Autodesk Resilient in the Face of Transition and Persistent Headwinds

Wide-moat Autodesk ADSK reported fiscal 2023 fourth-quarter financial results that were largely consistent with our expectations. While results were short of full-year targets due to persistent macroeconomic headwinds, we are impressed by the firm’s resilience thus far and expect solid market demand to prevail in the medium term. Management’s guidance was on the lighter side, as it expects foreign-exchange headwinds to continue to pressure results and lower overall billings as customers transition to annual from multiyear contracts. We are maintaining our $230 fair value estimate and view headwinds as transitory for this high-quality stock. We view the shares, down 3% afterhours, as slightly undervalued.

Fourth-quarter revenue grew 9% year over year to $1.318 billion, led by strength in the architecture, engineering, and construction segment as clients strive to connect digital workflows in the cloud. Billings impressively increased 28% to $2.12 billion, supported in part by continued solid demand as well as the pending removal of multiyear contract discounts. Autodesk plans to double down on its transition to annual terms from multiyear contracts in fiscal 2024, leading to decreased billings and ultimate free cash flow margin compression of approximately 41%. We view this transition as positive for Autodesk and anticipate the firm will have greater upsell opportunity, increasing stickiness with customers. With the firm’s stellar net revenue retention rate in the range of 100%-110%, we see little impediment to long-term success.

Despite headwinds, Autodesk reported sound profitability, with non-GAAP operating margin of 36%, up 100 basis points year over year. Non-GAAP EPS came in at $1.86, slightly above management’s guidance of $1.77-$1.83.