Autodesk, Inc.

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(ADSK - NASDAQ)

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$45.99

Note: More details to come, changes are highlighted. Except where highlighted no other sections of this report have been updated.

Reason for Report: 2Q16 Earnings Flash

Prev. Ed.: July 3, 2015: 1Q16 Earnings Update

Flash News Update [Earnings Update in progress; to follow]

Autodesk Inc. reported 2Q16 results. Adjusted earnings of $0.01 a share lagged the Zacks Consensus Estimate of $0.02. The company reported non-GAAP earnings of $0.19 in 2Q16, down from $0.35 reported in 2Q15.

Quarter Details

Revenues for 2Q16 decreased 4% y/y to $610 million, missing the Zacks Consensus Estimate of $612 million. Revenues were impacted by a 17.1% y/y decline in License revenues to $290.5 million. Subscription revenues, however, surged 11.3% from the 2Q15 to $319 million.

Total billings grew 7% on y/y basis, driven by higher subscription billings. Total subscriptions increased approximately 61,000 from 2Q15.

Segment wise, revenues from Platform Solutions and Emerging Business (PSEB) declined about 21% from the 2Q15 to $164 million.

Revenues from the Architecture, Engineering and Construction (AEC) business segment jumped 7% from the 2Q15 to $233 million.

Manufacturing revenues increased 2% on y/y basis to $171 million. Sales in Autodesk’s Media and Entertainment (M&E) segment decreased 6% on y/y basis to $41 million in 2Q16.

Revenues from Flagship products were $272 million, a decline of 11% on y/y basis. Revenues from Suites decreased 3% on y/y basis to $226 million. Revenues from New and Adjacent products rose 13% from 2Q15 to $112 million.

Geographically, revenues in the Americas rose 6% y/y to $236 million. EMEA revenues declined 7% to $226 million, while the same in APAC decreased 13% from 2Q15 to $148 million. Revenues in emerging economies decreased 7% from 2Q15 to $92 million, representing about 15% of total revenue.

Operating Results

Gross margin contracted 150 basis points (bps) from 2Q15 to 84.7%. Operating expenses were up 2.6% on y/y basis to $512.2 million in 2Q16. Operating expenses as a percentage of revenues increased to 84% from 78.4% in 2Q15.

As a result, income from operations plunged over 91% y/y to $4.3 million. Autodesk’s profitability was negatively impacted by the ongoing business model transition and investment in cloud infrastructure.

Balance Sheet

Autodesk exited 2Q16 with total cash and cash equivalents (including marketable securities) of $2.39 billion compared with $2.02 billion as on Jan 31, 2015. Cash flow from operating activities for 2Q16 was $77 million compared with $96 million in 2Q15.

Acquisition

Along with the earnings release, Autodesk announced its plans to acquire San Francisco-based company-SeeControl. SeeControl specializes in developing enterprise Internet of Things (IoT) cloud service platform. This acquisition that is scheduled to be closed in the 3Q16 is expected to enhance Autodesk’s cloud offerings in the booming IoT domain.

Outlook

For 3Q16, Autodesk expects revenues in the range of $580 million - $600 million. Non-GAAP EPS is expected in the range of $0.05–$0.10. The figure does not include stock-based compensation expense of $0.21 per share and amortization of acquisition-related intangibles of $0.07per share.

For fiscal 2016, management expects net billings to grow in the range of 2%-4%. Revenues are expected to increase 3% to 5% (earlier projection was 2%-4%). While operating margin on a non-GAAP basis is expected to be in the range of 9% to 10% versus 12% to 14% projected earlier.

Non-GAAP EPS (excluding stock-based compensation expense and amortization of acquisition-related intangibles) is expected in the range of $0.60 - $0.72, down from the earlier guidance of $0.95 - $1.10. The company projects subscription additions for fiscal 2016 to be between 375,000 - 425,000.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON ADSK.

Portfolio Manager Executive Summary

Autodesk Inc. (ADSK)develops 2D and 3D design software for the architectural, engineering, manufacturing, infrastructure and digital media markets.Its installed base comprises over six million copies of its various products, which include AutoCAD, AutoCAD LT, Inventor, Revit and Civil 3D.

Key factors for determining an investment strategy for Autodeskare as follows:

  • Autodesk's flagship product, AutoCAD, isa dominant 3D and 2D drafting and design product in the market
  • Autodesk’s business mix is more diverse than that of its competitors and its evolving subscription model continues to enhance revenue predictability

Of the 12firmscovering the stock in the Zacks Digest group, 8provided a positive rating, 3had a neutral stance and 1 rated the stock negatively. Target prices range from a low of $56.00 to a high of $81.00, with the average being $69.50.

