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Autodesk Inc. (ADSK - Analyst Report) reported fiscal second-quarter 2014 non-GAAP earnings of 35 cents, which decreased 8.4% from the year-ago quarter and was better than the Zacks Consensus Estimate of 31 cents.

Revenues

Revenues for the quarter decreased 1.2% year over year to $561.7 million, but just managed to beat the Zacks Consensus Estimate of $561.0 million. Revenues were adversely affected by a downturn in some of the company’s end markets, which negatively impacted the company’s products like AutoCAD and AutoCAD LT in the quarter.

However, the Architecture, Engineering and Construction (AEC) business segment performed well. Region wise, Americas and Asia-Pacific (APAC) posted strong growth, particularly Japan.

Segment Details

Segment wise, revenues from the Platform Solutions and Emerging Business (“PSEB”) were down 9% on a year-over-year basis. Revenues from the AEC and Manufacturing business segments increased 9% and 2% respectively, on a year-over-year basis.

Autodesk’s Media and Entertainment segment recorded a revenue decline of 11% year over year. Though, Autodesk reported an 18% increase in revenues from Suites, revenues from its Flagship products were down 11% year over year.

Geographically, declines in revenues from Asia Pacific (down 1.0% from the year-ago quarter) and EMEA (down 4.0% year over year) were offset to a certain extent by increased revenues from Americas (up 2% year over year).

Revenues from emerging economies, which represented 15.0% of the total revenue, were down 9% on a year-over-year basis.

Operating Results

Gross profit on a non-GAAP basis decreased 2.9% from the year-ago quarter to $493.9 million. Gross margin came in at 87.9% compared with 89.5% in the year-ago quarter. The decline was primarily due to lower revenues and unfavorable revenue mix. Including stock-based compensation, gross profit came in at $504.9 million.

Operating expenses on a non-GAAP basis decreased 1.6% from the year-ago quarter, to $369.7 million due to lower marketing and sales expenses (down 6.2% year over year), somewhat offset by higher research and development expenses (up 3.1% year over year). General and administrative expenses were also up 4.0% from the year-ago quarter.

Moreover, operating expenses, as a percentage of revenues, contracted 30 basis points (bps) to 65.8% in the quarter. Including stock-based compensation, operating expenses came in at $399.3 million.

Non-GAAP operating income decreased 5.1% from the year-ago quarter to $136.6 million. Operating margin contracted 100 bps from the year-ago quarter to 24%, primarily due to lower revenue base. Including stock-based compensation of $31.0 million, operating income came in at $105.6 million.

Net income on a non-GAAP basis was down 8.4% year over year to $101.8 million. Including stock-based compensation, net income came in at $78.9 million or 35 cents, compared with $84.6 million or 36 cents per share in the year-ago quarter.

Balance Sheet

Autodesk exited fiscal second quarter 2014 with total cash and cash equivalents of $1.40 billion compared with $1.66 billion in the previous quarter. Cash flow from operating activities was $65.0 million compared with $224.1 million in the prior quarter.

Outlook

For the third quarter of 2014, Autodesk expects revenues in the range of $540 million-$555 million and earnings per share in the range of 36 cents - 40 cents on a non-GAAP basis. Autodesk did not provide full year 2014 guidance.

Recommendation 

Autodesk’s second-quarter results were negatively impacted by the macroeconomic environment and soft end-market demand. This led to lower margins. However, Autodesk witnessed continued demand for design related suites and the AEC business segment.

Moreover, going forward, Autodesk’s new cloud-based offerings are expected to gain traction. The company’s focus on expanding its mobile applications for both Apple’s (AAPL - Analyst Report) iOS and Google’s Android platform will further drive market share, going forward.

However, sluggish macro-economic environment, weakness in emerging markets, customer concentration and increasing competition from Adobe Systems Inc. (ADBE - Analyst Report) are the major concerns. Moreover, continued investments in news products are expected to hurt margins in the near term.

Currently, Autodesk has a Zacks Rank #4 (Sell).

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