Autodesk Inc.

[Pages:8]March 09, 2015

Autodesk Inc.

(ADSK-NASDAQ)

Current Recommendation Prior Recommendation Date of Last Change

Current Price (03/06/15) Target Price

NEUTRAL

Outperform 03/09/2015

$61.74 $65.00

Earnings Update: Autodesk Reports Q4 Results

SUMMARY

Autodesk reported soft fourth-quarter fiscal 2015 results. While revenues improved encouragingly, earnings did not meet the expectations owing to the ongoing business transition. Autodesk is benefiting from the increased adoption of cloud-based services. The company s offerings like Fusion 360, BIM 360 and PLM 360 are also gaining traction. However, in the near term, the company s profitability will remain pressured due to the investments in cloud-based infrastructure and marketing initiatives. Further, the discontinuation of the perpetual license offerings in the following year may have some impact on the company s financials.

SUMMARY DATA

52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

Annual Cash Dividend Dividend Yield (%)

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

P/E using TTM EPS

P/E using 2016 Estimate P/E using 2017 Estimate

Zacks Rank *: Short Term 1 3 months outlook

* Definition / Disclosure on last page

$64.24 $45.19

15.16 2.00

2,128,193

227 $13,996

2.14 92 1

$0.00 0.00

6.3 0.8 N/A

89.5 89.5 75.3

3 - Hold

Risk Level *

Type of Stock Industry Zacks Industry Rank *

Below Avg.,

Large-Growth Comp-Software

161 out of 267

ZACKS CONSENSUS ESTIMATES

Revenue Estimates

(In millions of $)

Q1

Q2

(Apr)

(Jul)

2014 2015 2016 2017

570 A 593 A 625 E

562 A 637 A 642 E

Q3 (Oct)

555 A 618 A 646 E

Q4 (Jan)

587 A 665 A 695 E

Year (Jan)

2,274 A 2,513 A 2,608 E 2,789 E

Earnings Per Share Estimates

(EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1

Q2

Q3

Q4

Year

(Apr)

(Jul)

(Oct)

(Jan)

(Jan)

2014 $0.31 A

$0.35 A

$0.31 A

$0.28 A

$1.25 A

2015 $0.21 A

$0.24 A

$0.12 A

$0.12 A

$0.69 A

2016 $0.17 E

$0.18 E

$0.16 E

$0.18 E

$0.69 E

2017

$0.82 E

Projected EPS Growth - Next 5 Years %

34%

? 2015 Zacks Investment Research, All Rights reserved.



10 S. Riverside Plaza, Chicago IL 60606

RECENT NEWS

Autodesk Business Transition Mars Q4 Earnings, Revenues Top

Autodesk Inc. reported fourth-quarter and fiscal 2015 results. Adjusted earnings of $0.12 per share missed the Zacks Consensus Estimate by a penny.

The company reported non-GAAP earnings of $0.25 in the quarter, significantly down from $0.40 reported in the year-ago quarter. For fiscal 2015, Autodesk reported non-GAAP earnings of $1.17, significantly down from $1.68 a year ago.

The company s bottom line in the quarter was impacted by higher expenses owing to the ongoing business-model transition in areas like software, subscription and a shift toward cloud-based offerings.

Revenues

Revenues for the quarter increased 13.3% year over year to $664.6 million, ahead of both management s guided range of $640 $655 million and the Zacks Consensus Estimate of $652 million. Revenue contribution from the Delcam acquisition was approximately $20 million.

The year-over-year growth in revenues was primarily attributed to a 16.7% year-over-year jump in subscription revenues to $310.3 million. The improvement in subscription revenues came on the back of strong growth in subscription process through Autodesk eStore and also non-maintenance subscription revenues.

License revenues rose 10.5% from the year-ago quarter to $354.3 million attributable to an increase in upgrade revenues. However, flexible enterprise license agreements partially offset the increase.