Bullish Stance – (Equivalent Ratings: Buy, Outperform, and Overweight) – 8firms–These firms believe that the shift in Autodesk’s business strategy to emphasize on direct sales within large enterprise accounts will drive revenues going forward. Moreover, the company’s offerings in the cloud computing segment and mobile platforms would positively impact the top line as clients tend to prefer Autodesk’s easy-to-implement and cost-effective solutions than those of its peers. The firms also believe that Autodesk has a solid market position, with the largest worldwide channel network among design software vendors. Moreover, these firms believe that Autodesk is seeing an increasing proportion of recurring business due to the change in pricing and growing mix of Suites and 3D products, which carry higher attach rates and therefore will drive billings in the near term.The firms expect revenues from emerging markets to grow faster than average in the near term as Autodesk benefits from the massive infrastructure build-out in developing countries.

Neutral Stance – (Equivalent Ratings: Hold, Neutral, and Market Weight) –3firms–The firms believe that an uncertain macroeconomic scenario and the significant exposure in European countries are major concerns for Autodesk, going forward. Moreover, these firms believe that intensifying competition in the high end market from Dassault Systems’ SolidWorks and others will also a major headwind going forward. Additionally, high piracy rates of up to 90% in the emerging markets will adversely affect Autodesk’s growth in these markets going forward.

General Outlook

The firms believe that long-term growth is largely dependent on two key trends:migration toward 3D design from 2D, and collaboration for design data. The 3D tools make up nearly one-third of the company’s topline. However, the firms remain cautious due to the weak macroeconomic environment.

May 28, 2015

Overview

The firms have identified the following factors for evaluating the investment merits of Autodesk:

Key Positive Arguments / Key Negative Arguments
  • The secular trends underpinning Autodesk’s performance are: 1) globalization of design collaboration in key vertical markets – construction and manufacturing, 2) mass digitization of design data (i.e. few blueprints), 3) design/execution integration.
  • The firms expect the company to continue to leverage M&A to both deepen and broaden its product portfolio and discover untapped market opportunities.
  • 3D products, which have a higher margin than 2D products, are being increasingly adopted in the market.
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  • The company is vulnerable to weakness in key verticals, such as manufacturing and construction.
  • The company is exposed to fluctuations in foreign currency exchange rates.
  • The company faces competition in the high-end 3D market from Dassault's product SolidWorks.
  • Sluggish macroeconomic environment remains a concern

Based in San Rafael, CA, Autodesk Inc. (ADSK) is a leading software provider of design and digital content solutions to customers in the building, manufacturing, infrastructure, digital media and wireless data services fields. In addition to software, Autodesk offers a range of services, including consulting, support and training. The company also develops, integrates, markets, sells and supports film and television compositing systems, high-definition and standard-definition broadcasts, editorial and finishing systems, and digital cinema production systems for color grading, film finishing, animation, visualization and streaming media products. Autodesk’s products are sold in over 160 countries. For more information about the company, please visit its website:

Note:Autodesk’s Fiscal Year ends on Jan 31.

May 28, 2015

Long-Term Growth

According to the firms, Autodesk’s fundamentals remain solid and the demand for its 2D and 3Dbased modeling products remains strong across all operating regions and business segments.3D products carry a higher selling price than 2D products. Management declared that private and public software companies are primarily generating demand, as these continue to adopt digital technology to develop innovative products and provide better, cheaper and faster services. The company’s cost effective and easily-implemented cloud-based solutions also act as long-term positives. Autodesk’s EPS is projected to grow at the rate of 8.3% over the next five years.

The strategy of Autodesk is to continue offering high-end technologies at a lower price point than comparable specialized high-end design solutions in order to capture a greater number of users.Moreover, the cloud based services that Autodesk offers will act as a positive catalyst for the company in the long term.

The majority of firmsappreciate Autodesk’s move to transform the traditional engineering practices into electronic designing from a draft board in the Architecture, Civil Engineering, and Creating a Building Systems (AEC) market. The company’s 3D product, Revit, has gained a strong foothold among both new and old customers. Another product, Vault, is a product data management (PDM) solution. Autodesk has also launchedNexus, a Product Lifecycle Management (PLM) product.

Moreover, most of Autodesk’s core products are available on a rental basis. Inorder to provide much needed flexibility to its customers, Autodesk intends to make its rental plans lucrative to different spectrum of customers, be it startups, freelancers or project-based businesses. The endeavor seems to have paid off. This is expected to boost profitability going forward.

Additionally, Autodesk’s technological leadership and global brand recognition position it well for long term growth.

