Autodesk (ADSK), the biggest spender on research and development among companies of a similar size, plans to keep spending as it shifts more resources toward technology that helps distribute its design software via the Internet.
During its last fiscal year, Autodesk spent 25.4 percent of net sales on research and development, the largest percentage among U.S. software or Internet companies that have a market value above $5 billion and an annual R&D budget of at least $300 million, according to Bloomberg data.
The largest seller of engineering and design software, Autodesk aims to deliver more products over the Web, ramping up its use of so-called cloud computing. Chief Executive Officer Carl Bass is spending such a high percentage of sales on research even as Europe—the company’s largest market—struggles to contain a debt crisis. New products will help the company withstand any drop-off in the region’s demand, he said.
“When there are technology transitions in place, you better be more mindful of that, or you become road kill,” Bass says. Failure to innovate would pose a bigger threat to long-term prospects than turmoil in Europe, he says.
The enhanced-spending plan marks a change in strategy for Autodesk, whose software has been used to design everything from bridges to special effects in the 3D blockbuster Avatar. During the last recession, San Rafael (Calif.)-based Autodesk cut its annual research and development budget 21 percent, to $457.5 million, for the 2010 fiscal year in order to preserve cash.
“Stripping the Cupboard”
For Autodesk, the problem with cutting back on R&D now is that developing new products can take longer than a recession lasts.
“If they stop [developing] them, they may have stripped the cupboard bare just in time for the economic return and their competitors will have new products and they won’t,” says Barry Jaruzelski, partner at New York-based management consulting firm Booz & Co.
Indeed, IBM (IBM) CEO Sam Palmisano last year faulted Hewlett-Packard (HPQ) for relying too much on acquisitions, rather than spending on R&D, to pursue innovation. HP’s research and development spending fell 20 percent in the fiscal year that ended in October 2009, compared with the previous year.
Autodesk, meanwhile, boosted R&D expenditure 8.5 percent, to $496.2 million, in the fiscal year that ended in January. During the most recently reported 12-month period, it spent $525.5 million, or 26.7 percent of its sales, on R&D.
“We are devoting a larger percentage of our R&D budget to cloud computing, with a significant portion of our new product investments going toward products that are cloud-enabled,” says Paul Sullivan, a spokesman for Autodesk. “We expect that all of our major products will be available in the cloud within the next three years.”
Going Mobile for New Customers
The company is also using the cloud to deliver its applications for mobile devices made by Apple (AAPL) and those that sport the Android operating system from Google (GOOG). That may be helping Autodesk reach a broader audience more quickly.
Autodesk’s SketchBook application, which works on the iPhone, iPad, and Android devices, attracted 7 million users in less than two years. That compares with the nearly 30 years it took to attract 12 million customers with software products delivered through conventional shrink-wrapped boxes. In September, the company released Autodesk Cloud, a collection of more than a dozen Web-based capabilities, products, and services.
EMC’s Bold Spending Plan
EMC CEO Joe Tucci, who spoke last month at the University of Washington about the risks of not making the transition to the cloud, said his company is “going to spend a lot of money on R&D.”
EMC has spent $2.08 billion on R&D over the past 12 months, or about 11 percent of sales, according to Bloomberg data. The company is also planning to spend more than $2 billion on acquisitions to bring new technology into the company.
Microsoft said in April that it would spend 90 percent of its $9.6 billion R&D budget on cloud services. In its 2011 fiscal year, which ended in June, Microsoft spent 12.9 percent of its net sales on R&D—about half what Autodesk spent.
Microsoft cut its research expenses by $296 million, or 3.3 percent, in fiscal 2010. That brought its R&D spending down to 13.95 percent of sales, from 15.42 percent in fiscal 2009. The R&D cuts showed up in fiscal 2010 for Microsoft and some other companies because when the financial crisis hit in late 2008, budgets for 2009 were already set.
“We’ve been examining data from the mid-1990s and 2009 was the first year R&D spending declined in an absolute way,” says Jaruzelski at Booz & Co., which publishes an annual study of corporate R&D spending. Still, he says R&D fell at only one-third the rate that sales dropped.
R&D Gaining in 2011, 2012
Research spending among U.S. software companies dropped 5 percent in 2009, according to the Global R&D Funding Forecast published in December 2010 by the nonprofit Battelle Memorial Institute and R&D Magazine. This year, software and Internet companies are expected to increase spending by 7.5 percent.
“2011 looks to be a growth year overall for research and development and 2012 will likely be very similar,” says Martin Grueber, a research leader at Battelle.
Throwing money at research and development doesn’t guarantee that a company will come up with successful, innovative products. In fact, Jaruzelski says there’s no statistically significant relationship between a company’s R&D budget and its financial performance. Apple, the world’s most valuable technology company, spent just 2.2 percent of its sales on R&D in fiscal year 2011. “It’s about quality of strategy and quality of the talent, it’s not just about spending lavishly,” he says.
Bass says that if a recession does hit and Autodesk continues to invest in R&D at the expense of operating margins, he knows that investors—who have pushed shares down 9.4 percent this year—will complain. That’s a trade-off he says he’s willing to take, given the importance of making the transition to the cloud.
“There’s a whole class of problems we can now solve for our customers and it’s much more interesting for us to get into those businesses than it is to be too tied to short-term results,” Bass says.