Saturday, March 2, 2013

Autodesk Gets Back on Track

What to do with Autodesk (NASDAQ: ADSK)? As an investment proposition the company sets off so many triggers that it is hard to keep track of all of them together. In summary the company has had a difficult year dealing with a sales force realignment, macro-economic weakness and managing a transition to selling more of its solutions as Software as Service (SaaS) based suites (where solutions are bundled) as opposed to standalone flagship products. It missed some internal guidance numbers early in the year (a rare event for the company) and operates under the same amount of limited visibility as it has always done. With that said the stock is looking attractive at this evaluation and deserves a close look.

Autodesk’s Earnings

I covered the stock in a previous article linked here, and looking back on what was forecast in Q3 it's clear that Autodesk had a decent quarter in Q4.

  • Q4 Revenue of $607 million vs. internal guidance of $570-600 million
  • Q4 Non-GAAP EPS of 53c vs. internal guidance of 43-51c
  • Q1 Revenue Guidance of $570-590 million vs. analyst estimates of 583.8 million
  • Q1 Non-GAAP EPS Guidance of 41-46c vs.  analyst estimates of 45c
  • Full Year Revenue forecast to rise 6% with a 125-150bp rise in Non-GAAP operating margins

Considering that Autodesk has a history of guiding under, the forecasts for Q1 look pretty good when compared with analyst estimates. Before going any further I want to point out one aspect of the results and guidance that might have caused confusion.

From the chart it looks like Q4 revenues were great but Q1 estimates are weak. Don’t get exuberated and then alarmed. There was a pull forward of some $24 million in the quarter from promotional activity. This is going to be counterbalanced in the first half of 2014 so its full year results will end up binge back end loaded. Similarly after Q1, ADSK will come up against some easier comparables (you can see that in the Q2 & Q3 figures above). All of this is adequately expressed when looking at the 10% Non-GAAP EPS recorded for 2013 and then the weaker 8.8% forecast for 2014. In a sense some of the earnings have been brought forward into 2013 and paid for in weaker growth in 2014. No big deal.

Autodesk’s Investment Proposition

Imagine you are in a room full of its stockholders and you go around asking each one why they are here? One informs that you that he wants some cyclicality so he bought the stock. Another tells you that he likes the secular growth prospects inherent in shifting to a SaaS model and is holding it alongside companies like Intuit (NASDAQ: INTU) and Adobe Systems (NASDAQ: ADBE). A third tells you that he is a value investor and loves the cash flow generation and rock solid balance sheet. A fourth is a growth investor, he loves the SaaS argument, buys the cyclicality and he thinks that increasing use of ever complex design in emerging markets is going to drive demand higher in future.

Get the picture?

I think the stock is attractive, but you must be aware of a high amount of cyclical risk. Macro-economic discussion is never far from the agenda with Autodesk. Emerging market performance outside China was disappointing again, and this has been a running theme throughout the year for Autodesk. Europe saw the usual story of North good, South weak and I can’t see that changing anytime soon. The Americas were described as being ‘uneven,’ which is really a euphemism for saying that Brazil was weak and the US declined. I suspect the US weakness is a function of manufacturing deciding to hold off investing while the fiscal cliff issue was being resolved.

US growth is likely to snap back for Autodesk because the company stated that backlog was strong in the US, the fiscal cliff and sequestration issues will be resolved, and there are real signs of a recovery in general construction activity. With that said the company’s reliance on emerging market growth still remains.

As for the SaaS proposition it’s interesting that Autodesk is taking a slightly different route to Adobe. Both are moving to SaaS, but Adobe has pushed the subscription model more than Autodesk. I’ve discussed Adobe in more detail here, turning back to Autodesk and how its suite sales are expanding.

Thinking about the long term, the potential for Autodesk to ‘do an Adobe’ and move towards the subscription based model is there, but I guess this option will be partly a function of how Autodesk views its customer behavior and the likelihood of take-up. The evidence from early adopters of SaaS like Intuit is that the lifetime value of a customer will increase as retention ratios rise. In addition, Intuit has seen favorable movements in customer acquisition costs. In the long term I expect Autodesk to benefit in the same way as these two companies.

Where Next for Autodesk?

Times have been difficult for Autodesk, but this business has generated over $1.5 billion in free cash flow over the last three years and has strong secular growth prospects from the move to SaaS. To put that figure into context the current enterprise value of the company is around $7 billion. The question is not over its current evaluation (it is cheap) but rather what price you are willing to pay for the cyclical risk and emerging market and European exposure?

If you are confident of the global economy in 2013 then Autodesk is exactly the kind of stock you should be buying. For those of us who hedge and like to balance risk (upside and downside) I will consider it on the cyclical risk end of my portfolio when I have some space on the roster.

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