We said in our January article that Autodesk (NASDAQ:ADSK) was likely to keep surprising on the upside, as the company's two main verticals benefited from an increasingly supportive environment. Indeed, Autodesk delivered strong Q4 figures, with both revenues ($587m vs. consensus of $573m) and EPS ($0.40 vs. consensus of $0.34) coming in ahead of expectations, despite the continued transition to a rental model (~$30m impact on revenues). Importantly, the group also provided a sound FY15 3%-5% revenue growth guidance (vs. flat growth expected by consensus) that, in our view, is likely to remove investor concerns about the model shift, as the negative impact appears well under control at the top-line level.
Unsurprisingly, Autodesk was constructive on its two main verticals. Construction (32% of revenues) grew 8% in the quarter, confirming our positive stance. Leading indicators such as the Architecture Billings Index continue to point to an improvement, confirming the usual pattern (commercial/industrial construction typically lags residential construction recoveries by 6-12 months).
Manufacturing (25% of revenues) is also likely to remain supportive, as macro and PMI across the world have been improving in recent months, notably in two key geographies (Japan and Europe).
If short-term revenue growth is expected to pick up, the mid-term outlook is also attractive, as Autodesk is expected to be a key beneficiary in the advent of 3D printing. 3D printing will sharply increase the number of design software users globally and spark rising interest for PLM solutions. 3D printing is also expected to open a huge market for Autodesk, the consumer market, that could be worth several billions in a few years (see our assumptions in our previous article).
New model perfectly suited to the consumer market
While still early in its business model transition, Autodesk now has roughly 45% of recurring revenues and 1.9m subscribers. The group is thus well on track to reach its mid-term 70% recurring revenues target.
Despite the slight short-term pressure on revenues and margins (FY15 non-GAAP operating margin guided to 14%-16% vs. consensus at 20%), the transition from a traditional license model to a rental and usage-based model remains a clear positive, in our view. Revenue streams become more predictable as they are based on subscriptions, new paying users are likely to join as upfront costs are attractive (vs. licenses) and piracy is likely to be reduced through the use of cloud-based authentication.
In all, this model is perfectly suited to the consumer market and could enable Autodesk to fully benefit from the expected take-off of 3D printing for the mass market, for which the product pricing is key.
Higher revenues will come with lower commercial costs in the mid and long-term, suggesting that the new model is likely to deliver higher margins and cash flows in the long run.
We reiterate our view that Autodesk is a different and safer way to play the 3D printing revolution, with valuation levels and earnings expectations much more decent than 3D printing stocks such as 3D Systems (NYSE:DDD), leaving room for upside.