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Autodesk Inc. (ADSK - Analyst Report) reported a better-than-expected third quarter of fiscal 2014, beating the Zacks Consensus Estimate by 4 cents. Earnings increased 10.2% from the year-ago quarter but decreased 10.1% sequentially to 31 cents in the reported quarter.

Revenues

Revenues climbed 1.3% year over year but decreased 1.2% quarter over quarter to $555.2 million, which met the high-end of management’s guided range of $540.0 million to $555.0 million and beat the Zacks Consensus Estimate of $547.0 million.

The year-over-year growth was driven by higher subscription revenues, which increased 8.4% from the year-ago quarter to $257.7 million. License and other revenues declined 4.1% year over year to $297.5 million.

Sequentially, weak license and other revenues, down 5.0%, fully offset a 3.7% increase in subscription revenues.

Segment wise, revenues from the Platform Solutions and Emerging Business (PSEB) were down 10.0% on a year-over-year and 7.1% on a quarter-over-quarter basis to $183.0 million.

Revenues from the Architecture, Engineering and Construction (AEC) business segment increased 13.0% from the year-ago quarter and 5.1% from the previous quarter to $186.0 million.

The AEC results were driven by broad-based recovery in the commercial construction market. The company continues to expand its BIM product portfolio, particularly based on acquisitions, a couple of which it closed in the reported quarter.

In the quarter, Autodesk renewed an agreement with an existing customer using BIM 360 enterprise. The renewed agreement worth $1.5 million was 20.0% more than the previous contract.

Manufacturing revenues increased 8.0% year over year but decreased 1.4% sequentially to $142.0 million. The strong year-over-year result was driven by broad-based and faster adoption of manufacturing suites as well as industrial design, visualization and simulation technology.

Cloud based PLM 360 reported a robust quarter, driven by strong demand from small- and medium-size businesses in industrial machinery, automotive and high tech sectors. Autodesk also saw strong demand for Fusion 360, the world's first cloud-based software for industrial and mechanical design, which currently has more than 20,000 users.

Autodesk’s Media and Entertainment segment recorded a revenue decline of 9.0% year over year but increased 2.3% sequentially to $44.0 million.

Although, Autodesk reported 21.0% jump in revenues from Suites, revenues from its flagship products were down 9.0% year over year. Revenues from new and adjacent products remained flat year over year.

Geographically, revenues from Americas decreased 1.0% from the year-ago quarter, while EMEA revenues increased 4.0%. Asia-Pacific revenues remained flat on a year-over-year basis.

Revenues from emerging economies, which represented 15.0% of consolidated revenues, were up 6.0% on a year-over-year basis.

Operating Results

Gross margin (including stock based compensation excluding amortization) contracted 30 basis points (bps) from the year-ago quarter but remained flat on a sequential basis at 89.9%. The year-over-year decline was primarily due to unfavorable revenue mix.

Operating expenses (including stock based compensation excluding amortization) as a percentage of revenues, contracted 50 bps year over year but expanded by the same percentage points to 71.6% in the quarter.

The year-over-year decline was primarily due to lower marketing & sales (down 60 bps) and research and development expenses (down 110 bps), which fully offset higher general and administrative expense (up 10 bps) in the quarter.

Operating margin (including stock based compensation excluding amortization) contracted 80 bps from the year-ago quarter and 50 bps on a sequential basis to 18.3%, primarily due to lower revenues and gross margin base.

Net income (including stock based compensation excluding amortization) margin improved 90 bps from the year-ago quarter but declined 130 bps on a sequential basis. The year-over-year expansion was due to lower income tax rate.

Balance Sheet

Autodesk exited third quarter of fiscal 2014 with total cash and cash equivalents (including marketable securities) of $2.48 billion compared with $2.41 billion in the previous quarter. Cash flow from operating activities was $90.6 million compared with $65.0 million in the previous quarter.

Outlook

For the fourth quarter of fiscal 2014, Autodesk expects revenues in the range of $560.0 - $580.0 million. Earnings (excluding stock based compensation expense, amortization of intangibles and restructuring charges) are expected to be in the range of 29 to 36 cents for the upcoming quarter.

Our Take  

Autodesk’s third-quarter result reflects improving demand environment in the AEC market. We believe that the company has significant growth opportunities in the AEC and manufacturing markets going forward.

Autodesk believes that the momentum from the BIM product portfolio will help it to faster penetrate the construction industry, which is a $7.0 trillion market. We believe that Autodesk’s new cloud-based offerings are gaining traction.

Moreover, 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 new products are expected to hurt margins in the near term.

Currently, Autodesk has a Zacks Rank #5 (Strong Sell).

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