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.

SEE: 3 Secrets Of Successful Companies
 
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.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Stock Analysis

    Top 5 Companies Owned By Microsoft (MSFT)

    Find out about Microsoft's most newsworthy acquisitions. Microsoft acquired Skype in 2011 to expand its footprint in the online telecommunications sector.
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  7. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  8. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  9. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  10. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
RELATED FAQS
  1. Is Apple Pay safe and free?

    Apple Pay is a mobile payment system created by Apple to reduce the number of times shoppers and buyers have to pay for goods ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the formula for calculating weighted average cost of capital (WACC) in Excel?

    When analyzing different financing options, companies need to look at how much it will cost to fund operations. There are ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center