Autodesk weathers downturn well

Software maker Autodesk recently lowered its sales targets for future quarters, but Wall Street is more than willing to cut the company some slack, largely because it is expected to profit from a strong product upgrade cycle.

Autodesk is one of those companies that fly below the radar, but it has been among the few to consistently meet or beat earnings estimates amid economic turmoil. The company is best known for dominating the architecture and construction-design software market with its flagship AutoCAD product, but it has branched out into areas such as multimedia tools through its 1999 acquisition of Discreet Logic.

The company's main goal is to use its flagship products to sell more software into vertical markets such as utilities, communications, education, and government and public agencies.

Autodesk also has delivered despite a downturn in the manufacturing sector--the company's meal ticket. That's because customers in the commercial building and government sectors are still spending.

"Companies cannot give up on new design cycles," Autodesk Chief Executive Carol Bartz said on a conference call with analysts. "They still keep their doors open."

But that doesn't mean the company is completely in the clear. In its second-quarter earnings report last week, Autodesk served up a mixed bag of results. It reported pro forma earnings, excluding goodwill and charges, of 53 cents a share, well ahead of estimates of 46 cents. But sales of $231 million were lower than many analysts had projected.

And then there was the outlook. On the conference call with analysts, Bartz cut the company's revenue forecast for the year to a range of $970 million to $990 million from its previous forecast of $1 billion and $1.02 billion. Bartz cited a weak European economy as primary cause for concern. "We expect selling pressure to continue," she said.

So why be optimistic about Autodesk?

For starters, Autodesk has its financial house in order. The company indicated that it will hit its earnings targets for the year despite a sales shortfall. According to First Call, Autodesk is expected to report earnings of $2.14 a share for its current fiscal year.

Autodesk Stock price from August 2000 to present.
Source: Prophet Finance

Steve Cakebread, chief financial officer for Autodesk, said the company has been able to maintain its earnings guidance because it has become more efficient about cutting costs internally. The company also has moved to a direct-sales hybrid model.

Cakebread said Autodesk expects 40 percent of its sales to eventually be sold directly to customers, with another 40 percent sold through resellers. The remainder will be derived through e-commerce and services.

"Investors are starting to pay attention to the company because even though it cut its forecast, it was a modest cut," said Merrill Lynch analyst Jay Vleeschhouwer. "Within tech, it's still well regarded."

The San Rafael, Calif.-based company should also benefit from a slew of new products set to launch in the second half of the year, Cakebread said.

Indeed, the company benefited by shipping 12 new products in its second quarter. The products were designed to boost collaboration, design automation and integration. In the Americas, Autodesk brought in $55 million in upgrade revenue for its design software.

Analysts are particularly upbeat about Autodesk's upgrade plans because only 8 percent of its customers upgraded in the second quarter. "Autodesk anticipates a large portion of the remaining customer base to follow in upcoming quarters," said Morgan Stanley analyst Vinay Shah, who cut his estimates but maintained an "outperform" rating on the stock.

Autodesk executives are hoping that the company's upgrade cycle will carry over into international markets, which fuel more than half of the company's sales. Although new versions of the AutoCAD software have been launched for the Americas, localized versions for the international markets are still on deck.

On the weak side

Gartner analyst Marc Halpern says the success of Autodesk continues to challenge its prospects for faster growth in the future. see commentary

Vleeschhouwer said Autodesk's sales in Europe and Asia, both weak markets for the company in the second quarter, are at the mercy of their respective economies but could improve as local language upgrades are released.

Simply put, it's a jump ball between a weak economy and the need for manufacturers to upgrade their Autodesk software. "Europe weakness for the next one to two quarters is likely to limit near-term growth," said Credit Suisse First Boston analyst Erach Desai.

Europe isn't the only worry for Autodesk. The company's Discreet Logic division was a big disappointment in the quarter, analysts said. The division, which sells systems and software for the entertainment production markets for special effects, had second-quarter revenue of $40 million--well below Merrill Lynch's estimate of $56.6 million.

The Discreet sales were hurt by delays in booking for advanced systems and concerns about the viability of Silicon Graphics, which provides the platforms for Discreet's software, said Vleeschhouwer, who expects the division to rebound on the strength of its desktop applications.

Autodesk also recently said it would buy the remainder of Buzzsaw.com, a unit that provides services and applications for building design and construction markets. Autodesk spun off Buzzsaw in October 1999 with the expectations of an eventual initial public offering.

Buzzsaw landed some major customers such as silicon technology company Dow Corning and entertainment bigwig Walt Disney, but had been "substantially unprofitable," analysts said. Despite the losses, Autodesk executives said Buzzsaw won't affect the company's earnings outlook.

Those concerns aside, analysts said the positives outweigh the negatives for Autodesk, even though they're wary of a global economic slowdown.

In fact, many analysts are hoping the company's quarterly results will become more predictable as it gradually releases a subscription program in its current quarter. Autodesk will allow customers to subscribe for software upgrades over the Internet and to rent applications.

"The company has shown it is well-managed and can control expenses," Vleeschhouwer said. "We expect that the company can maintain the momentum in the various components of its core business."