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Autodesk (NASDAQ:ADSK) Q2: Beats On Revenue, Stock Soars


Full Report / August 23, 2023

Design software company Autodesk (NASDAQ:ADSK) reported Q2 FY2024 results exceeding Wall Street analysts' expectations, with revenue up 8.73% year on year to $1.35 billion. The company also expects next quarter's revenue to be around $1.39 billion, in line with analysts' estimates. Autodesk made a GAAP profit of $222 million, improving from its profit of $186 million in the same quarter last year.

Autodesk (ADSK) Q2 FY2024 Highlights:

  • Revenue: $1.35 billion vs analyst estimates of $1.32 billion (1.86% beat)
  • EPS (non-GAAP): $1.91 vs analyst estimates of $1.73 (10.6% beat)
  • Revenue Guidance for Q3 2024 is $1.39 billion at the midpoint, above analyst estimates of $1.38 billion
  • The company reconfirmed revenue guidance for the full year of $5.43 billion at the midpoint
  • Free Cash Flow of $128 million, down 82.1% from the previous quarter
  • Gross Margin (GAAP): 90.6%, down from 91.6% in the same quarter last year

Founded in 1982 by John Walker and growing into one of the industry's behemoths, Autodesk (NASDAQ:ADSK) makes computer-aided design (CAD) software for engineering, construction, and architecture companies.

Autodesk is best known for its flagship software, AutoCAD, which is used to design buildings, cars, and bridges. Being the first CAD software to run on PC, AutoCAD by Autodesk accelerated the shift from paper-based engineering designs to digital designs. Paper-based designs were error-prone, difficult to keep up to date and made cooperation between teams hard. Autodesk and its collection of design tools have made these problems a thing of the past. AutoCAD not only makes edits easy but also allows designers and architects to create a library of components that can be reused later, making the design process much more efficient.

Today, even after 40 years, the software is still an essential go-to tool for a number of industries and its functionality has expanded far beyond its original scope, for example it comes with built-in tools that can analyze and remedy weaknesses in a building’s design. Autodesk also makes software for the entertainment and gaming industries. One of the tools, Maya, is a 3D animation software that is used to add special effects to video games and movies, and was essential in making movies such as Avatar, The Matrix, and Spider-Man.

The demand for rich, interactive 2D, 3D, VR and AR experiences is growing, and while the ubiquitous metaverse might still be more of a buzzword than a real thing, what is real is the demand for the tools to create these experiences, whether they are games, 3D tours or interactive movies.

It is worth highlighting the competition in the design software space, which includes players such as Dassault Systèmes (OTC:DASTY), Adobe (NASDAQ:ADBE), Ansys (NASDAQ:ANSS), PTC (NASDAQ:PTC), and Bentley Systems (NASDAQ:BSY).

Sales Growth

As you can see below, Autodesk's revenue growth has been mediocre over the last two years, growing from $1.06 billion in Q2 FY2022 to $1.35 billion this quarter.

Autodesk Total Revenue

Autodesk's quarterly revenue was only up 8.73% year on year, which might disappoint some shareholders. However, its revenue increased $76 million quarter on quarter, a strong improvement from the $49 million decrease in Q1 2024. This is a sign of acceleration of growth and very nice to see indeed.

Next quarter's guidance suggests that Autodesk is expecting revenue to grow 8.4% year on year to $1.39 billion, slowing down from the 13.7% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 9.7% over the next 12 months before the earnings results announcement.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Autodesk's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 90.6% in Q2.

Autodesk Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.91 left to spend on developing new products, sales and marketing, and general administrative overhead. Autodesk's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity. It's also comforting to see its gross margin remain stable, indicating that Autodesk is controlling its costs and not under pressure from its competitors to lower prices.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Autodesk's free cash flow came in at $128 million in Q2, down 48% year on year.

Autodesk Free Cash Flow

Autodesk has generated $2.21 billion in free cash flow over the last 12 months, an eye-popping 42.6% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from Autodesk's Q2 Results

Sporting a market capitalization of $42.9 billion, more than $2.07 billion in cash on hand, and positive free cash flow over the last 12 months, we believe that Autodesk is attractively positioned to invest in growth.

It was encouraging to see Autodesk narrowly top analysts' revenue expectations this quarter. EPS also beat and next quarter's revenue guidance slightly topped estimates. That really stood out as a positive in these results. Zooming out, we think this was a decent quarter, showing that the company is staying on target. The stock is up 6.67% after reporting and currently trades at $218 per share.

Is Now The Time?

When considering an investment in Autodesk, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We think Autodesk is a good business. However, its revenue growth has been weak, and analysts expect growth rates to deteriorate from there. But on a positive note, its bountiful generation of free cash flow empowers it to invest in growth initiatives and its impressive gross margins indicate excellent business economics.

The market is certainly expecting long-term growth from Autodesk given its price to sales ratio based on the next 12 months is 7.7x. There's definitely a lot of things to like about Autodesk and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

Wall Street analysts covering the company had a one year price target of $231.8 per share right before these results, implying that they saw upside in buying Autodesk even in the short term.

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