Total billings grew 13% on a year-over-year basis, driven by higher license and subscription billings. Total maintenance, desktop (rental), and cloud subscriptions increased approximately 100,000 from the prior quarter, including approximately 17,000 subscriptions related to the recent Shotgun acquisition.

Segment wise, revenues from Platform Solutions and Emerging Business (PSEB) declined about 4% from the year-ago quarter to $189 million.

Revenues from the Architecture, Engineering and Construction (AEC) business segment surged 24% from the year-ago quarter to $242 million.

Manufacturing revenues increased 23% on a year-over-year basis to $190 million. Autodesk s Media and Entertainment (M&E) segment rose 5% on a year-over-year basis to $43 million in the reported quarter.

Revenues from Flagship products reached $298 million, an increase of 4% compared to the prior-year quarter. Revenues from Suites increased 15% on a year-over-year basis to $249 million. Revenues from New and Adjacent products rose 41% from the year-earlier quarter to $117 million.

Geographically, revenues in the Americas rose 15% year over year to $238 million. EMEA revenues grew 19% to $273 million, while the same in APAC increased 2% from the year-ago quarter to $154 million. Revenues in emerging economies rose 21% from the year-ago quarter to $107 million, representing about 16% of total revenue.

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Operating Results

Gross margin contracted 120 basis points (bps) from the year-ago quarter to 86.5% in the reported quarter. The decline was primarily due to business model transition and higher cloud-based cost.

Operating expenses spiked 21.2% on a year-over-year basis to $561.1 million during the fourth quarter. The increase was primarily due to a rise in marketing & sales (up 24.8%), research and development (up 17.9%), general and administrative expenses (up 32.8%) and amortization of purchased intangibles (up 3.3%).

As a result, income from operations plunged nearly 73% year over year to $14 million in the quarter. Autodesk s profitability was negatively impacted by the ongoing business model transition and investment in cloud infrastructure.

Balance Sheet

Autodesk exited the year with total cash and cash equivalents (including marketable securities) of $2,026.4 million compared with $2,267.1 billion in the previous quarter. Cash flow from operating activities for fiscal 2015 was $708.1 million compared with $563.5 million in fiscal 2014.

Deferred revenues for the quarter increased 28% on a year-over-year basis to a record $1.16 billion.

Outlook

For the first quarter of fiscal 2016, Autodesk expects revenues in the range of $625 $645 million. NonGAAP EPS is expected in the range of $0.25 $0.30 for the upcoming quarter. The figure does not include stock-based compensation expense of $0.16 per share and amortization of acquisition-related intangibles of $0.08 per share.

For fiscal 2016, management expects net billings to grow in the range of 3% 5%. Revenues are also expected to increase 3% to 5%, while operating margin on a non-GAAP basis is expected to be in the range of 13% to 15%. Non-GAAP EPS (excluding stock-based compensation expense and amortization of acquisition-related intangibles) is expected in the range of $1.05 $1.20. The company projects subscription additions for fiscal 2016 to be between 375,000 and 425,000.

VALUATION

Autodesk shares are currently trading at 89.5X TTM earnings, a premium to both the peer group average of 37.4X and S&P 500 average of 18.3X. Over the last five years, the shares have traded in a range of 21.3X to 93.1X trailing 12-month earnings. Hence, the TTM multiple is towards the higher end of the range indicating downside from the current level.

The stock is trading at 89.5X our forward earnings estimates for 2016, a 98.4% discount to the peer group average of 45.1X. Moreover, the company is expected to earn 34% over the next 5 years, compared to the peer group average of 15.6%, indicating that some caution is justified.

Thus, we set a target price of $65.00 (94.2x 2016 EPS).

