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Autodesk Inc. (ADSK - Analyst Report) reported third quarter earnings (including stock based compensation expense of 23 cents per share) of 28 cents per share, which missed the Zacks Consensus Estimate by 3 cents.

Quarter Details

Revenue for the quarter decreased marginally from the previous-year quarter to $548.0 million and was below management’s guided range of $550.0 million to $570.0 million. Revenue also fell shy of the Zacks Consensus Estimate of $561.0 million.

The lower-than-expected revenue was a result of tepid demand for Autodesk’s solutions. License revenue for the quarter was down 4.3%, which fully offset the 6.3% increase in maintenance revenue and resulted in a decline in overall revenue.

Management also cited that ‘Superstorm Sandy’ had a negative effect on quarterly revenue. Moreover, sluggishness in the macroeconomic environment also led to the weaker-than-expected revenue.

On a segmental basis, Platform Solutions and Emerging Business (“PSEB”) revenue decreased 2.0% year over year to $205.0 million. Revenue from the Architecture, Engineering and Construction (“AEC”) business segment increased 7.0% year over year to $163 million, while revenue from Manufacturing segment inched down 1.0% from the year-ago quarter to $132.0 million. Media and Entertainment revenue declined 9.0% year over year to $48.0 million.

On geographic basis, revenue from America (up 4.0% year over year) was fully offset by the decrease in Asia-Pacific (down 3.0% year on year), and EMEA (down 3.0% year over year). Revenue from emerging economies, which represented 15.0% of the total revenue, was down 9.0% compared with the year-ago quarter.

Gross profit (including stock-based compensation) remained flat on a year-over-year basis to $499.9 million. Gross margin also remained flat on a year over year basis to 91.2%.

Operating expenses (including stock-based compensation) increased 4.1% year over year to $406.7 million, primarily attributable to higher research & development expenses (up 8.8% year over year) and general and administrative expenses (up 12.3% year over year) which fully offset the 0.8% decline in marketing & sales expenses. Moreover, operating expenses as a percentage of revenue expanded 300 bps to 74.2% in the quarter.

Operating income (including stock-based compensation) of $93.2 million was down 14.9% year over year. Operating margin came in at 17.0% in the quarter, down 300 bps year over year, primarily due to higher-than-expected operating expenses.

Net income on non-GAAP basis came at $107.8 million or 47 cents per share, which improved from $102.1 million or 44 cents in the previous-year quarter.

Our non-GAAP calculations may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management.

The company exited the third quarter with total cash and cash equivalents of $827.0 million compared with $930.2 million in the previous quarter. Cash flow from operating activities was $157.0 million compared with $107.0 million in the prior quarter.

Outlook

For fourth quarter 2013, Autodesk expects revenue in the range of $570.0 million to $600.0 million.  Non-GAAP earnings is expected in the range of 43 cents to 51 cents per share, which excludes 13 cents related to a stock-based compensation expense, 3 cents for restructuring charges and 9 cents related to amortization of acquisition related intangibles.

For fiscal 2013, Autodesk expects revenues in the range of $2.28 billion to $2.31 billion and expects non-GAAP earnings in between $1.84 and $1.92 per share.

Recommendation

Autodesk maintains a dominant position in the computer-aided designing market. We believe that Autodesk’s expanding product portfolio, broadening industry applications and geographic reach will help sustain longer-term growth. The company’s initiatives to shift towards cloud and mobile computing are expected to be long-term positives.

However, sluggish macroeconomic environment along with the company’s high exposure to Europe amidst the lingering financial turmoil are the near term headwinds. Moreover, margin contractions coupled with slower-than-expected revenue growth and a tepid outlook keep us cautious on the stock.

Additionally, customer concentration and increasing competition from Adobe Systems Inc. (ADBE - Analyst Report) and Dassault Systemes are the other headwinds going forward.

We have a Neutral recommendation on Autodesk’s shares in the long term. Currently, Autodesk has a Zacks #4 Rank, which translates into a short-term (1-3 months) Sell rating.

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