It's interesting to see which excuses the Street willingly accepts when a company is struggling with guidance. In the case of Autodesk (Nasdaq:ADSK), the Street isn't too bothered by another round of lower guidance and ongoing economic uncertainties. Instead, investors seem excited about the potential of a more pronounced transition to a SaaS model. Although I think the Street may be a little too optimistic on that point, the shares do look a little undervalued and remain a volatile software play leveraged to improving economic activity.
Fiscal Second Quarter Basically On Target
It sounds like there's still quite a bit of noise and uncertainty in Autodesk's core CAD/CAM end markets, but the company still delivered an in-line quarter.
Revenue fell 1% from last year, and a little more than that on a sequential basis, as an 8% drop in license revenue was offset up a 9% increase in maintenance revenue. Both Architecture, Engineering, and Construction (AEC) and Manufacturing were up annually and sequentially, while Platform/Emerging declined over both periods.
Margins weren't great, but analysts weren't expecting that they would be. Gross margin (adjusted) declined more than a point, while operating income fell 5% and operating margin fell by one point.
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Emerging Markets Have Yet To Emerge
There's still quite a bit of uncertainty and turbulence in Autodesk's core end-markets, but that's not exactly news. If you look at a graph of past trends across the AEC, Manufacturing, and Platform businesses, it looks something like a squid's tentacles. In any case, the recovery in non-residential construction is still far from confirmed, and it often takes one or two quarters for improvements in regional/national PMIs to show up in better licensing performance.
Nevertheless, management issued rather weak guidance for the fiscal third quarter – offering a new midpoint that was about 6% below the prior average estimate. Emerging economies remain particularly challenging for Autodesk at this time, a point made previously by PTC (Nasdaq:PMTC) particularly with respect to Chinese manufacturing. It's also worth noting that Dassault's (Nasdaq:DASTY) quarter was not exactly a blockbuster either, but it has done no real harm to the stock.
Will A SaaS Transition Really Move The Needle?
In a vacuum, I suspect that Autodesk's guidance would have been a setback for the stock. Management offset that with news that it intends to accelerate the company's transition to a more SaaS-oriented model. With that, it sounds like investors have jumped on the “It'll be like Adobe (Nasdaq:ADBE) all over again” train.
I'm not sure that's the right move right now. Autodesk already has a large percentage of its customers (around 70%) on a subscription plan, while Adobe's business was based far more on discrete purchases. On the other hand, Aspen Technology (Nasdaq:AZPN) and Cadence Design (Nasdaq:CDNS) had beneficial transitions that could point to longer-term potential for Autodesk. All of that said, I'd be careful about making the wholesale assumption that this is a completely positive move – nobody has shown yet that a SaaS model can be leveraged to the same sort of profitability as more traditional software models and lucrative maintenance revenue has long been a key part of the Autodesk story.
The Bottom Line
Just looking at Dassault and PTC, it would seem that Autodesk shares should be a little stronger than they are. Likewise, a discounted cash flow analysis using a growth assumption of about 6% suggests these shares are at least 10% undervalued. Add to that the possibility that global economic activity could improve more than analysts expect, and there's a bullish case to make. On the other hand, I would worry a bit about inflated expectations for the SaaS transition and the shares aren't exactly dirt cheap.
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.