Autodesk: Earnings, Revenue, Cash Flow Improved Sequentially

| About: Autodesk, Inc. (ADSK)
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A leader in 2D and 3D design, Autodesk Inc.’s (NASDAQ:ADSK) fourth quarter results (both revenue and earnings) beat the Zacks Consensus Estimate and the company’s own guidance.

Earnings, revenue and cash flow improved sequentially on higher cost controls and continued focus on growth initiatives. The company said that the sequential improvement was driven by improving end-market demand and continued competitive displacements.

Sequentially, revenue and profitability improved due to increased revenues from commercial new seat licenses. Both domestic and international revenues increased. Further, the company witnessed increased revenue from each of its products and segments, including Manufacturing, AEC, and Platform Solutions and Emerging Business.

Considering that results were slightly down year over year on lower licensing revenue, its margin improvement is commendable. Further, the company provided guidance for the first quarter of 2011 of both revenue and earnings in line with the Zacks Consensus.

Operating Performance

The company reported net income on a non-GAAP basis of $69.9 million in the fourth quarter of 2010, down marginally by 0.6% from $70.3 million reported last year. Earnings per share (EPS) of 30 cents beat the Zacks Consensus Estimate of 15 cents, but were down by one cent from 31 cents reported in the year-ago period.

However, earnings increased 3 cents from 27 cents a share sequentially. Earnings came in above the company’s own guidance range of $19 cents to $24 cents a share.

This reflects the company’s strong execution in reducing operating expenses. Operating expenses in the quarter decreased 11% year over year, mainly due to lower marketing and sales expenses (-12.8%) as well as lower R&D costs (-10.7%). As a result, Operating margin came in at 19.5% in quarter, up from 15.9% reported in the year-ago quarter. Margin also improved from 18.4% in the previous quarter due to a lower revenue base.

Total non-GAAP pre-tax spending (operating expenses plus cost of goods sold) for the full-year fiscal 2010 decreased by $312 million, or 18%, compared to fiscal 2009. This was above the company’s initial target of a total pre-tax cost saving of $250 million.

Gross margin came in at 92.1% versus 91.8% in the year-ago period and 89.2% in the previous quarter due to lower cost of sales.


Revenues of $456.1 million were down 6.9% year over year, mainly due to a year-over-year decrease of 12.9% in License revenues, partially offset by an increase of 3.5% in Maintenance revenues. However, revenues were up 9.6% sequentially as both License and Maintenance revenues improved. Revenue came in above the company’s own guidance range of $420 – $440 million.

By geography, revenue from the Americas increased 3% sequentially but decreased 2% from the year-ago period. EMEA revenues increased 18% sequentially but decreased 15% year over year on a constant currency basis. Revenue from the Asia-Pacific increased 6% sequentially and 4% year over year on a constant currency basis. Revenues from emerging economies represented 16% of total revenue and increased 18% sequentially and 16% year over year on a constant currency basis.

Moreover, revenues from 3D design solutions were down 25% from the year-ago period but were flat sequentially. Revenues from 2D horizontal and vertical products declined 37% year over year and decreased marginally from the last quarter. We are positive on Autodesk’s migration from 2D products to 3D products, which have a higher margin.

Revenue from 3D model designs increased 10% sequentially but declined 7% year over year. Revenue from 2D horizontal and 2D vertical products increased 13% sequentially but decreased 8% year over year. Combined revenue from AutoCAD and AutoCAD LT products increased 9% sequentially but decreased 9% from the year-ago period.

Although the company has a strong market position in the "mainstream" CAD market, it faces competition from Dassault Systemes. Moreover, the company competes against Adobe Systems Inc. (NASDAQ:ADBE), Apple Inc. (NASDAQ:AAPL), Avid Technology (NASDAQ:AVID), Sony (NYSE:SNE) and Thomson Reuters (NYSE:TRI).

Balance Sheet and Cash Flow

Autodesk has a strong balance sheet with cash, investments and securities totaling $1.1 billion or $4.92 per share at the end of quarter and no long-term debt. Cash flow from operations was $126 million in the fourth quarter, an increase of 169% sequentially and 45% compared to the fourth quarter of fiscal 2009.


For the first quarter, Autodesk expects revenue to be in the range of $420 – $440 million. Earnings on a non-GAAP basis are expected to be in the range of 18 cents to 23 cents a share. The effective tax rate is expected to be 27%, an increase from fiscal 2010, primarily due to the expiration of the R&D tax credit.

The company did not provide revenue and EPS guidance for the full fiscal year 2011. However, the company expects the GAAP operating margin to increase significantly from fiscal 2010 level. The company anticipates modest improvement in the non-GAAP operating margin for full year fiscal 2011 compared to fiscal 2010.

As the company witnesses stabilization in end-market demand, we expect recovery in fiscal 2011. Moreover, the company should be a major beneficiary of the global economic recovery and the rapidly improving IT spending environment. We believe Autodesk is well positioned for additional upside in fiscal year 2011.