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Analyst Blog

On Aug 28, 2013, Zacks Investment Research downgraded Autodesk Inc. (ADSK - Analyst Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

The downgrade primarily reflects declining top-line growth in the second quarter. Although earnings of 35 cents comfortably beat the Zacks Consensus Estimate by 4 cents, revenues of $561.7 million just managed to beat the Zacks Consensus Estimate of $561.0 million.

Revenues declined for the second straight quarter (down 1.2% in the second quarter), primarily due to 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.

Significantly, revenues declined in Asia Pacific (down 1.0% from the year-ago quarter) and EMEA (down 4.0% year over year), partially offset by the Americas (up 2.0% year over year) in the reported quarter.

The decline in revenue base had a negative impact on margins. Gross margin contracted 160 basis points (bps), while operating margin declined 100 bps from the year-ago quarter.

For the third quarter, Autodesk expects revenues in the range of $540.0 - $555.0 million and earnings of 36 - 40 cents per share. A sluggish demand environment, increasing challenges in emerging markets and shift towards a subscription and rental based model are expected to hurt top-line growth in the near term.

The Zacks Consensus Estimate for the third quarter of 2014 declined 34.1% (14 cents) to 27 cents per share over the last 60 days.

The Zacks Consensus Estimate for 2014 decreased 17.8% (27 cents) to $1.25 per share over the last 60 days. The Zacks Consensus Estimate for 2015 plunged 29.6% (53 cents) to $1.26 per share over the same period.

Other Stocks to Consider

Not all software providers are performing as poorly as Autodesk. We recommend Dealertrack Technologies (TRAK - Snapshot Report) and eGain Corp , as both have a Zacks Rank #1 (Strong Buy). Dassault Systemes SA (DASTY), which has a Zacks Rank #2 (Buy), is also looking good at present.

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