We updated our research report on Autodesk, Inc. ADSK on May 26, 2015.
Autodesk reported soft fourth-quarter fiscal 2015 results. While revenues improved significantly, earnings failed to meet expectations owing to the ongoing business transition. The company is benefiting from the increased adoption of cloud-based services. The company’s offerings like Fusion 360, BIM 360 and PLM 360 are also gaining traction. However, in the near term, its profitability will remain under pressure due to investments in cloud-based infrastructure and marketing initiatives. Further, the discontinuation of the perpetual license offerings in the following year may impact its financials.
Autodesk’s uneven top-line growth in the recent past has made it over-dependent on cost cutting programs to generate earnings growth. Although restructuring programs are corrective measures to realign costs, their success often depends on execution. We believe that there is a certain limit up to which costs can be curtailed, and investments are necessary to boost organic growth. The restructuring plan also includes the consolidation of eight leased facilities. However, its plan to continue to shift to mobile and cloud computing will increase investments. Over the long term, we believe restructuring programs will not be enough to boost earnings and the company will have to generate organic revenue growth to remain profitable.
In the absence of long-term customers, the company has started offering a number of products on a rental basis, which is typically a pay-per-use model. This short-term rental business will mostly cater to project-based needs of clients. Although it will generate revenues, it is worth noting that this low-margin and low-volume business will be a drag on the company's margins.
However, we remain positive on Autodesk’s long-term growth prospects as it is well positioned to capitalize on the rapid adoption of computer-aided designing and manufacturing through its comprehensive product portfolio. We expect the company to gain new customers in both domestic as well as overseas markets on the back of its broad portfolio. Moreover, growth in construction and manufacturing activities in the emerging markets present further growth opportunities. Additionally, a low channel inventory, increasing efficiencies through its channel partner framework, simplified upgrade pricing mechanism and electronic software delivery will help it to achieve long-term growth targets.
Stocks to Consider
Autodesk has a Zacks Rank #4 (Sell). Better-ranked stocks in this sector are Advent Software, Inc. ADVS and Aspen Technology, Inc. AZPN sporting a Zacks Rank #1 (Strong Buy), and Guidance Software, Inc. GUID with a Zacks Rank #2 (Buy).
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