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Autodesk Still At The Drawing Board
Going back to the drawing board is supposed to be a bad a thing - a mark of failure that comes after a plan does not quite work out as expected. For Autodesk (Nasdaq:ADSK), it's just another day on the job for this leading provider of design and digital content software, including the very well-known AutoCad software, which is a leader in drafting, design and architectural drawing.
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With the economic recovery in full swing, the question for Autodesk investors now is what the company can do to leverage its extensive brand value into new growth opportunities. The answer to that question may well spell the difference between an underappreciated growth opportunity and yet another well-known, old-school tech stock destined to languish.
A Solid Start to the Year
Autodesk got the year off to a good start. Revenue rose 11%, with license revenue rising 15% and making up more than 60% of total revenue. Looking at the company's segments, there was a pretty remarkable conformity. The platforms, manufacturing and design business all grew around 15% for the period. In contrast, weak infrastructure and commercial construction activity is keeping a lid on the AEC (architecture, engineering and construction) business, and growth here was just 3% for the quarter.
Autodesk is delivering better operating leverage with this revenue growth, though not quite to the level that analysts were expecting. Gross margin rose about 70 basis points (on a GAAP basis), while operating income rose almost 55% and operating margin expanded more than four points to just under 15%. On a non-GAAP basis, operating margin expanded more than two points and stock compensation expense rose a little less than 7%, to $25.9 million (or just under 5% of revenue).
Will the Adobe Model Work Here?
In order to drive better market penetration and product "stickiness", Autodesk has been focusing more on subscription models that require less upfront cash from the customer in exchange for higher subscription fees over a longer period of time. It has worked relatively well for Autodesk's rival Dassault (OTC:DASTY) and should offer some growth opportunities for the company.
Autodesk is also trying to focus more on bundling offerings together into product "suites". This gives the end-user more tools all at once, making the package more useful and in some cases exposing them to products they may not have known they needed. It's a strategy that Adobe (Nasdaq:ADBE) has used for a little while (the Creative Suite combines products like PhotoShop, Illustrator and Acrobat) but to good effect.
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Moving Beyond Proven Niches?
Autodesk has built a great franchise with its AutoCAD line. Millions of people use this program every day and it is relatively common in schools and training programs, so there would definitely be some switching costs involved if another brand of software came into favor. That makes it harder for companies like Dassault and Parametric (Nasdaq:PMTC) to unseat Autodesk with experienced users.
That said, Autodesk still needs to find new avenues of growth. Overseas growth is certainly one option; the company's growth rate in emerging economies is above the company average, but still a relatively low 15% of sales. It is also worth wondering whether the company would pursue acquisitions to compete in new markets.
Would Autodesk be interested in expanding into the sort of electrical engineering design and simulation products that are currently sold by companies like Ansys (Nasdaq:ANSS), Cadence (Nasdaq:CDNS) or Synopsys (Nasdaq:SNPS)? It's a volatile business and the entrenched players don't have especially impressive returns on capital, but perhaps the growth would be worth it. What's more, it could provide some counter-cyclical business for a company like Autodesk.
By the same token, maybe there is more that the company can do in digital content creation. Competing more with the likes of Adobe, Avid (Nasdaq:AVID) and Apple (Nasdaq:AAPL) is no free ride either, but this is clearly a growing market opportunity as more and more content goes digital and smartphones and tablets become even more significant.
The Bottom Line
The manufacturing rebound story is pretty much over, but Autodesk may still have an eventual recovery in commercial construction and infrastructure to boost revenue in the coming years. With a very clean balance sheet (over $6 per share in cash and securities) and a solid legacy business, Autodesk certainly has some options. If the company can sell Wall Street on the idea that there's more growth potential here, this could be a good risk-reward tradeoff.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
TUTORIAL: Top Stock-Picking Strategies
With the economic recovery in full swing, the question for Autodesk investors now is what the company can do to leverage its extensive brand value into new growth opportunities. The answer to that question may well spell the difference between an underappreciated growth opportunity and yet another well-known, old-school tech stock destined to languish.
A Solid Start to the Year
Autodesk got the year off to a good start. Revenue rose 11%, with license revenue rising 15% and making up more than 60% of total revenue. Looking at the company's segments, there was a pretty remarkable conformity. The platforms, manufacturing and design business all grew around 15% for the period. In contrast, weak infrastructure and commercial construction activity is keeping a lid on the AEC (architecture, engineering and construction) business, and growth here was just 3% for the quarter.
Autodesk is delivering better operating leverage with this revenue growth, though not quite to the level that analysts were expecting. Gross margin rose about 70 basis points (on a GAAP basis), while operating income rose almost 55% and operating margin expanded more than four points to just under 15%. On a non-GAAP basis, operating margin expanded more than two points and stock compensation expense rose a little less than 7%, to $25.9 million (or just under 5% of revenue).
Will the Adobe Model Work Here?
In order to drive better market penetration and product "stickiness", Autodesk has been focusing more on subscription models that require less upfront cash from the customer in exchange for higher subscription fees over a longer period of time. It has worked relatively well for Autodesk's rival Dassault (OTC:DASTY) and should offer some growth opportunities for the company.
Autodesk is also trying to focus more on bundling offerings together into product "suites". This gives the end-user more tools all at once, making the package more useful and in some cases exposing them to products they may not have known they needed. It's a strategy that Adobe (Nasdaq:ADBE) has used for a little while (the Creative Suite combines products like PhotoShop, Illustrator and Acrobat) but to good effect.
Autodesk has built a great franchise with its AutoCAD line. Millions of people use this program every day and it is relatively common in schools and training programs, so there would definitely be some switching costs involved if another brand of software came into favor. That makes it harder for companies like Dassault and Parametric (Nasdaq:PMTC) to unseat Autodesk with experienced users.
That said, Autodesk still needs to find new avenues of growth. Overseas growth is certainly one option; the company's growth rate in emerging economies is above the company average, but still a relatively low 15% of sales. It is also worth wondering whether the company would pursue acquisitions to compete in new markets.
Would Autodesk be interested in expanding into the sort of electrical engineering design and simulation products that are currently sold by companies like Ansys (Nasdaq:ANSS), Cadence (Nasdaq:CDNS) or Synopsys (Nasdaq:SNPS)? It's a volatile business and the entrenched players don't have especially impressive returns on capital, but perhaps the growth would be worth it. What's more, it could provide some counter-cyclical business for a company like Autodesk.
By the same token, maybe there is more that the company can do in digital content creation. Competing more with the likes of Adobe, Avid (Nasdaq:AVID) and Apple (Nasdaq:AAPL) is no free ride either, but this is clearly a growing market opportunity as more and more content goes digital and smartphones and tablets become even more significant.
The Bottom Line
The manufacturing rebound story is pretty much over, but Autodesk may still have an eventual recovery in commercial construction and infrastructure to boost revenue in the coming years. With a very clean balance sheet (over $6 per share in cash and securities) and a solid legacy business, Autodesk certainly has some options. If the company can sell Wall Street on the idea that there's more growth potential here, this could be a good risk-reward tradeoff.
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by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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