Autodesk (ADSK 2.97%) is a well-known software company. Its tools for 3D design and manufacturing help clients plan projects and create visual content for a range of use cases, from architecture and construction to digital media and entertainment. In fact, the company's AutoCAD software is the most popular tool in the computer-aided design industry, holding 32% market share.
Recently, the company released what appeared to be solid second-quarter earnings, but the report sent shares tumbling. And today, the stock price sits more than 15% below its all-time high. Is this a buying opportunity for long-term investors?
In this Backstage Pass video from Aug. 26, 2021, Motley Fool contributors Brian Withers and Jon Quast discuss Autodesk's recent earnings and share their outlook on the company.
Brian Withers: I'm going to talk a little bit about Autodesk. I know we talked about it yesterday. The stock was down some 7% or so today. At one point, it was down 10%. Let's see the market is closed. It wowed, it finished the day a little more than 9%. Let's run through some of the things that may have made people nervous and we'll talk through that. Let me share my desktop here.
Here was the slides that we were looking at yesterday just to level-set folks. Revenue came in. This was from last quarter. Management outlooks, last quarter that they were going to do between $1 and almost $1.1 billion in revenue. Look at this, they matched the high-end of the range of guidance, which was a 16% year-over-year increase.
Interestingly enough, when you read through the conference call and the 10-Q, it's a 14%, CN is currency-neutral. I could have run off the screen, so currency-neutral. They had some currency headwinds to about the tune of 2% on the top-line. EPS generally accepted accounting principles which means just the way you're supposed to is they were a beat. Even on the non-GAAP when they pull out one-time expenses and stock-based compensation, it was beat.
Why is the stock down? Well, let's keep looking. They full-year outlook. Here on the left is last quarter's full-year outlook, and here on the right is this quarter's outlook. I had some little smiley faces and frowning faces. Billings, you can see the top end of the range slightly decreased, as well as the bottom end of the range decreased. They narrowed the range, which you would expect as the quarters go on, you get closer to the end of the year. Remember this is a full-year billings number or how they're going to end the year, then they reduced it. Revenue, they upped the lower end. [laughs]
This is strange. You can see this $4,385 [million] is the same number on the high-end, but they upped the lower-end, which means they have a little more confidence in the quarter. You can see it's instead of 14% to 16% it's up 15% to 16%. These are about the same. On the earnings, they upped the entire range, both on the EPS, the GAAP, and the non-GAAP numbers. Now, here, between the billings and the free cash flow are the things that they reduced. You remember Trevor talking about remaining performance obligations and all these. Some of these billings and these free cash flows are forward-looking and taking into account multiyear contracts and things like that. These are indicators of future business and this range was reduced, and it was reduced below the bottom end, you can see now the high-end is $1,575 [million], where that was the low-end before. I think that's what disappointed the market, disappointed investors and why they're selling a stock off slightly.
Let's just look at Q3, then I'll backup and I'll share a little bit of stuff from the conference call. Q3, analysts expected this wide range. They came in a little lower. It's in the middle of the range. I don't think that frightened anybody and then analysts had this really wide expectation again for these earnings-per-share non-GAAP and they hit about the average. It's not really a revenue statement for next quarter or an earnings statement. It's really the billings and future cash flows concern. Let me go to the earnings call.
One of the things that the company talked about is they've been seeing good trends in the market that have moved to reopening. They've talked about China, Korea, Japan, product renewal rates are all trending in the right direction. The pipelines are very strong, but they said there's still a fair amount of uncertainty, particularly in the US and UK. Basically, what they said, and this is the CFO, "As we weigh all the combination of those factors together, it gives us the confidence to raise the overall revenue target by $15 million at the midpoint, but we had said the high end of that guidance range was previously expecting more of a swift recovery." While they said they've seen that in some markets, they haven't seen it in all markets. There's a little bit of recovery stuff going on there. Here's the one other thing. They've changed the way they go and deliver. They get paid for multiyear contracts. This is coming out in the next quarter which affects their billings and free cash flow targets. For enterprise business agreements, which is these large multi-million-dollar contracts, in the past, they've collected all of this money up front. That seems, for a three-year thing, that seems like that's an undue burden potentially on the customers.
What they've done now, in order to get all that money up front, Autodesk would take future years and discount them and give them a cash up front discount. Well, they've changed that, they've eliminated the discounts and basically what they've said is, we want you to pay annually, but we're going to have this multiyear contracts. It throws this free cash flow thing and these billing things into a little bit of a tizzy, but to me, this is a pro-customer move where customers now can more appropriately budget. I think it's an opportunity as well. DocuSign does this super well, and I imagine Autodesk is also going to start to do this if they don't already, is have more conversations with these multiyear customers.
When the bill comes due, they can look and see how they've been using the cloud software, if either usage rate is running higher or whatever, and then they can go back and go, "You know what, we need to rejigger the contract and have another discussion about what you're using. Maybe we can bundle it with some other software that we've come out within the past year that we think you'll benefit from." There's these billings and free cash flow depression that when you just look at the numbers, can say, "The future for Autodesk doesn't look as bright as it has in the past." Well, it's really just an accounting change.
I saw Tim talking about Autodesk earlier today and he went through the report and said, "There's absolutely nothing here that I like." I know Jon and I got the pleasure talking to Jim Gillies last night, Jim loves Autodesk. I think this was a solid report and I think the sell off could be an opportunity to get the stock and a couple points better.
Jon Quast: Brian, you handle this really well. I don't know this company very well, but let me give a layman's perspective here. I was on the show with Brian Feroldi this morning, he was talking Autodesk. He pointed out that even with the free cash flow disappointment, if you want to call it that, we're still north of 30% margins, and the top line is growing by double digits. That's a company that you rarely want to bet against, when they're growing the top line quickly and the free cash flow margin is over 30%. For a company that their software is the gold standard, they still have millions of people who haven't converted from the legacy software, and then they have many more who are using it, but not paying, and they're trying to get those people to convert. Still, a major tailwind potentially if they can get those people to convert to the subscription.
Brian Withers: For Backstage members, this was announced, we're about two weeks and a day now, I can't remember. Autodesk was one of the five initial Backstage recs, and you can see why as we've talked it up today.
