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Autodesk (NYSE:ADSK) Reports Q2 In Line With Expectations But Stock Drops


Full Report / August 25, 2021
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Design software company Autodesk (NASDAQ: ADSK) reported results in line with analyst expectations in Q2 FY2022 quarter, with revenue up 16% year on year to $1.05 billion. Autodesk made a GAAP profit of $115.6 million, improving on its profit of $98.2 million, in the same quarter last year.

Autodesk (ADSK) Q2 FY2022 Highlights:

  • Revenue: $1.05 billion vs analyst estimates of $1.05 billion (small beat)
  • EPS (non-GAAP): $1.21 vs analyst estimates of $1.12 (8.09% beat)
  • Revenue guidance for Q3 2022 is $1.11 billion at the midpoint, above analyst estimates of $1.1 billion
  • The company reconfirmed revenue guidance for the full year, at $4.36 billion at the midpoint
  • Free cash flow of $186.2 million, down 41% from previous quarter
  • Gross Margin (GAAP): 90%, in line with previous quarter

Founded in 1982, Autodesk 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.

In recent years, Autodesk has shifted its offerings to the cloud to offer its customers a central platform to manage their work and collaborate efficiently. Given the opportunity to improve design tools that arise from technologies like artificial intelligence and virtual reality, we can expect demand for computer-aided design applications to remain strong in the near future.

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 solid over the last year, growing from quarterly revenue of $913.1 million, to $1.05 billion.

Autodesk Total Revenue

This quarter, Autodesk's quarterly revenue was once again up 16% year on year. On top of that, revenue increased $70.4 million quarter on quarter, a strong improvement on the $49.9 million decrease in Q1 2022, and a sign of acceleration of growth, which is very nice to see indeed.

Analysts covering the company are expecting the revenues to grow 17.2% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

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 is left after paying for servers, licences, technical support and other necessary running expenses was at 90% in Q2.

Autodesk Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.90 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a great gross margin, that allows companies like Autodesk to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. It is good to see that the gross margin is staying stable which indicates that Autodesk is doing a good job controlling costs and is not under a pressure from competition to lower prices.

Key Takeaways from Autodesk's Q2 Results

With a market capitalization of $75 billion, more than $924.9 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

It was good to see Autodesk provide next quarter revenue outlook exceeding analysts’ expectations. That feature of these results really stood out as a positive. On the other hand, revenue growth is overall a bit slower these days. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is down -7.34% on the results and currently trades at $317 per share.

Is Now The Time?

When considering Autodesk, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are numerous reasons why we think Autodesk is one of the best software as service companies out there. Its revenue growth has been mediocre, but at least that growth rate is expected to increase in the short term. But on a positive note, its bountiful generation of free cash flow empowers it to invest in growth initiatives, and its impressive gross margins are indicative of excellent business economics.

The market is certainly expecting long term growth from Autodesk given its price to sales ratio based on the next twelve months is 16.1. Looking at the tech landscape today, Autodesk's qualities really stand out, and it is not hard for us to argue that the multiple is well deserved. We really like the stock at this price.

The Wall St analysts covering the company had a one year price target of $341.1 per share right before these results, implying that they saw upside in buying Autodesk even in the short term.

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