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No Surprises In Autodesk's (NASDAQ:ADSK) Q3 Sales Numbers But Stock Drops


Full Report / November 23, 2021
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Design software company Autodesk (NASDAQ:ADSK) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue up 18.2% year on year to $1.12 billion. On the other hand, guidance for the next quarter missed analyst expectations with revenues guided to $1.19 billion at the midpoint, or 0.86% below analyst estimates. Autodesk made a GAAP profit of $136.7 million, improving on its profit of $132.2 million, in the same quarter last year.

Autodesk (ADSK) Q3 FY2022 Highlights:

  • Revenue: $1.12 billion vs analyst estimates of $1.11 billion (small beat)
  • EPS (non-GAAP): $1.33 vs analyst estimates of $1.26 (5.82% beat)
  • Revenue guidance for Q4 2022 is $1.19 billion at the midpoint, below analyst estimates of $1.2 billion
  • Free cash flow of $257 million, up 38% from previous quarter
  • Gross Margin (GAAP): 90.4%, down from 92% 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.

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 measured over the last year, growing from quarterly revenue of $952.4 million, to $1.12 billion.

Autodesk Total Revenue

This quarter, Autodesk's quarterly revenue was once again up 18.2% year on year. Looking at the last couple of quarters, we can see that revenue increased by $66.1 million in Q3, which was a bit less than the $70.4 million revenue add in Q2 2022. This steady quarter-on-quarter growth shows the company is able to more or less maintain its paced growth trajectory.

Analysts covering the company are expecting the revenues to grow 18% over the next twelve months, although estimates are likely to change post earnings.

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, licenses, technical support and other necessary running expenses was at 90.4% in Q3.

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 Q3 Results

With a market capitalization of $68.2 billion, more than $1.79 billion 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.

We struggled to find many strong positives in these results. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations. Overall, it seems to us that this was a complicated quarter for Autodesk. The company is down 8.39% on the results and currently trades at $278.48 per share.

Is Now The Time?

Autodesk may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. There are a number of reasons why we think Autodesk is a great business. 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 impressive gross margins are indicative of excellent business economics, and its very efficient customer acquisition hints at the potential for strong profitability.

Autodesk's price to sales ratio based on the next twelve months is 13.6x, suggesting that the market is expecting more measured growth, relative to the hottest tech stocks. Looking at the tech landscape today, Autodesk's qualities as a business really stand out and we do like the look of the company at current prices.

The Wall St analysts covering the company had a one year price target of $352.8 per share right before these results, implying that they saw upside in buying Autodesk even in the short term.

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