On Dec. 20, the same day that design-and-build software giant Autodesk (NASDAQ: ADSK) completed its $875 million acquisition of construction productivity software provider PlanGrid, the company announced an agreement to acquire BuildingConnected, a global construction bid-management platform, for $275 million.
Both purchases admirably complement Autodesk's construction portfolio. PlanGrid adds cloud-based, document-centric workflows to Autodesk's construction design solutions, which center on its BIM 360 computer model-centric workflows. BuildingConnected gives Autodesk entry into the bid phase of construction via its network of more than 700,000 construction professionals. Essentially, the software helps real estate owners and contractors manage the bid process in the preconstruction phase.
Construction belongs to one of Autodesk's four major product families, which it terms "industry collections." These collections are Architecture, Engineering, and Construction; Manufacturing; AutoCAD (computer-aided design) and AutoCAD LT; and Media and Entertainment. Of these, Architecture, Engineering ,and Construction products account for the lion's share of total company revenue -- roughly 42% in fiscal 2018.
CEO Andrew Anagnost believes the construction industry is a logical area to achieve the company's ambition to become a "design and make" company. Focus within this discipline also fits within a larger strategic initiative undertaken in the fourth quarter of fiscal 2018, a reorganization Autodesk will complete by the end of the current fiscal year.
The reorganization plan calls for completion of Autodesk's business model transition from term licenses to subscription-based revenue streams, the digitization of company processes, and the "re-imagining [of] manufacturing, construction, and production." The plan also specifically anticipates increased spending in digital infrastructure, customer service, and the construction portfolio over the next few years.
Industry growth statistics appear to explain some of Autodesk's enthusiasm for the construction market. In its 2018 investor day presentation, the company highlighted estimates indicating that the global construction industry will need to add another 200 million jobs by 2030 to keep up with new demand.
In addition, the company projects that its total addressable market in design- and construction-related software opportunities will reach $22 billion by 2020. Based on the rapid uptake of its construction flagship BIM 360 software, Autodesk envisions several years in which it can increase share within an expanding construction products market:
Autodesk's use of bolt-on acquisitions to supplement core Autodesk construction technologies like BIM 360 (as well as the AutoCAD and Revit software offerings) can be seen as a tactic within the overall reorganization strategy. By presenting its construction platform as, if not a "one-stop-shop," an indispensable suite of products for middle-market and larger construction contractors, Autodesk enhances its recurring revenue potential and validates its business model transition.
The company's most recent earnings report, which covers the fiscal third quarter of 2019, exhibits the strength of the revenue transition (which began in earnest roughly four years ago). In this well-received filing, Autodesk achieved record year-over-year growth in annualized recurring revenue (ARR) of 33% during the quarter. Annualized revenue per subscription, or ARPS, also hit a record.
As Autodesk continues to convert maintenance plan subscribers over to product subscriptions, the improvements in ARR and ARPS are translating into diminished losses on the company's income statement. Autodesk's fiscal-year-to-date net loss of $145.5 million represents a 63% improvement over the $393.4 million loss during the same three quarters in fiscal 2018.
The organization is intent on pursuing higher subscription revenue (which currently represents 68% of total revenue), especially within its construction concentration. In the company's most recent earnings conference call in late November, CEO Anagnost noted that Autodesk has historically considered itself an acquisitive company and that the last two years of relative quiet on the M&A front represent an anomaly.
Anagnost advised investors to expect a return to frequent merger transactions, primarily in construction. The company followed these comments up with news of the BuildingConnected purchase in December, and investors can expect that more deals will bulk up Autodesk's construction product line in the quarters ahead.
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