Architectural design software firm Autodesk (NASDAQ:ADSK) has continued to lag the S&P over the past 52 weeks, even as Wall Street analysts have warmed to the stock. What's got the suits so impressed? Today, we dig through the numbers to learn why they're so optimistic about tomorrow -- and the fiscal Q1 2007 earnings news it will bring.

What analysts say:

  • Buy, sell, or waffle? There's been quite a turnaround in sentiment on Autodesk over the past few months. Buys now outnumber holds, nine to six. (In February, the count went five to nine in favor of holding.)
  • Revenues. Sales are expected to surge 21% tomorrow, to $430.9 million.
  • Earnings. But profits are predicted to eke out only a 3% gain, to $0.31 per share.

What management says:
Former CEO, now Executive Chairperson, Carol Bartz is a big fan of superlatives. In Autodesk's February earnings release on fiscal 2006 results, she exulted over "an excellent finish to another outstanding year." She noted the imminent retirement of, first, the firm's AutoCAD 2002-based line of products, and then, the 2004 line, as new versions are rolled out this year. She then concluded that she has "never been more optimistic about Autodesk's opportunities."

Until April, that is, when Bartz said she had "never seen Autodesk better positioned. She confirmed: "With nearly four weeks remaining in its fiscal first quarter, the company ... is experiencing growth across divisions and all geographies."

What management does:
Autodesk's economies of scale are a thing of wonder. Over the past six months, the company clocked 21% better sales than last year, yet its cost of goods sold actually declined. The extra wiggle room on the upper lines of the income statement meant that even though operating costs have outpaced sales growth, operating and net margins continue to expand.

Margins %

10/04

1/05

4/05

7/05

10/05

1/06

Gross

86.1

86.3

86.7

87.3

88.1

88.8

Op.

19.8

21.2

22.9

24

24.9

24.3

Net

18.2

18

19.8

21

21.3

21.6
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
That all sounds great, right? I think so, too. So here's what has me flummoxed: Autodesk's sales are roaring. Its margins are expanding. Management is, well, extremely optimistic. Why, then, are tomorrow's profits expected to come in essentially flat year over year?

It's not the analysts who are off base here. They're just quoting the company line, expressed in both the fiscal 2006 earnings report and the guidance update. Both times, Autodesk predicted pro forma profits of $0.30 to $0.32 per share, exclusive of $0.08 worth of options expensing and goodwill amortization. Logically, when revenues go up, and the profit margins earned on those revenues hold steady or increase, profits should go up even faster, but no one expects to see that reported tomorrow.

Autodesk did mention that it expects its tax rate to increase, but I hardly think that should suffice to wipe out essentially all profits growth. After ruling everything else out, the only thing I can come up with is that the company expects its margins to drastically contract for Q1.

In just a few hours, we'll see what the true story is.

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Fool contributorRich Smithdoes not own shares of any company named above.