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Autodesk Inc. (ADSK - Analyst Report) reported earnings of 40 cents per share, which declined 24.5% from the year-ago quarter. The company’s fourth-quarter results were negatively impacted by business model transition toward subscription revenues, it announced late fiscal 2014.

Revenues

Revenues decreased 3.3% year over year to $586.6 million, which were ahead of management’s guided range of $560.0 to $580.0 million and beat the Zacks Consensus Estimate of $572.0 million. Backlog was $20.0 million, flat on a year-over-year basis.

Revenues exclude $30.0 million related to business model transition, as Autodesk recognized revenues ratably instead of up front payment. Wider variety of pricing also hurt revenue growth.

The year-over-year decline was primarily attributed to lower license and other revenues, which declined 12.1% year over year to $320.7 million. Subscription revenues increased 9.8% from the year-ago quarter to $265.9 million. Net subscription billings increased 2.0% year over year in the last quarter.

Segment-wise, revenues from the Platform Solutions and Emerging Business (PSEB) were almost flat on a year-over-year basis at $196.0 million. AutoCAD and AutoCAD LT revenues increased a modest 1.0% to $171.0 million. AutoCAD’s weak performance reflects continuing migration of customers to the company’s Design and Creation suites.

Revenues from the Architecture, Engineering and Construction (AEC) business segment decreased 5.8% from the year-ago quarter to $196.0 million, due to the negative impact of business model transition.

In the quarter, Autodesk booked more than 20 BIM-360 transactions worth over $100K including two new transactions worth over $1.0 million each.

Manufacturing revenues decreased modestly on a year-over-year basis to $154.0 million. Autodesk continues to win new deals in industrial machinery, consumer products and automotive. The company launched Fusion 360 a cloud-based CAD tool for mechanical and industrial designers during the quarter.

PLM 360 product continues to attract new customers as is evident from the fact that 25.0% of last quarter customers were first timers for Autodesk. The recent acquisition of CAM technology provider Delcam is further expected to expand the company’s market share in manufacturing process.

Autodesk’s Media and Entertainment segment recorded a revenue decline of 12.8% year over year to $41.0 million. Animation products revenues (includes Maya, 3ds Max, and Entertainment Creation Suites) decreased 5.0% year over year, while Creative Finishing revenues decreased 28.0 % from the year-ago quarter.

Media and Entertainment segment suffered from lower end-market demand. The company also moved some products in other Autodesk industry suites, which hurt revenues in the last quarter.

Although Autodesk reported 15.0% jump in revenues from Suites (37.0% of revenues), revenues from its flagship products were down 13.0% year over year. Revenues from new and adjacent products decreased 6.0% on a year-over-year basis.

Geographically, revenues from Americas and Europe, Middle East & Africa (EMEA) revenues decreased 6.3% and 3.8%, respectively, from the year-ago quarter, while Asia-Pacific revenues increased 1.4%.

Revenues from emerging economies, which represented 15.0% of consolidated revenues, were up 5.0% on a year-over-year basis.

Operating Results

Gross margin (including stock-based compensation) contracted 180 basis points (bps) from the year-ago quarter. The year-over-year decline was primarily due to business model transition and higher cloud-based cost.

Operating expenses (including stock-based compensation) as a percentage of revenues expanded 370 bps on a year-over-year basis to 76.3% in the quarter. The year-over-year increase was primarily due to higher marketing & sales (up 70 bps) and research and development expenses (up 310 bps), which fully offset higher general and administrative expense (down 60 bps) in the quarter.

Operating margin (including stock-based compensation) contracted 530 bps from the year-ago quarter to 16.5%, primarily due to lower revenues and gross margin base.

Net income (including stock-based compensation) was $66.5 million or 29 cents per share compared with $91.0 million or 40 cents per share in the year-ago quarter. Earnings per share comfortably beat the Zacks Consensus Estimate by 8 cents.

Balance Sheet

Autodesk exited the fourth quarter of fiscal 2014 with total cash and cash equivalents (including marketable securities) of $2.27 billion compared with $2.48 billion in the previous quarter. Cash flow from operating activities was $184.0 million compared with $90.6 million in the previous quarter.

Deferred revenues increased 8.0% to a record $901.0 million at the end of fiscal 2014.

Outlook

For the first quarter of fiscal 2014, Autodesk expects revenues in the range of $560.0–$575.0 million. Earnings (excluding stock-based compensation expense, amortization of intangibles and restructuring charges) are expected in the range of 19 to 22 cents for the upcoming quarter. This is lower than the Zacks Consensus Estimate of 24 cents.

Management expects net billings to grow in the range of 5.0% to 8.0% for fiscal 2015. Net new subscription additions are expected to be in the range of 150K to 200K for the full year. Revenues are expected to increase 3.0% to 5.0%, while operating margin on a non-GAAP basis is expected to be in the range of 14.0% to 16.0%.

Management reiterated long-term guidance that includes 12% billing CAGR, 20% more annual value from new and existing subscriptions, and a 50% increase in subscriptions. Autodesk expects operating margin of 30.0% by the end of fiscal 2018.

Our Take  

Autodesk’s fourth-quarter result reflects improving demand environment in the AEC market. We believe 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 $7.0 trillion construction market. We believe Autodesk’s new cloud-based offerings are gaining traction. Moreover, the business transition will boost the company’s profitability, going forward.

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 (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 #3 (Hold).

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