Autodesk Inc. (ADSK) reported third-quarter fiscal 2015 earnings of 13 cents per share, which beat the Zacks Consensus Estimate by a couple of cents. Revenues beat the Zacks Consensus Estimate quite convincingly.

Driven by the robust third-quarter result, the company raised its fiscal 2015 guidance. Shares were up 3.56% ($2.08) in after-hours trading following the upgraded guidance.

Revenues

Revenues increased 11.3% year over year to $618.0 million, ahead of management’s guided range of $590 to $605 million and beat the Zacks Consensus Estimate of $603 million. Revenue contribution from the recent acquisition of Delcam was approximately $14 million.

The year-over-year growth in revenues was primarily attributed to a 15.4% year-over-year jump in subscription revenues to $297.5 million. The improvement in subscription revenues came on the back of an increase in maintenance subscription revenues.

License revenues increased 7.7% from the year-ago quarter to $320.5 million attributable to an increase in upgrade revenues.

Total billings increased 25% on a year-over-year basis, driven by higher license and subscription billings. Total maintenance, desktop (rental), and cloud subscriptions increased approximately 121,000 from the prior quarter, including approximately 25,000 subscriptions related to Delcam.

Cloud-based PLM 360 billings registered robust growth. During the quarter, the company announced plans of introducing cloud-based data management to complement the existing cloud-based PLM.

Segment wise, revenues from Platform Solutions and Emerging Business (:PSEB) increased 3% from the year-ago quarter to $188 million. AutoCAD and AutoCAD LT contributed 27% of total revenues in the quarter.

Revenues from the Architecture, Engineering and Construction (AEC) business segment surged 17% from the year-ago quarter to $217 million. Continued adoption of BIM in the building and infrastructure industries drove growth in AEC suites, which increased 23% from the year-ago quarter.

Manufacturing revenues increased 1.2% on a year-over-year basis to $170 million. Autodesk’s Media and Entertainment (M&E) segment declined 2.3% on a year over year basis to $43 million in the reported quarter.

Revenue from Flagship products was $288 million, an increase of 5% compared to the prior year quarter. Revenue from Suites increased 13% on a year over year basis to $225 million. Revenue from New and Adjacent products rose 29% from the prior year quarter to $105 million in the third quarter.

Geographically, revenues in the Americas increased 11% on a year-over-year basis to $231 million. EMEA revenues increased 17% to $238 million from the third quarter of last year. Revenues in APAC increased 5% from the year-ago quarter to $149 million. Revenues from emerging economies represented 15% of total revenue in the reported quarter.

Operating Results

Gross margin (including stock-based compensation) contracted 170 basis points (bps) from the year-ago quarter to 88.2% in the reported quarter. The decline was primarily due to business model transition and higher cloud-based cost.

Operating expenses (including stock-based compensation) increased 24.4% on a year-over-year basis to $507.9 million. The increase was primarily due to a rise in marketing & sales (up 20.5%), research and development (up 23.4%) and general and administrative expenses (up 41.4%) in the quarter.

As a result, operating profit (including stock-based compensation) plunged 59% year over year to $37.2 million in the third quarter. Autodesk’s profitability was negatively impacted by the ongoing business model transition, investment in cloud infrastructure and key initiatives and the dilutive effect of the Delcam acquisition.

Net income (including stock-based compensation) was $29.5 million or 13 cents per share compared with $76.9 million or 34 cents per share reported in the year-ago quarter. However, earnings per share (EPS) declined approximately 62.3% from the year-ago quarter due to higher operating expenses.

Autodesk Inc - Earnings Surprise | FindTheBest

Balance Sheet

Autodesk exited the third quarter with total cash and cash equivalents (including marketable securities) of $1.90 billion compared with $1.91 billion in the previous quarter. Cash flow from operating activities was $136 million compared with $96 million in the previous quarter.

Deferred revenues increased 31% on a year-over-year basis to a record $1 billion at quarter end.

Outlook

For the fourth quarter of fiscal 2015, Autodesk expects revenues in the range of $640–$655 million while the Zacks Consensus Estimate for the same is pegged at $635 million. Non-GAAP EPS is expected in the range of 22 cents to 25 cents for the upcoming quarter. This is higher than the Zacks Consensus Estimate of 11 cents.

For fiscal 2015, management expects net billings to grow in the range of 15% to 17% (up from 10% to 12%). Revenues are expected to increase 9% to 10% (up from 7% to 9%), while operating margin on a non-GAAP basis is expected to be in the range of 15% to 15.5%.

Our Take

We remain positive on Autodesk’s long-term growth prospects as it is well-positioned to capitalize on the rapid adoption of computer-aided designing and manufacturing through its comprehensive product portfolio. We expect its broad product portfolio to generate new customers in both domestic as well as overseas markets.

Moreover, the increase in construction and manufacturing activities in the emerging markets present further growth opportunities. Additionally, a low channel inventory, increasing efficiencies through its channel partner framework, simplified upgrade pricing mechanism and electronic software delivery will help it to achieve long-term growth targets.

The company’s focus on expanding its mobile applications for both Apple’s (AAPL) iOS and Google’s (GOOGL) Android platforms would also drive market share, going forward.

Autodesk’s uneven top-line growth in the recent past has made it over-dependent on cost saving programs to boost earnings. Although restructuring programs are corrective measures to realign cost, their success often depends on execution. We believe that there is a certain limit up to which costs can be curtailed, hence, the company needs to invest to boost organic growth.

However, foreign exchange fluctuations, increasing exposure to Europe and competition from the likes of Adobe Systems Inc. (ADBE) are the headwinds. Additionally, challenges in the form of customer concentration keep us on the sidelines.

Currently, Autodesk has a Zacks Rank #2 (Buy).

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