Autodesk: Spicing Up Strong Fundamentals With The 3-D Printing Opportunity

May.22.14 | About: Autodesk, Inc. (ADSK)


Autodesk delivered a strong quarter once again. The positive earnings revision cycle is likely to last in view of the improving macro environment in Japan and Europe.

Autodesk’s open-source strategy in 3-D printing makes sense: if its platform enjoys wide adoption, it could give a significant boost to Autodesk’s sales of its core design and PLM solutions.

Autodesk is a different and safer way to play the 3-D printing revolution in our view.

The stock's 2015 P/E is expensive at first sight (42x) but it's worth noting that the operating margin and earnings are distorted by the business model transition.

Assuming a normative operating margin of 30%, the stock's P/E would stand around 20x, which is not expensive for a software company with a huge opportunity in 3-D printing.

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 (Construction and Manufacturing) benefited from an increasingly supportive environment. And indeed, Autodesk delivered once again strong quarterly figures, with both revenues ($593m vs. consensus of $569m) and EPS ($0.32 vs. consensus of $0.21) coming in ahead of expectations.

Strength in the quarter was relatively broad-based, with both Construction (32% of revenues) and Manufacturing (25% of revenues) performing well and with most geographies contributing to the beat. This was perfectly in line with our scenario of a strong commercial construction market (which typically lags residential construction recoveries by 6-12 months) and of an improving environment for Autodesk's Manufacturing customers, as macro and PMI have been improving in recent months notably in the important Japan and Europe geographies. We believe that these drivers remain intact and that the earnings revision cycle (FY15 revenue growth guidance slightly raised to 4%-6% from 3%-5%) will remain positive in coming quarters.

Importantly, the business model transition from licenses to Cloud & subscriptions is off to a strong start. It looks like customers are responding well to the shift to Cloud as Autodesk reported 89K net sub adds in the quarter, tracking well ahead of the FY15 target of 150-200K net adds. And billings growth, now widely viewed as a key metric as it takes into account the business model transition, was up +10% in Q1.

We explained in our previous articles that this new model was a clear positive as revenue streams would become more recurring and predictable (based on subscriptions), as new paying users would join as upfront costs were more attractive (vs. licenses) and as piracy would be reduced through the use of cloud-based authentication. In all, we expect this model to deliver higher revenues, margins and cash flows in the long run.

The 3-D printing opportunity is just around the corner

We have long been highlighting 3-D printing as a major growth opportunity for Autodesk whose core business is 3-D design. Autodesk's announced launch of an open-source 3-D printing software platform called Spark was thus a pleasant surprise. We believe that the group's open-source strategy makes sense. While Autodesk's long track record in the design software business is likely to make Spark more reliable and more user-friendly than proprietary solutions, the open-source nature of Spark (i.e. free) will probably attract a large number of printer makers that do not have sufficient in-house software development skills.

If Spark enjoys wide adoption and becomes the 3-D printing software standard, it could give a significant boost to Autodesk's sales of its core 3-D design and PLM (Product LifeCycle Management) solutions.


We reiterate our view that Autodesk is a different and safer way to play the 3-D printing revolution, with valuation levels and earnings expectations much more decent than 3-D printing stocks such as 3D Systems (NYSE:DDD). Note that the 2015 P/E is expensive at first sight (42x) but that this is due to Autodesk's financials being distorted by the current model transition. Assuming a normative operating margin of 30%, the stock's P/E would stand around 20x, which is not expensive for a software company with a leading position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.