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Key Indicators

Autodesk Inc. (ADSK)

P/E F1

89.5

P/E F2

75.3

Est. 5-Yr EPS Gr%

34

P/CF (TTM)

47.5

P/E (TTM)

89.5

P/E 5-Yr High (TTM)

93.1

Industry Average S&P 500

45.1 39.5

15.6

16.7 15.6

10.7

29.7

37.4 250.5

14.9

18.3

18.4

DST Systems Inc. (DST)

17.6 16.1

11.0

10.7

18.9

20.5

Dassault Systems SA (DASTY)

30.8 27.8

16.0

22.6

29.6

36.6

Synopsys Inc. (SNPS)

31.8 26.5

9.5

13.4

19.8

22.2

Konami Corp (KNM)

32.3 16.1

16.5

36.5

51.3

TTM is trailing 12 months; F1 is 2016 and F2 is 2017, CF is operating cash flow

P/E 5-Yr Low (TTM)

21.3

19.9 12.0

8.6 20.9 14.8 9.8

P/B Last Qtr.

Autodesk Inc. (ADSK) 6.6

P/B 5-Yr High

6.6

P/B 5-Yr Low

3.5

ROE (TTM)

7.1

D/E Last Qtr.

0.3

Div Yield Last Qtr.

0.0

EV/EBITDA (TTM)

31.8

Industry Average

8.9

8.9

8.9

-14.2

0.3

0.3

4.9

S&P 500

6.2

9.8

3.2

25.4

2.0

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Earnings Surprise and Estimate Revision History

NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET

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OVERVIEW

San Rafael, CA.-based Autodesk (ADSK) develops model-based design, engineering and documentation software and also offers consulting, support and training services. Autodesk s software helps customers to imagine, design and create digital prototypes of their ideas. Through the company s software they can visualize, simulate and analyze the real-time performance of these digital prototypes.

Autodesk serves customers in architecture, engineering and construction; manufacturing; and digital media and entertainment industries. Autodesk operates in four segments: Platform Solutions and Emerging Business and Other (PSEB), Architecture, Engineering and Construction (AEC), Manufacturing Solutions (MFG), and Media and Entertainment (M&E). The company also offers design and creation suites that combine multiple products across segments.

The PSEB (35.0% of fiscal 2014 revenues) segment consists of AutoCAD (computer-aided design application) and AutoCAD LT. AutoCAD is used for designing, drafting, detailing and visualization and is the company s largest revenue-generating product. AEC (32.0% of fiscal 2014 revenues) segment offerings primarily include Autodesk Revit customized for building information modeling (BIM). The MFG (25.0% of fiscal 2014 revenues) segment offers digital prototyping solutions to manufacturers in automotive and transportation, industrial machinery, consumer products and building products industries. The M&E (8.0% of fiscal 2014 revenues) segment includes two product groups Animation (3ds Max and Maya software) and Creative Finishing.

Autodesk s revenues declined 1.7% year over year to $2.27 billion in fiscal 2014. License and other (55.0% of revenues) declined 8.0% year over year, while Subscription (45.0% of revenues) climbed 7.5% from fiscal 2013. The company s flagship products (AutoCAD, AutoCAD LT, AutoCAD Civil 3D, AutoCAD Mechanical, AutoCAD Architecture, Autodesk 3ds Max and Autodesk Maya) accounted for approximately 51% of revenues in 2014. Design and creation suites accounted for approximately 34.0% of revenues, while new products contributed 14.0% of revenues in fiscal 2014.

Autodesk distributes its products and services primarily through indirect channels (approximately 2,500 resellers), which accounted for 84.0% of the 2014 revenues. Sales through its largest distributor, Tech Data Corp, accounted for 24.0% of 2014 revenues.

Autodesk faces significant competition in most of its operating segments from the likes of Adobe, ANSYS, Bentley Systems, Dassault, Google Inc., Parametric Technology, Siemens Product Lifecycle Software and Trimble Navigation Limited.

REASONS TO BUY

We remain positive on Autodesk s long-term growth prospects as it is well positioned to capitalize on the rapid adoption of computer-aided designing and manufacturing through its comprehensive product portfolio. We expect its broad product portfolio to generate new customers in both domestic as well as overseas markets. Moreover, the growth in construction and manufacturing activities in the emerging markets present further growth opportunities. Additionally, a low channel inventory, increasing efficiencies through its channel partner framework, simplified upgrade pricing mechanism and electronic software delivery will help it to achieve long-term growth targets.

