Autodesk (ADSK) shares have risen close to 4% at the time of writing. The company announced its earnings results for the third quarter of fiscal 2020 on Tuesday after the market close.
Autodesk reported sales of $843 million and an adjusted EPS of $0.78, which was above the consensus revenue estimates of $825.77 million and the EPS estimates of $0.72.
The company expects sales between $3.255 billion and $3.270 billion in fiscal 2020—down from the previous forecast of sales between $3.24 billion and $3.27 billion.
Autodesk also narrowed its EPS forecast to between $2.74 and $2.79 from between $2.69 and $2.81. Analysts expected the company to post sales of $3.25 billion and an EPS of $2.74 in fiscal 2020.
Andrew Anagnost, Autodesk’s CEO, said, “Our strong performance continued in Q3 as revenue, billings, ARR, earnings and free cash flow came in above expectations. We continue to demonstrate the cash generating power of our business model, and this quarter drove a record last twelve months free cash flow of nearly $1 billion.”
He also said, “The breadth and depth of our product portfolio in Construction paved the way for another strong quarter. In Manufacturing, we continue to displace competitors and grow faster than the overall market.”
Autodesk stock fell close to 12% after it announced its second-quarter results in August.
What drove Autodesk’s sales in the last quarter?
Autodesk’s billings in the October quarter rose by more than $1 billion. The growth was driven by the company’s organic business and strong demand from the construction vertical. The revenue growth was 28% YoY (year-over-year) driven by strong subscription sales. The company’s acquisitions resulted in revenue growth of four percentage points YoY.
Autodesk managed to beat its revenue forecast in the third quarter due to its up-front revenue recognition. A few contract deals closed earlier than expected, which resulted in higher revenues. The total ARR (average recurring revenue) rose 28%, while the cloud ARR rose 164% due to the strong performance in the construction vertical.
However, the growth was driven by Autodesk’s acquisitions. Excluding inorganic growth, the cloud ARR has risen 35% YoY. The company’s BIM 360 Design drove the cloud sales. The company’s AutoCAD and AutoCAD LT products rose 29% in the third quarter. AEC sales rose 36%, while manufacturing sales rose 15%.
Autodesk’s M2S, its subscription program, is in the third year. Notably, the conversion rate rose to a record high of 40%. The company was optimistic about the uptick. Maintenance renewal prices rose 20% in the second quarter, which resulted in a move to subscription products for cost-effective customers.
The net revenue retention rate was 110%–120% in the third quarter. Autodesk expects similar levels in the January quarter as well. The company experienced strong growth across geographies. Sales from the Americas and Asia-Pacific region rose 30%, while the Europe, Middle East and Africa region experienced 24% growth.
What’s next for Autodesk and investors?
Autodesk moved to a subscription revenue model a few quarters ago. The move will reduce business cyclicality driven by long-term customer contracts. Autodesk, like several other firms, will be impacted by the upcoming slowdown. However, the company has strong fundamentals to make it a solid long-term bet.
Autodesk’s RPO (remaining performance obligations) is the sum of its billed and unbilled deferred revenues. In the third quarter, the RPO rose 32% YoY at $3 billion. The current RPO (future sales expected to be recognized over the next 12 months) is $2.1 billion—a rise of 23%.
Strong revenue growth has also resulted in expanding profit margins. In the third quarter, Autodesk managed to increase its operating margin by 13 percentage points to 27%. The company is optimistic about reporting an operating margin of 40% in fiscal 2023.
In the third quarter, Austodesk generated a free cash flow of $267 million. The figure is at a record of $972 million in the last four quarters. Although the company doesn’t pay dividends, it uses part of the cash to repurchase stock and reinvest in the business or pay back debt. In the third quarter, Autodesk repurchased shares worth $124 million. The figure stands at $264 million in 2019.
The stock is valued at $37.5 billion or 11.5x forward sales. Autodesk has a forward PE ratio of 38x. These multiples might seem as though the stock is trading at expensive valuations.
However, Autodesk is expected to grow its sales 26.7% in 2020 and 21.8% in 2021. As we mentioned above, the sales will translate into robust bottom-line growth. Analysts expect the company to increase its earnings at an annual rate of 76% over the next five years.
Analysts are bullish
Despite the lower guidance, analysts are bullish about Autodesk stock. According to multiple reports from The Fly,
- Stifel increased its target price from $160 to $190 and reiterated a “buy” rating.
- Barclays increased its target price from $173 to $195 and reiterated an “overweight” rating.
- Mizuho increased its target price from $190 to $195 and maintained a “buy” rating.
- Credit Suisse increased its target price from $175 to $185 and reiterated an “outperform” rating.
- Wedbush increased its target price from $162 to $171 and reiterated a “neutral” rating.
- Oppenheimer increased its target price from $175 to $200 and maintained an “outperform” rating.
Analysts expect Autodesk’s cash flow growth and its subscription-based revenue model to help tide over the macroeconomic weakness and ongoing industry slowdown. When the stock lost market value after its second-quarter results, I identified it as a solid long-term buy.
Since then, the stock has gained more than 17%.