend a fortune marketing to its installed base to get them to upgrade. Out of all its new
"products," subscription appears the most likely to bring in some serious revenue, although the
customer base has just shelled out for a major upgrade and will be looking to control
expenditure in these uncertain times.
Stock split
Autodesk's problems appear to have been further compounded by a decision to split the stock. Stock splits increase the number of company shares in existence but
keep the value of the company the same. So, if a stock is trading at $40 with 100 shares in existence and undergoes a 2 for 1 split, you end up with 200 shares trading at $20. Fundamentally it does not affect the balance sheet or earnings but adds liquidity to the stock, as there are more shares in existence at a lower
price. This in turn, it is hoped, increases the volume traded.
It also has the psychological effect of making them appear cheaper - although in reality to own the same portion of the company you would still need the same amount of capital (two $20 shares). This can also change the investor base (more individual investors).
Traditionally, a stock split signals that the company's board is optimistic about the outlook and is seen by the market as being bullish.
So while this type of stock maneuver is usually reserved for
"good times," Autodesk decided to do it in the first quarter, post-September 11th and in a quarter in which it failed to meet its target numbers (down
35 percent year quarter on year quarter). The net result was
that the stock got panned and coincided with Cakebread, the CFO of five years, leaving to join another company.
Having had such a good previous year, it's not uncommon to raise the sights some more. I wonder if Autodesk management started to
believe its own spin that only 30 percent of revenues come from AutoCAD? And that it could build year-on-year despite the three-year
mass upgrade cycle that it created? Many customers I have talked to who have upgraded feel resentful as they felt it was forced on them and they will not be spending money on their CAD system for a while. Meanwhile Autodesk's new products appear to be locked inside the US, unable to be distributed globally.
Conclusion
Even if the current financial crisis wasn't happening, it was always going to be a tall order for Autodesk to build on its success in 2001 with its
AutoCAD upgrade- enhanced revenues. For various reasons, Autodesk's new products and services haven't ripened enough to plug the gap, and although Autodesk has diversified into adjacent areas, these too are experiencing soft demand.
One can only hope that things pick up for everyone later this year after the accountants
have cleaned up their collective acts and we can all move forward. For Autodesk it looks like it will have to wait for its new products to blossom in 2003. The post-September 11th climate has obviously not helped matters. Nor have the accountancy scandals. As Autodesk should have seen less AutoCAD-related revenue in the coming quarter, the decision to split the stock in a quarter which missed target seems ill advised.
However, Autodesk is not "going down the
plug-hole." It's just in cost-cutting mode. The company is acting no differently than any other firm
facing the prevailing market conditions. Autodesk's new products are not mature enough or ready for global distribution, and
therefore are unable to really make up any shortfall. And while
these are apparently good products, their revenue potential, compared to
being the company's "next AutoCAD," is, in my opinion, dubious in the short to mid-term. It looks like Autodesk's attempts to become a $1 billion company
will be thwarted for another year.
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