What Happened at Autodesk?

It’s been a wild ride for Autodesk the last couple of months.

In that short time, Autodesk launched an internal probe of its accounting that sent its stock price tumbling. The company concluded the investigation by saying nothing was remiss, but they would be replacing their CFO anyway. Not placated was an activist on its board of directors who sued them, stating their top executives had done a cash grab, plying top customers with discounts if only they would only pay now for future years of software use — something they had vowed never to do again but were doing so now to release a torrent of cash that would flow into FY24 and ensure their annual bonuses.

Let’s look at the chain of events.

On April 1, Autodesk filed for a delay in 10-Q reporting because it found discrepancies in the company’s recent accounting of free cash flow. A 10-Q normally follows the annual report and provides more detail, containing information valuable to analysts such as threats to the company’s business. Also, it carries extra responsibility for corporate officers who have to swear under oath that all information contained is accurate.

Not filing a 10-K on time results is a big deal. The SEC will issue a fine in most cases and a late filing will set off alarms among investors. The day that Autodesk said the 10-Q was late, the share price dropped. It wouldn’t stop dropping for over two weeks, going from $259 on April 1 to $211.

Autodesk valuation dropped over $10 billion in 18 days.

On May 31, Autodesk announced that it had concluded its internal investigation and would now file the 10-Q. The company had indeed found some discrepancies, most having to do with how cash flow was accounted for as the company “engaged in programs designed to incentivize customers to accept multiyear upfront filling, renew early, and/or pay before the end of the year.”

But in 2022, Autodesk had stated that it would shift from multi-year upfront billing to annual billing. Now it was now saying it was reverting to multi-year upfront billing in a big way to make its free cash goals for the year. Also, the “free cash flow was one factor in the company’s executive compensation program,” according to Autodesk’s own press release.

In the aftermath of the 10-Q delay, Autodesk relieved Debbie Clifford of her role of CFO and slid her sideways into a Chief Strategy Officer role, a role that had been vacant for over 20 years. Clifford would seem an unlikely candidate for a Chief Strategy Officer, judging from her LinkedIn profile, having held only roles with strictly financial duties. Carl Bass, last in the CSO role, had considerable knowledge and insight into design and manufacturing.

Is there more than meets the eye with Autodesk’s wrap up of their own investigation? Monica Schnitger, a CAD industry analyst, thinks not. “There is nothing to see here,” she says in her detailed account of the accounting. Autodesk did after all, have a great quarter, she says. As if to say who are we to question who gets billed when and who cares about 10-Qs? Executive compensation does not register.

But not all have been convinced that Autodesk conducted its accounting and investigation properly. We learn of Starboard Ventures having a $500 million investment in Autodesk, a 1% stake, but sufficient for a seat on the board of directors. Starboard filed a lawsuit in the state of Delaware (where Autodesk is incorporated) to delay the company’s annual meeting so new board members can be elected and in a June 17 letter argued that the investigation had uncovered “significant issues and questions about the Company’s accounting and disclosure practices, executive compensation practices, and oversight, or a lack thereof, from the Board of Directors” that ought to be addressed.

Why was Autodesk in such a rush to increase free cash flow? Two reasons, according to the Starboard: Autodesk reports free cash flow as a key operational metric and uses it as one of the primary determinants of executive compensation (emphasis theirs). Starboard goes on to contend that while Autodesk was telling the world one thing (that annual billing was in effect), it began an aggressive campaign to secure free cash by upfront billing, that “substantially exceeded historical levels, helping the company to meet its lowered annual free cash flow target” (Emphasis theirs), offering discounts as an inducement.

Autodesk uses free cash flow targets in its calculations of PSUs (performance stock units) awarded to key executives. The payout from PSUs formed 50-53% of the key executive’s total compensation for the year. A PSU is equal in value to a share of common stock and is taxable. PSUs and RSUs (restricted stock unit, nontaxable, based on stock price, not on free cash flow, and forms 33% to 35% of the total compensation) combine for an annual bonus — and it can be sizable.

Andrew Anagnost’s PSU and RSU awards combined for over $20 million. Debbie Clifford, in her last year as CFO, got $6 million in PSU and RSU awards.

Starboard maintains that in failing to inform shareholders of the free cash issue, Autodesk deprived them of a chance to nominate incoming board members, an issue it hoped to rectify with a delay in the annual meeting, when presumably new board members would be announced.

However, the State of Delaware denied Starboard’s request, a ruling favorable to Autodesk. The annual meeting and board appointments will take place as Autodesk had planned.

I don’t think this is the end of the story, though. The meeting date and board appointments may not have gone the way an activist investor intended but the alleged issues of company underperformance, accounting practices and executive compensation will likely be brought up again.

While some may believe that its back to business as usual for Autodesk, I am reminded of Carl Bass, who after leading Autodesk into its golden days was ousted by an activist investor.