Computer-assisted design (CAD) pioneer and design and project software provider Autodesk (NASDAQ:ADSK) released fiscal third-quarter earnings results on Tuesday after the market close. Shares of the technology investment were trading up roughly 4% at midday on Wednesday as investors endorsed a continuing transition to subscription-based revenue and a focus on the construction software market. Below, let's walk through results of the last three months, keeping in mind that all comparable numbers refer to those of the prior-year quarter.

Autodesk's headline numbers

Metric Q3 2019 Q3 2018 Change
Revenue $842.7 million $660.9 million 27.5%
Net income $66.7 million ($23.7 million) N/A
Diluted EPS $0.30 ($0.11) N/A

Data source: Autodesk. EPS = earnings per share. N/A = Not applicable.

Essential highlights from the third quarter

  • Annualized recurring revenue, or ARR, a key metric in evaluating software-as-a-service (SaaS) companies, improved 28% to $3.22 billion, with 4 percentage points of growth contributed from recent acquisitions. Management pointed out that ARR also increased by 5% (which should not be confused with 5 percentage points) sequentially over the second quarter.
  • Subscription plan-based ARR rose 49%; acquisitions contributed 6 percentage points of the growth.
  • As the company weans customers off maintenance plans and transitions them to more profitable subscription programs, maintenance plan revenue has been in steep decline. Maintenance plan ARR decreased by 39% to $365 million during the quarter.
  • ARR from cloud business ("Cloud ARR") jumped 164% to $232 million. Even after removing 128 percentage points of contribution from acquisitions, organic Cloud ARR still improved by 36%.
  • Billings advanced by 55% to $1.0 billion.
  • Deferred revenue, an important indicator of future revenue recognition, grew by 35% to $2.42 billion.
  • The transition from maintenance to subscription revenue provided another strong quarter of margin expansion. Gross margin increased by 160 basis points to 90.6%, while operating margin soared by nearly 11 percentage points to 13.1%, as revenue growth outstripped the growth in sales and marketing, research and development, and other overhead expenses. Operating margin inflation resulted in positive net income versus a net loss in the prior-year period, as seen in the table above.
A woman leans on blueprints and points to an architectural rendering on a computer screen.

Image source: Getty Images.

Management's comments

As I discussed earlier this year, Autodesk's subscription sales transition has been undergirded by an aggressive expansion of its presence in the market for construction design and project software. In the current quarter, Autodesk's Architecture, Engineering, and Construction product family increased revenue by 36% to $358 million, which accounted for 42% of total sales in the period.

During management's earnings conference call, CEO Andrew Anagnost discussed the company's construction vertical in the context of its recently held annual conference, Autodesk University:

In construction, the breadth and depth of our product portfolio continue to make our offerings more compelling for our customers. In the last two years, the number of participants from the construction industry at Autodesk University increased over seven-fold to approximately 3,500. At AU this year we announced Autodesk Construction Cloud, which combines our advanced technology with the industry's largest network of builders and powerful predictive insights to drive more productivity, predictability and profitability for companies across the construction lifecycle.

Autodesk Construction Cloud is comprised of our best of breed Construction Solutions Assemble, BuildingConnected, BIM 360, and PlanGrid [software programs] and connects these solutions with Autodesk's unmatched design technology such as AutoCAD and our 3D modeling solutions Revit and Civil 3D.

The announcement included more than 50 new product enhancements across the portfolio and deeper integrations, including powerful new artificial intelligence that helps construction teams identify and mitigate design risks before problems occur.

Revisions to the full-year outlook

Due to a slightly greater foreign currency impact than previously anticipated and the timing of revenue recognition in the third and fourth quarters, Autodesk revised its fiscal 2019 outlook on Tuesday. The company now expects full-year ARR to land between $3.405 billion and $3.445 billion, versus a prior forecast of $3.425 billion to $3.485 billion.

Fiscal 2019 revenue is now expected to advance by 27%, in a range of $3.255 billion to $3.270 billion, in comparison to the previous goalposts of $3.240 billion to $3.270 billion.

Autodesk tightened its earnings-per-share guidance to a band of $0.80 to $0.85 from the previous envelope of $0.75 to $0.87. Finally, improving profitability is showing up in Autodesk's cash-generation ability: The company is chalking in free cash flow of $1.30 billion to $1.40 billion in fiscal 2019, an improvement over the previous target of $1.3 billion.