The firms believe that Autodesk should benefit from its business model shift to desktop and cloud subscriptions in the long run. They alsobelieve that the company has a solid market position, with the largest worldwide channel network among design software vendors.

Moreover, these firms also believe that Autodesk’s migration from 2D to 3D based products will benefit the company in the long run. Further, the firms believe that Autodesk will certainly take steps like decreasing desktop rental pricing or increasing license prices inorderto accelerate its desktop subscriptions in the long run and to combat the headwinds arising from the elimination of license upgrades.

The major impediment faced by Autodesk in the emerging economies is the prevalence of software piracy. Any decline in piracy rates in such nations will act as a major positive catalystfor Autodesk’s growth in the long run.

May 28, 2015

Target Price/Valuation

Provided below is a summary of valuation and ratings as compiled by Zacks Research Digest:

Rating Distribution
Positive / 76.9%↑
Neutral / 23.1%↓
Negative / 0.0%
Digest High / $73.00↑
Digest Low / $50.00
Avg. Target Price / $65.00↑
No. of firms with Target Price/Total / 12/14

Risks to the target price include a larger-than-expected impact of a slowdown in U.S. economic activities, possible headwinds in the migration from the indirect channel to more sophisticated 3D software, slower-than-expected acceptance of 3D software, execution risks related to ongoing cost reductions, tighter liquidity constraints affecting channel partners and customers, and possible longer-term technological disruptions.

Recent Events

On May20, 2015, Autodesk announced its 1Q16 results. Highlights are as follows:

  • Revenues increased9.1% y/y to $646.5 million
  • Non-GAAP EPSdecreased 6.7% y/yto $0.30
  • Cash flow from operating activities was $86.5 million compared with $218.7 million in 1Q15

Revenues

1Q16 revenues increased 9.1% year over year to $646.5 million, ahead of both management’s guided range of $625 million – $645 million and the Zacks Consensus Estimate of $624 million.

Provided below is a summary of revenue as compiled by Zacks Research Digest:

Total Revenue ($ in million) / 1Q15A / 4Q15A / 2015A / 1Q16E / 2Q16A / 2016E / 2017E / 2018E
Digest Average / $592.5 / $664.6 / $2,512.2 / $646.5 / $617.1 / $2,575.4↓ / $2,436.3 / $2,764.6
Digest High / $592.5 / $664.6 / $2,512.2 / $646.5 / $623.2 / $2,592.9 ↓ / $2,594.5 / $2,764.6
Digest Low / $592.5 / $664.6 / $2,512.1 / $646.5 / $613.8 / $2,562.4↑ / $2,222.8 / $2,764.6
Y/Y Growth / 3.9% / 13.3% / 10.5% / 9.1% / -3.1% / 2.5%↓ / -5.4% / 13.5%
Q/Q Growth / 1.0% / 7.5% / -2.7% / -4.5%

The year-over-year growth in revenues was primarily attributed to a 15.7% jump in subscription revenues to $320 million.

License revenues rose 3.3% from the year-ago quarter to $327 million attributable to an increase in upgrade revenues.

Total billings grew 3% on a year-over-year basis, driven by higher license and subscription billings. Total subscriptions increased approximately 95,000 from the prior quarter.

Segment wise, revenues from Platform Solutions and Emerging Business (PSEB) declined about 13% from the year-ago quarter to $185 million.

Revenues from the Architecture, Engineering and Construction (AEC) business segment surged 21% from the year-ago quarter to $237 million.

Manufacturing revenues increased 25% on a year-over-year basis to $185 million. Autodesk’s Media and Entertainment (M&E) segment rose 6% on a year-over-year basis to $40 million in the reported quarter.

Revenues from Flagship products reached $299 million, flat on a year-over-year basis. Revenues from Suites increased 14% on a year-over-year basis to $240 million. Revenues from New and Adjacent products rose 30% from the year earlier quarter to $108 million.

Provided below is a summary of revenues by end market as compiled by Zacks Research Digest:

Revenue Segments / 1Q15A / 4Q15A / 2015A / 1Q16E / 2Q16A / 2016E / 2017E
License & Other Revenues / $316.2 / $354.3 / $1,341.4 / $326.7 / $290.8 / $1,265.4↓ / $726.2
Maintenance Revenues / $276.3 / $310.3 / $1,170.8 / $319.8 / $323.0 / $1,327.6↓ / $1,496.5

A graphical analysis of segment revenues is given below:

Geographically, revenues in the Americas rose 19% year over year to $244 million. EMEA revenues grew 9% to $245 million, while the same in APAC increased 3% from the year-ago quarter to $157 million. Revenues in emerging economies rose 17% from the year-ago quarter to $93 million, representing about 14% of total revenue.

