Monday, November 21, 2011

Short-Sell Recommendation on Autodesk ADSK

I've got a low-risk high-reward sell-short stock pick on Autodesk software this week. I see the major market indicies topping out here near term with a retest of the September October lows.

According to Zacks Investment Research, Autodesk Inc Nasdaq ADSK reported third quarter 2012 earnings of 36 cents per share, beating the Zacks Consensus Estimate by 2 cents. Earnings per share, including stock-based compensation but excluding one-time charges increased 33.3% year over year, driven by continued growth in revenues across geographies and business segments.


Revenues increased 15.1% year over year to $548.6 million in the reported quarter, beating the Zacks Consensus Estimate of $544.0 million. Revenues were also at the higher end of management’s guided range of $535.0 million to $550.0 million.

The year-over-year growth in revenues was driven by higher license and other revenues, which increased 17.5% year over year to $331.4 million. Maintenance revenues rose 11.6% year over year to $217.2 million in the quarter. Additionally, the revenues for the quarter were boosted by 36.0% increase on a year-over-year basis in the Suites revenue and an increase in the platform solutions and emerging business segments.

On a segmental basis, Platform Solutions and Emerging Business revenues jumped 21.0% year over year to $210.0 million in the reported quarter.

Revenues from the Architecture, Engineering and Construction business segment were $152.0 million, up 12.0% year over year, while Manufacturing revenues increased 14.0% year over year to $134.0 million in the quarter. Revenues from the Media and Entertainment business rose 6.0% year over year to $53.0 million in the quarter.

Autodesk posted significant upside in all of its geographical regions on the back of continued adoption of its products. Revenues in America jumped 12.0% year over year to $200.0 million.

International businesses continued its strong performance during the quarter. EMEA revenues climbed 10.0% year over year to $202.0 million. Asia-Pacific revenues escalated 28.0% year over year to $146.0 million.

Revenues from emerging economies (16.0% of the total revenue) climbed 15.0% year over year to $87.0 million.

Operational Performance

Gross profit (including stock-based compensation but excluding one-time charges) was $500.1 million, up 14.5% year over year. However, gross margin decreased 40 basis points (bps) from the year-ago quarter to 91.2%.

Operating expenses (including stock-based compensation but excluding one-time charges) increased 10.6% year over year to $390.6 million, primarily attributable to higher marketing & sales expenses (up 11.4% year over year) and research & development expenses (up 15.0% year over year) which fully offset a 4.8% year-over-year decline in the general and administrative expenses. However, operating expenses, as a percentage of revenue, contracted 290 bps to 71.2% in the quarter.

Operating income (including stock-based compensation but excluding one-time charges) of $109.5 million was up 31.5% year over year. Operating margin came in at 20.0% in the quarter, up 250 bps year over year, attributable to strong revenue growth and cost controls in the quarter.

Balance Sheet and Cash Flow

Autodesk’s balance sheet remains strong with no debt. The company exited the third quarter of 2012 with total cash and cash equivalents of $1.34 billion, compared with $1.37 billion in the previous quarter. The decrease was due to the closing of 10 strategic acquisitions during the quarter. Cash flow from operating activities was $138.0 million compared with $132.4 million in the prior quarter.


For fourth quarter 2012, Autodesk expects revenues in the range of $575.0 million to $590.0 million. The Zacks Consensus Estimate is pegged at $581.0 million.

GAAP EPS is expected in the range of 26 cents to 29 cents. Non-GAAP EPS is expected in the 42 cents to 45 cents range. The Zacks Consensus Estimate is currently pegged at 34 cents per share, which is evidently below the guided range.

For fiscal 2012, Autodesk expects revenues in the range of $2.20 billion to $2.21 billion. GAAP EPS is expected in the range of $1.17 to $1.20 and non-GAAP EPS is expected in the range of $1.70 to $1.73. The Zacks Consensus Estimate is pegged at $1.39. Autodesk expects non-GAAP operating margin to improve between 210 and 240 basis points in fiscal 2012.

Additionally, the company provided a sneak peak into their fiscal 2013. For fiscal 2013, Autodesk expects revenues to increase 10.0% on a year-over-year basis, with about 150 basis points increase in the GAAP operating margin and roughly 200 basis points increase in non-GAAP operating margin, over the fiscal 2012 figures.


In our view, Autodesk’s expanding product portfolio and broadening industry and geographic reach will help it sustain its longer-term growth strategy of providing high-volume, lower-cost CAD software. We believe this will likely drive earnings going forward.

Moreover, the acquisitions that are being made in the field of CAD and gaming middleware sections will provide the company with long-term opportunities, particularly in the web-based communities that will likely boost the company’s cloud offerings going forward.

However, foreign exchange fluctuations and increasing exposure in Europe and competition from Adobe Systems Inc. ADBE, Parametric Technology Corp. PMTC are the headwinds. Additionally, there is a risk of customer concentration as an estimated 30% of the Autodesk’s business comes from 1% of the customers.

We have a Neutral recommendation on Autodesk’s shares in the long term. Currently, Autodesk has a Zacks #4 Rank, which translates into a short-term (1-3 months) ‘Sell’ rating.

Sell Short Autodesk – Ticker ADSK

Sell Entry: 36.86 to 32.91

Stop-Loss: 39.80

Take Profit Areas: 21.40 to 20.47, 14.42 to 13.73

Company Profile

Autodesk, Inc. provides design software and service solutions to customers in architecture, engineering, and construction; manufacturing; and digital media and entertainment industries. It operates in four segments: Platform Solutions and Emerging Business (PSEB); Architecture, Engineering, and Construction (AEC); Manufacturing (MFG); and Media and Entertainment (M&E). The PSEB segment offers AutoCAD, a computer-aided design application for professional design, drafting, detailing, and visualization; and AutoCAD LT, a software for professional drafting and detailing. The AEC segment provides Autodesk Revit products that collect information about a building project and allow this information to be coordinated across other representations of the project; AutoCAD Civil 3D, a surveying, design, analysis, and documentation solution for civil engineering; AutoCAD Architecture that built on the AutoCAD platform for architects; and AutoCAD Map 3D, which provides direct access to data needed for infrastructure planning, design, and management activities. The MFG segment offers Autodesk Inventor, which provides a set of tools for 3D mechanical design, simulation, analysis, tooling, visualization, and documentation to manufacturers; AutoCAD Mechanical, a software to accelerate the mechanical design process; and Autodesk Moldflow, an injection molding simulation software, as well as a range of services, including consulting, support, and training. The M&E segment provides Autodesk 3ds Max, which offers 3D modeling, animation, and rendering solutions for game developers, design visualization professionals, and visual effects artists; Autodesk Maya, a solution for film and video artists, game developers, and design visualization professionals; and creative finishing solutions. It licenses and sells its products and services directly, as well as through distributors and resellers worldwide. Autodesk, Inc. was founded in 1982 and is headquartered in San Rafael, California.

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