Autodesk Beats, Guidance Mixed

Autodesk Inc. (ADSK - Analyst Report) third quarter earnings beat the Zacks Consensus Estimate but fell below the year-ago levels. However, earnings increased sequentially due to higher cost controls.

The company reported net income on a non-GAAP basis of $63.1 million in the third quarter of 2010, down 51.5% from last year. Earnings per share (EPS) of 27 cents beat the Zacks Consensus Estimate of 15 cents, but were down from 56 cents reported in the year-ago period. However, earnings increased from 24 cents a share sequentially.

This reflects the company’s strong execution in reducing operating expenses. Operating margin came in at 18.4% as operating expenses decreased 20.7% year over year, mainly due to lower marketing and sales expenses (-20.6%) as well as lower R&D costs (-20.2%).

Gross margin came in at 89.2% versus 91.3% in the year-ago period. Cost of sales in dollar terms decreased 14.9% year over year; however as a percentage of revenue cost of sales increased to 10.8% in the quarter compared to 8.3% in the year-ago period.

Revenues of $416.9 million were down 31.3% year over year, mainly due to a decrease of 43.9% year over year in Licenses revenues and partially due to a 2.8% decrease in Maintenance revenues. However, revenues were flat sequentially.

By geography, revenue from the Americas increased 2% sequentially but decreased 25% from the year-ago period. EMEA revenues declined 3% sequentially and 35% year over year on a constant currency basis. Revenue from the Asia Pacific decreased 7% sequentially and 33% year over year on a constant currency basis. Revenues from emerging economies represented 15% of total revenue and decreased 3% sequentially and 45% year over year on a constant currency basis.

Moreover, revenues from 3D design solutions were down 25% from the year-ago period but were flat sequentially. Revenues from 2D horizontal and vertical products declined 37% year over year and decreased marginally from the last quarter. We are positive on Autodesk’s migration from 2D products to 3D products, which have a higher margin.

Combined revenue from AutoCAD and AutoCAD LT declined 39% year over year. Although the company has a strong market position in the "mainstream" CAD market, it faces competition from Dassault Systemes. Moreover, the company competes against Adobe Systems Inc. (ADBE - Analyst Report), Apple Inc. (AAPL - Analyst Report), Avid Technology 
(AVID - Snapshot Report), Sony (SNE - Analyst Report) and Thomson Reuters (TRI - Analyst Report).

Autodesk has a strong balance sheet with cash, investments and securities totaling $1.05 billion at the end of quarter and no long-term debt.

Mixed Guidance
The forecast for the fourth quarter of 2010 were mixed, with earnings below Consensus expectations and revenues in-line. The company provided guidance for fiscal 2010 of both revenue and earnings in line with the Consensus.

For the fourth quarter, Autodesk expects revenue to be in the range of $420 – $440 million. Earnings on a non-GAAP basis is expected to be in the range of 19 cents to 24 cents a share, excluding 6 cents related to stock-based compensation expense and 6 cents for amortization of acquisition related intangibles.

Net revenue for fiscal 2010 is expected to be in the range of $1.68 – $1.7 billion. Non-GAAP earnings per share (EPS) are expected to be in the range of 88 cents to 93 cents a share.

The company anticipates total non-GAAP pre-tax spending (operating expenses plus cost of goods sold) for fiscal 2010 to range between $1.42 and $1.43 billion. The company said that it is on track to deliver more than $300 million in pre-tax cost savings in fiscal 2010 compared to fiscal 2009.

For the first quarter and full fiscal year 2011, the company did not provide revenue and EPS guidance. However, the company expects GAAP operating margin to increase year over-year in the first quarter of fiscal 2011, due to significant impairment charges. Non-GAAP operating margin in the first quarter is anticipated to be flat to slightly down compared to the year-ago period due to seasonality and increased costs.

GAAP operating margin for the full year fiscal 2011 is expected to increase. The company anticipates modest improvement in non-GAAP operating margin for full year fiscal 2011 compared to fiscal 2010.

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