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Autodesk's Cash Surge Shows No Signs of Letting Up

By Demitri Kalogeropoulos – Dec 3, 2019 at 8:23AM

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The shift towards subscription services is finally paying off for the business.

Autodesk (ADSK 0.96%) investors were optimistic heading into the design software specialist's third-quarter earnings report. Its prior results back in August contained plenty of good news, including strong sales growth, cash flow, and earnings.

The software-as-a-service provider extended that positive momentum into the third quarter by announcing last week that it had again exceeded management's guidance thanks to healthy demand across its product categories and across different geographic divisions. Let's take a look at a few highlights from that report.

A user interacts with a design program displayed on a laptop

Image source: Getty Images.

Sales are rising

Sales growth was strong, as revenue increased 28% to $843 million. CEO Andrew Anagnost and his team had forecast a range of between $820 million and $830 million, and so the actual result comfortably exceeded the high end of that guidance. Autodesk executives highlighted the broad-based nature of the demand growth, which included market share gains in the construction and manufacturing industries. "Third quarter results were driven by all regions and products," CFO Scott Herren said in a press release.

The company's base of annualized recurring revenue, which management sees as a key growth metric in its cloud-focused, subscription business, rose 28% to mark a modest slowdown compared to the prior quarter's 31% increase.

Financial wins

Autodesk's earnings are still being pressured by its quick shift into subscription service plans that spread customer payments out over time. Yet its finances are improving. Operating income soared to $111 million compared to $15 million a year ago, pushing operating margin up to 13% of sales from 2%.

Cash flow was another standout success, with operating cash jumping to $276 million from just $39 million last year. "We continue to demonstrate the cash generating power of our business model," Anagnost said, "and this quarter [we] drove a record [trailing] twelve months free cash flow of nearly $1 billion."

ADSK Free Cash Flow (TTM) Chart

ADSK Free Cash Flow (TTM) data by YCharts.

Looking ahead

Investors didn't have to squint to see signs of robust growth for the fourth quarter and likely into 2020. Autodesk managed 30% or higher sales gains in three of its five geographic regions in Q3, and the Europe segment, its slowest, still managed a 24% increase.

Meanwhile, the company's billings, which represent contracted but not yet fulfilled sales, point to plenty of revenue ahead. "Outstanding execution," Herren said, "produced billings over $1 billion, a 55% [increase]."

Autodesk's guidance updates were slightly negative but didn't change the overall robust growth picture. Sales are still on track to rise by about 26% while spending stays restrained. Billings should still increase roughly 50% for the year to over $4 billion.

These trends will translate into non-GAAP earnings of between $2.69 and $2.81 per share. Yet the stronger business is showing up more clearly in Autodesk's free cash flow, which is on pace to hit $1.3 billion his year compared to $300 million last year and a modest decrease in fiscal 2018.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Autodesk. The Motley Fool has a disclosure policy.

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