Autodesk s robust product portfolio caters to large enterprises, small and medium businesses, professionals and individual customers. The company builds momentum with the introduction of new products, thus continuing the AutoCAD (core product) upgrade cycle, which is the traditional driver of the stock. In the long term, we believe that higher demand for the company s cloud-based products

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(Autodesk 360 cloud platform, BIM 360 cloud platform, Simulation 360 and PLM 360), mobile products (AutoCAD 360) and design suites (Building, Infrastructure and Plant) will drive top-line growth. Moreover, the introduction of rental and usage-based offerings in fiscal 2014 would help the company s efforts to capture new markets by providing greater flexibility of payment to customers.

Autodesk s aggressive acquisition strategy has played a pivotal part in developing its business over the last couple of years. The company acquired Graitec and made fourteen business combinations and technology acquisitions during fiscal 2014 for a total consideration of $176.7 million. During the first six months of fiscal 2015, Autodesk acquired fifteen businesses including Shotgun, Within Technologies and Delcam for a sum of $578.6 million. 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.

Autodesk s strong cash balance ($1.32 billion) and cash flow from operations ($314.9 million) at the end of the second quarter will enable it to pursue any growth strategy that includes acquisitions and further share repurchase. During the six months, the company spent $203.5 million to repurchase $3.9 million shares. At the end of the quarter, 17.9 million shares remained available for repurchase under the current repurchase program (which authorized the repurchase of 30.0 million shares) approved by Autodesk s board of directors in June, 2012.

REASONS TO SELL

Investors have historically traded Autodesk shares based on the upgrade cycle for AutoCAD, which has led to major volatility in the stock. Moreover, Autodesk is largely dependent on the success of these product offerings (both AutoCAD and AutoCAD LT), which are its largest revenue contributors. As designers become increasingly tech-savvy, Autodesk must continue to enhance and improve its product offerings to meet changing demands, failing which the company would lose market share.

Autodesk s uneven top-line growth in the recent past has made it over dependent on cost saving programs to generate earnings growth. Although restructuring programs are corrective measures to realign cost, their success often depends on execution. Most importantly, we believe that there is a certain limit up to which costs can be curtailed, after which investments are needed to boost organic growth. The restructuring plan also includes the consolidation of eight leased facilities. However, its plan to continue to shift to mobile and cloud computing will increase investments. In the long term, we believe that restructuring programs will not be enough to boost earnings and the company needs to generate organic revenue growth in order to remain profitable.

In the absence of long-term customers, the company has started offering a number of products on a rental basis, which is typically a pay per use model. This volatile short-term rental business will mostly cater to project based needs of clients. Although it will generate revenues for the company, it is worth nothing that this low-margin and low-volume business will be a drag on margins.

Autodesk has been expanding through acquisitions and integration of products, operations and personnel, which could be tricky. Related integration costs may also have a negative impact on the company, going forward. Additionally, acquisitions often tend to adversely affect the balance sheet of the company in the form of a high level of goodwill and intangible assets. At the end of the first six months of fiscal 2015, goodwill accounted for about 30.8% of the total assets of Autodesk.

Autodesk has significant product and customer concentration. The company derives a significant portion of its revenues from a handful of products such as AUTOCAD and AUTOCAD LT (together

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accounted for 30% of revenues in 2014), which is a major headwind. Any decline in demand for any of these products will affect the company s growth adversely. Similarly, Autodesk depends on a few distributors for the major portion of its revenue. This is evident from the fact that Tech Data alone accounted for near about 26% of its revenues for the first six months of fiscal 2015. This dependence may prove costly for the company going forward as any disruption in Tech Data s business will negatively impact the profitability of the company.

DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of ADSK. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1128 companies covered: Outperform - 15.6%, Neutral - 75.1%, Underperform 8.5%. Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.

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