hapabapa Investment action I recommended a buy rating for Autodesk (NASDAQ:ADSK) when I wrote about it in mid-March this year, as I believed the growth outlook remains positive, especially with the business closing a record number of deals and the transition phase being mostly over. Based on my current outlook and analysis, I recommend a buy rating. My key update to my thesis is that I see potential for ADSK to see growth inflection up to the mid-teens level as the transition to a direct sales model is tracking very well and ADSK is seeing positive traction in countries that have already transited. The new GenAI product also enables ADSK to tap into a fast-growing vertical in the industry. Lastly, the FCF outlook is now a lot clearer without the previous headwinds. Review ADSK reported 1Q25 earnings on the 10th of June. Topline grew 12% to $1.417 billion on a reported basis and 13% on a constant currency basis. This growth performance beat the mid-point of guidance by around 180 bps. The beat was largely organic, with subscription revenue growing 11%, driven by early renewals and robust demand from Enterprise Business Agreement [EBA] customers. Net revenue retention rate came in at 105% for 1Q25; deferred revenue declined 12% y/y to $3.96 billion; RPO grew 9% y/y to $5.89 billion, while current RPO grew 12% y/y to $3.92 billion. In terms of billings, total billings were down 5% y/y to $1.11 billion. On a cash flow basis, free cash flow came in at $487 million. There are several things to like about this earnings call that continue to paint a positive outlook for ADSK. Firstly, the new transaction model implementation is on track, with Australia and New Zealand [ANZ] performing in line with expectations. The transaction model also went live in North America on June 10, and the expectation is for it to be growth-accretive (guided to add 1% revenue growth and 3-4% billing growth). Based on ANZ’s performance, I don’t anticipate any problems with North America’s execution. Once the launch in North America is going well, I expect ADSK to start implementation in EMEA and Japan (management noted this plan in the earnings call). ADSK I have discussed the long-term impact in my previous post, so I will not go into details again: Over the long term, this should yield favorable revenue growth and margin expansion opportunities as it provides ADSK with more control and insights into the actual usage of its products, giving it critical data as to where it should allocate its R&D budget and also what products it should cross-sell to the user. However, I think investors should know what the near-term impacts will be. My interpretation of the mechanics is that in this new transaction model, ADSK will handle the actual transaction with the customer, while solution providers offer quotes to customers. Since ADSK will be dealing directly with end users in its new transaction model, sales incentives given to solution providers will be classified as operating expenses. Specifically, sales incentives paid to solution providers will be capitalized (these are recoverable costs charged to customers). The income statement will reflect the deferred costs after they are amortized over the benefit period. For sales incentives that do not meet the criteria to be capitalized, the expenses will be recorded directly to Sales and Marketing on the income statement as they are incurred in accordance with the incentive program terms. As such, the near-term impact is that ADSK will experience revenue growth tailwind due to the shift in accounting for sales incentives to indirect channels, which shifts the focus from contra revenue to operating expenses. However, free cash flow and the bottom line will be unaffected. Secondly, more on the growth outlook: on May 8, ADSK announced Project Bernini, and I see this as a revolutionary product for ADSK. To put it simply, Bernini allows users to easily create usable 3D shapes from 2D text and images. With its 3D training data, Bernini is able to reason about an object’s internal structure, setting it apart from other GenAI foundational models. Bernini generates shape and texture independently. Importantly, it can be trained with various kinds of input data, which expands its usefulness across many workflows (more use cases) and allows it to produce numerous design options with just one set of inputs (improved productivity). Last but not least, it can be fine-tuned on top of a customer’s current 3D repositories in a short amount of time and at a low cost so that it fits the specific creative demands of a company, which lowers the adoption friction. In my previous post, I mentioned that GenAI can help disrupt current workflow processes and automate existing capabilities and workflows – a major productivity “enhancer” for the construction and design industries, which are old and mature industries with many moving parts. For Bernini, it enables ADSK to tap into a large and growing market that adds to the list of growth tailwinds that the business is already experiencing. Based on a research report by Spherical Insights, the industry is expected to grow at a staggering CAGR of ~22% over the coming years. While it is early to determine a monetization strategy, management highlighted consumption-based pricing as a monetization strategy for Bernini. Given the strong value proposition, I am expecting strong adoption as more design companies take advantage of AI, and the best way for ADSK to maximize its growth potential is through a consumption model. Lastly, ADSK FCF outlook is now a lot clearer, as the most significant FCF headwinds from the transition from up front to annual billings for multi-year contracts are now behind. Management reiterated FY25 FCF guidance ($1.43 to $1.5 billion), which implies ~35% growth at the mid-point, excluding the $200 million from FY24 FCF for multiyear upfront billings. For FY26, FCF is expected to grow to $2.05 billion at the midpoint. Valuation Author’s work I believe ADSK can grow as expected for FY25 (my assumption for FY25 is the same), especially with the near-term growth tailwind from the transition. However, I have increased my growth expectations for the next 2 years to reflect the monetization potential of ADSK’s latest AI product, with a target that ADSK could accelerate growth back to the mid-teens level. That said, I held my margin assumption flat, as I would expect ADSK to reinvest excess profits into R&D for more AI products. A key stock upside driver will be multiples rerating upwards. In the peer comparison table below, the market growth expectation for ADSK is low-teens, in line with peers, but the stock trades at a steep discount. With a positive growth outlook (the transition phase is almost over and GenAI products are promising) and FCF clear to inflect upwards, I don’t think ADSK should trade at the bottom of the list. ADSK should, at least, trade closer to where PTC is trading today (similar growth profile). Using 31x forward PE for my model, I believe there is ~43% upside. Author’s work Risk Regarding the accounting practice investigation related to free cash flow and non-GAAP operating margin practices, it is now complete, and any potential comments on the investigation were already included in the recent public filing. I will not go into the details, but I think an area to monitor is what Starboard Value mentioned in their letter: that management is saying one thing but doing another (ADSK mentioned they are pursuing annual billings but instead pursued multiyear billing to meet FY23 FCF goals). My personal view is that this is a matter of the past as the investigation has been completed, and importantly, there was no major financial impact. However, if there are incremental signs of management pursuing another strategy vs. the one communicated to shareholders, I think it will be a major area of concern. Final thoughts My recommendation is still a buy for ADSK due to positive growth outlook. ADSK transition to a direct sales model is on track and shows positive results. The launch of the new GenAI product, Bernini, creates a significant growth opportunity in a large and expanding market. Additionally, with the headwinds from the billing transition mostly behind them, the free cash flow outlook is clear and positive. While the stock trades at a discount to peers despite a positive growth trajectory, I believe a rerating of the valuation multiple is likely. The key risk to monitor is any potential future discrepancies between management’s communication and actions.
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