We are now at the tail end of the second-quarter earnings season. Tons of software companies whose quarters ended in July are set to report results over the next two weeks. One of the first to report was Autodesk (NASDAQ:ADSK), which sells design and build software to engineers, architects, and construction workers. The company posted solid Q2 results, but investors sold off the stock heavily on the news, and shares are now down 9% the day after the report.
However, this looks like investors overreacting to short-term news. Here's why investors shouldn't be worried after Autodesk's Q2 earnings report.
On Aug. 25, Autodesk released earnings covering the period from May through July of this year. Revenue grew 16% year over year to $1.06 billion in the period. More importantly, billings increased 29% to $1.015 billion, showing the recovery in cash collections that were delayed by the COVID-19 pandemic last year. (Billings is revenue plus the change in deferred revenue in the period.) Since Autodesk signs annual subscription deals, it has a large amount of deferred revenue, meaning that billings are a better measure of top-line growth for the company.
Looking out to future revenue, remaining performance obligations grew 24% year over year to $4.14 billion in the quarter. This large backlog shows how predictable Autodesk's business is, which is why investors tend to give the stock a premium valuation. For the full year, Autodesk is guiding for $1.5 billion-$1.575 billion in free cash flow, which is down from its Q1 guidance of $1.575 billion-$1.65 billion. This guide down was likely the reason for the stock drop. However, on the conference call, CFO Debbie Clifford explained why management decided to make this change.
Previously, large customers would sign multi-year deals with Autodesk, paying for all of its services upfront with a discounted price. The company has decided to change this to annual billings with lower or no discounts. This will hurt cash flow in the short term (no lump sum payments) but will increase the total cash Autodesk will generate over the long term. If you plan on holding Autodesk stock for many years, you should be happy management made this change.
Big opportunities in Fusion 360 and Construction Cloud
Outside of its core design business, which encompasses dominant software products like Revit and AutoCAD, Autodesk is trying to move further across the different industries it serves. In manufacturing, mechanical, and electrical engineering, it has a fast-growing design and build platform called Fusion 360. Fusion 360 is a cloud-based modeling solution that is aiming to bring together all different engineering industries. It also has extensions to third-party programs like Ansys, which helps engineers not waste valuable time doing manual file transfers. At the end of Q2, Fusion 360 had 165,000 paying subscribers, up from 95,000 in Q2 of last year.
On the construction side of the business, Autodesk has invested heavily into the Autodesk Construction Cloud, which is a collection of software tools for the people who actually build stuff (as opposed to Revit and AutoCAD, which are for designers). Its core product is called Autodesk Build, which was launched in February and has already been used on 11,000 construction projects around the world. It is still early days in construction, but investors should be excited about this new product segment and how it can help Autodesk grow over the next decade.
With a market cap of $75 billion, investors might think that Autodesk is overvalued, with free cash flow projected to hit only $1.5 billion this fiscal year. However, due to the timing of customer payments and the slow transition to subscription contracts, free cash flow is expected to inflect to $2.4 billion next fiscal year.
On the conference call, Clifford reiterated these goals and said in the years following she expects to grow free cash flow at a double-digit rate. With a high gross margin of 90%+, Autodesk has tons of room to expand the free cash flow margin on its software products. Combine that with industry tailwinds and tons of new products gaining traction, and there's plenty to be excited about if you're an Autodesk shareholder at the moment.