Autodesk : Hold

ADSK : NASDAQ : US$54.72 
HOLD  Target: US$52.00 

Autodesk is a global design software company that sells high- function, low-cost 2D and 3D computer-aided design (CAD) applications. The firm also provides visualization and simulation tools, which in conjunction with the company’s design apps, enable customers to experience their ideas early in the design process through the development and analysis of virtual prototypes. All amounts in US$ unless otherwise noted.

Technology — Enterprise Software — Applications BUSINESS MODEL CHANGE BEGINS. MAINTAIN HOLD FOR NOW. 
Investment thesis Autodesk generated normalized revenue growth of about 2%, and as reported revenues declined 3%, due in large part to a transition to subscription. If investors react to this transition as they have with Adobe, the stock will work. However, if the underlying fundamentals of the business do not change, Autodesk shares will eventually behave like EDA stocks, which similarly went to subscription, but underlying growth remained sluggish. We lean toward the former scenario, but for the time being, with not quite enough conviction to upgrade the stock. HOLD.
 An OK quarter: a bit of upside versus conservative forecasts. ADSK reported Q4/14 revenue and non-GAAP EPS of $587M and $0.40, which compared to our estimates of $573M and $0.35. Reported revenues were down 3% y-o-y, but when normalized for the model transition, grew 2%. Billings, which will become an increasingly important metric to watch during the transition, grew 3% in the quarter – overall, management was “pleased” with what the firm saw in its first full quarter with subscription licensing options. During Q4, ADSK signed its largest deal ever, worth more than $20M, and noted continued momentum with Suites, which were up 15% y-o-y.
 Outlook: a lot of moving parts, but 5-8% billings growth and fairly meaningful margin compression. Autodesk provided some new guidance metrics to add benchmarks against which investors will be able to measure progress while reported revenues are in flux. 5-8% billings growth is a step towards the firm’s 12% CAGR target and the addition of 150-200k net new subscribers would be roughly 9% growth. However, taking consideration for the dilution associated with Delcam as well the financial impact of ratable revenue recognition on an unchanged cost structure, near term margins will be negatively impacted. ADSK guided for non-GAAP operating margins in the range of 14-16%, which is down from the 22.5% reported in F2014. In the interim, investors will need to focus on cash flow growth, which we believe will be close to 10% in F2015.


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