Another Disappointing Quarter, But Every Cloud...
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It’s the third quarter in a row of disappointing results from Autodesk (NASDAQ: ADSK), but by now investors appear to have become relatively immune. Autodesk tends to be a business operating in cyclical markets without a great amount of visibility for future revenues. This quarter confirmed a slowdown in its end markets, but the stock is looking cheap now and operational improvements with its move to software as a service (SaaS) based suite sales offer potential upside to margins. I decided to take a closer look.
I discussed the company in depth in an article linked here and I would encourage investors to read it in conjunction with this article.
Turning to a summary of the Q3 numbers.
- Revenues of $548 million vs. internal estimates of $550-570 million, analyst consensus at $559 million
- Non-GAAP EPS of 47 cents vs. internal estimates of $40-45 cents, analyst consensus 43 cents
- Q4 Revenue Guidance of $570-600 million vs. analyst consensus of $604 million
- Q4 Non-GAAP EPS Guidance of 43-51 cents vs. analyst consensus of 54 cents
So in earnings parlance it’s a “miss” and it’s also a lowering of full year guidance. Last quarter Autodesk had guided towards full year revenues of $2.3-2.35 billion but this has now been lowered to $2.275-2.305 billion or by $35 million at the mid-point.
While the lowering of guidance and the linearity of it is a concern, I think there are reasons to look positively on Autodesk’s prospects.
Reasons to be Cheerful
First, it’s a slowdown, but it’s not 2008! A reduction of $35 million in full year guidance over the last two reports is disappointing, but it is hardly a catastrophe. Gross basics were basically flat and nine month cash flow is ahead of last year. Management described the slowdown as broad based.
Second, in the last quarter’s results management indicated that the weakness was due to the realignment of its sales force rather than macro difficulties. Apparently, it was the other way around in this set of results. This implies that the shift to SaaS is not an intrinsic part of the company’s current weakness. This is a key point because if Autodesk can accelerate this shift it might be able migrate to the kind of-previously discussed- 30%+ operating margins even while its end markets get tougher. We shall see.
Third, this is a small consolation, but if you add back the $2-3 million that Autodesk estimates it lost due to Sandy then it actually came in above the low end of its revenue change.
All About the Macro?
Autodesk was cautious in the outlook and understandable so. It has significant exposure to the kind of emerging market industrial sectors that are noticeably slowing right now. Execution improved in Central Europe and Brazil, but in general markets were weaker. In fact these results were in concert with another company with similar end markets Dassault Systemes (NASDAQOTH: DASTY) which discussed a weaker macro environment and a lengthening in sales cycles recently.
In common with Dassault, Parametric Technology (NASDAQ: PMTC) reported that the Americas and Far East were doing well, but saw weakness in the more developed markets of Europe and Japan. I think that this is more of a function of where these companies are positioned to sell too. The US seems to be doing relatively well right now.
As I outlined in the previous article, Autodesk tends to be cautious with its guidance so when it starts missing it is a cause for concern.
Going forward I think your near term view of this stock is going to colored by a macro opinion on the global economy. This is usually the case with such a cyclical stock.
On the other hand, investors don’t always invest with such a myopic focus. In the long term its end markets will get back to growth and there is an important secular growth story here with the shift to Saas.
Analysts have questioned the viability of this move in terms of the inevitable shortfall in revenues that it will create when you shift a permanent license buyer to a subscription based customer. However, I think it makes sense. If a company like Intuit (NASDAQ: INTU) is a useful guide, operational efficiencies should ensue as customer acquisition costs decline when marketing becomes easier. In addition, Autodesk is a company whose top percentages of customers create the bulk of revenues.
The key is to get customers (existing or new) to buy new licenses. It is not just about signing up new customers. I would look for future customers on if the top customers are buying more licenses under SaaS. Of course, the problem with this optic is that it will be clouded by the weakness in the economy.
Where Next for Autodesk?
It is the classic investment puzzle. The stock is attractive long term, but has near term risk so what is an investor to do? Frankly I wouldn’t buy in here without a long term perspective and an expectation of some volatility.
That said, the company has a rock solid balance sheet and continues to generate significant amounts of cash. If it can demonstrate success in its SaaS operational shift then it may well get as re-rating. Until then it remains a position on the global economy with an emphasis on emerging markets.
SaintGermain has a position in Intuit. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!