Outlook

For 2Q16, Autodesk expects revenues in the range of $600 million - $620 million. For fiscal 2016, revenues are expected to increase 2%-4% (earlier projection was 3% to 5%).Management expects net billings to grow in the range of 2%-4% in fiscal 2016 compared with the earlier provided outlook of 3%–5% increase.Management also projects subscription additions for fiscal 2016 to be between 375,000 and 425,000.

The firms believe that Autodesk’s aggressive acquisition strategy has played a pivotal part in developing its business over the last couple of years.The company continues to expand its product portfolio through the acquisition of small start-ups that are easy to integrate into its own business line. We believe that Autodesk will continue to pursue strategic acquisitions in order to expand its cloud and mobile-based offerings over the long term.

Please refer to Zacks Research Digest spreadsheet of ADSK for detailed revenue estimates.

Margins

Gross margin contracted 90 basis points (bps) y/y to 88% in 1Q16. Operating expenses spiked 13.1% on a y/y basis to $533 million in 1Q16. Operating expenses as a percentage of revenues increased to 82.5% from 79.6% in 1Q15.

As a result, income from operations plunged over 49% year over year to $21.5 million in 1Q16. Autodesk’s profitability was negatively impacted by the ongoing business model transition and investment in cloud infrastructure

Provided below is a summary of margins as compiled by Zacks Research Digest:

Margins / 1Q15A / 4Q15A / 2015A / 1Q16E / 2Q16A / 2016E / 2017E
Gross / 89.2% / 88.9% / 88.9% / 88.3% / 88.9% / 88.7%↑ / 86.2%
Operating / 17.2% / 12.8% / 15.2% / 14.6% / 10.2% / 12.7%↓ / 13.6%
Pre tax / 16.7% / 12.0% / 14.6% / 14.4% / 9.7% / 12.3%↓ / 13.1%
Net / 12.5% / 8.8% / 10.8% / 10.7% / 7.2% / 9.1%↓ / 9.7%

Outlook

For fiscal 2016, management expects operating margin on a non-GAAP basis to be in the range of 12% to 14% versus 13% to 15% projected earlier.

Please refer to Zacks Research Digest spreadsheet of ADSK for detailed margins estimates.

Earnings per Share

Adjusted earnings of $0.15 per share matched the Zacks Consensus Estimate. The company reported non-GAAP earnings of $0.30 in the quarter, down from $0.32 reported in the year-ago quarter.

Provided below is a summary of EPS as compiled by Zacks Research Digest:

EPS / 1Q15A / 4Q15A / 2015A / 1Q16E / 2Q16A / 2016E / 2017E / 2018E
Zacks Consensus
Digest Average / $0.32 / $0.25 / $1.17 / $0.30 / $0.19 / $1.04 / $1.18↓ / $2.28↓
Digest High / $0.32 / $0.25 / $1.18 / $0.30 / $0.19 / $1.07 / $1.50↓ / $2.28↓
Digest Low / $0.32 / $0.25 / $1.17 / $0.30 / $0.18 / $0.97 / $0.76↓ / $2.28↓
Y/Y Growth / -24.0% / -37.3% / -30.2% / -6.4% / -47.0% / -11.6% / 14.1% / 92.7%
Q/Q Growth / -20.7% / 1.2% / 18.4% / -37.5%

Highlights from the EPS table are as follows:

  • 2Q16 forecasts (3 firms)range from $0.18 to $0.19; the average is $0.19
  • 2016 forecasts(3 firms) range from $0.97 to $1..07; the average is $1.04
  • 2017 forecasts (3 firms) range from $0.76 to $1.50 the average is $1.18
  • 2018 forecast (1 firm) is $2.28

Outlook

For 2Q16, Non-GAAP EPS is expected in the range of $0.14–$0.19. For fiscal 2016, Non-GAAP EPS(excluding stock-based compensation expense, amortization of intangibles and restructuring charges) is expected in a range of $0.95 - $1.10, down from the earlier guidance of $1.05 – $1.20.

The firms have lowered their EPS estimates to reflect the huge sum spent on the Delcam acquisition as well as the enormous investments made to support new deliverables in the form of cloud offerings. Further, the firms believe that the company’s substantial exposure to economic forces will constrain its near-term growth rate.

Please refer to Zacks Research Digest spreadsheet on ADSK for detailed EPS estimates.

Analyst / Prachi Jhunjhunwala
Copy Editor
Content Ed.
QCA / Sejuti Banerjea
Lead Analyst / Vaishali Doshi
Reason for Update / 2Q16 EarningsFlash

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