Autodesk (NASDAQ: ADSK) is a well-known software company. Its 3D design and manufacturing tools help clients plan projects and create visual content for a range of use cases, from architecture and construction to digital media and entertainment. In fact, the company’s AutoCAD software is the most popular tool in the computer-aided design industry, holding a 32% market share.
Recently, the company released what appeared to be strong second-quarter earnings, but the report sent stocks tumbling down. And today, the share price is more than 15% below its all-time high. Is this a buying opportunity for long term investors?
In this Backstage Pass video of August 26, 2021Motley Fool contributors Brian Withers and Jon Quast discuss recent Autodesk earnings and share their perspectives on the company.
Brian Withers: I’ll talk a bit about Autodesk. I know we talked about this yesterday. The stock was down about 7% today. At one point, it was down 10%. Let’s see that the market is closed. It was bluffing, it ended the day at just over 9%. Let’s take a look at some of the things that may have made people nervous and we’ll talk about them. Let me share my desktop here.
Here are the slides we were looking at yesterday just to bring people up to speed. Income has come in. It was from the last trimester. Management outlook, last quarter they were going to make between $ 1 billion and nearly $ 1.1 billion in revenue. Look at this, they matched the high end of the advice range, which was a 16% increase year over year.
Interestingly enough, when you read the conference call and 10-Q it’s a 14%, CN is currency neutral. I could have left the screen, so without currency. They had headwinds of around 2% on sales. EPS Generally Accepted Accounting Principles, which means exactly like you’re supposed to, is they were a beat. Even on non-GAAP when they take out one-time expenses and stock-based compensation, it was beaten.
Why is the stock falling? Well, let’s keep looking. They outlook full year. Here, on the left, the outlook for the last quarter for the entire year, and here on the right, the outlook for this quarter. I had little smiling faces and scowling faces. Billings, you can see the upper end of the slightly decreased range, as well as the lower end of the decreased range. They have narrowed the range, which you would expect as the quarters go on you get closer to the end of the year. Remember it’s a billing number for the full year or how they’re going to end the year and then they reduced it. Income, they increased the lower end. [laughs]
This is strange. You can see this $ 4,385 [million] is the same number on the high end, but they increased the low end, which means they have a bit more confidence in the quarter. You can see it’s instead of 14-16%, it’s up 15-16%. They are pretty much the same. On earnings, they went up the entire range, both on BPA, GAAP, and non-GAAP numbers. Now, here, between the billings and the free cash flow, there are the things that they have reduced. You remember Trevor talking about the remaining performance bonds and all that. Some of that billings and free cash flow are forward looking and factor in multi-year contracts and things like that. These are indicators of future business and this range has been reduced, and it has been reduced below the low end, you can see now that the high end is $ 1,575. [million], where it was the low end before. I think this is what has disappointed the market, disappointed investors and why they are selling a stock lightly.
Let’s just look at Q3, then I’ll make a backup and share a few things from the conference call. In the third quarter, analysts expected this wide range. They came a little lower. It’s in the middle of the range. I don’t think that scared anyone off, and then the analysts had these really wide expectations for those non-GAAP earnings per share again and they hit the average. It’s not really an income statement for the next quarter or an income statement. It’s really billing and future cash flow. Let me go to the earnings call.
One of the things the company talked about was that they saw some good trends in the market that have moved towards reopening. They talked about China, Korea, Japan, product renewal rates are all going in the right direction. The pipelines are very strong, but they said there is still a lot of uncertainty, especially in the US and UK. Basically what they said, and here’s the CFO: “As we weigh all the combinations of these factors together, it gives us the confidence to increase the overall revenue target from $ 15 million to mid-term, but we said the high end of that advice range previously expected a faster recovery. “While they said they saw this in some markets, they didn’t see it on all markets. There’s a little bit of recovery going on there. Here’s the other thing. They’ve changed the way they go and deliver. They’re getting paid for multi-year contracts. This will come out in the next one. quarter, which will affect their billing and free cash flow targets. For corporate trade deals, that is, those big multi-million dollar contracts, in the past they’ve collected all that money. in advance. It seems, for one thing of t Kings years, this appears to be a potentially undue burden on customers.
What they did now, in order to get all that money up front, Autodesk would take the years to come and discount them and give them cash back up front. Well, they changed that, they took out the discounts, and basically what they said was we want you to pay annually, but we’re going to have these multi-year contracts. It makes that free cash flow and billing things a little tricky, but for me it’s a pro-client movement where clients can now budget more appropriately. I think it’s also an opportunity. DocuSign does it very well, and I imagine Autodesk will also start doing that if they don’t already is having more conversations with these multi-year customers.
When the bill comes due, they can look and see how they’ve used the cloud software, if the usage rate is higher or whatever, and then they can go back and say, “You know what, we need to rearrange the software. contract and have another chat about what you are using. Maybe we can bundle it with some other software that we’ve released over the past year that we think you will benefit from. “There’s this billing and this free cash flow depression that when you just look at the numbers can say, ‘The future of Autodesk doesn’t look as bright as it once did.” Well, it is. really just an accounting change.
I saw Tim talking about Autodesk earlier today and he went through the report and said, “There is absolutely nothing here that I like.” I know Jon and I had the pleasure of talking to Jim Gillies last night, Jim loves Autodesk. I think it was a solid report and I think the sell could be an opportunity to improve the stock and some points.
Jon Quest: Brian, you’re handling this really well. I’m not very familiar with this company, but let me give a layman’s point of view here. I was on the show with Brian Feroldi this morning, he was talking about Autodesk. He pointed out that even with the free cash flow disappointment, if you want to call it that, we are still north of the 30% margin, and revenue is increasing by double digits. This is a company that you rarely want to bet against, when it is rapidly growing in revenue and the free cash flow margin is over 30%. For a company whose software is the gold standard, there are still millions of people who have not converted from legacy software, and then there are many more who are using it but not. not pay, and they are trying to get these people to convert. Still, a major tailwind potentially is if they can get these people to convert to the subscription.
Brian Withers: For Backstage members it was announced, it’s about two weeks and one day now I can’t remember. Autodesk was one of the first five Backstage registrations, and you can see why as we talked about today.
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