Autodesk (ADSK)

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See all Bulls Reasons Bulls: Reasons To Buy More than half of the current repurchase plan remains outstanding 100% agree More than half of the current repurchase plan remains outstanding More than half of the current repurchase plan remains outstanding The company purchased 7.1 million shares (for $325 million) during the quarter; additional 9.2 million shares remain under current authorization. View or Edit Reason 2 votes 100% agree Solid free cash flow 100% agree Solid free cash flow Autodesk generated $640 million in free cash flow over the last 12 months, which amounts to a free cash flow yield approaching 8% of enterprise value. With a 500-basis point advantage over Treasuries and a long-term expected growth rate of 16% (which is more than justified by... read more View or Edit Reason 1 votes 100% agree Bears: Reasons To Sell Feeling Bearish? Be the first to explain why this would make a poor investment Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Autodesk sells Computer Aided Design (CAD) software, which is used by engineers and architects to mock up designs for products and buildings. While Autodesk's competitors sell advanced software with a $10,000 price tag to niche audiences, Autodesks's "AutoCAD" sells for a relatively modest $4,000, making it the de facto standard with 85% market share. The software's price means AutoCAD is the only option for smaller firms - a market the company's competitors have only recently begun to target.

Autodesk's large customer base (at 85% market share more than 8 million AutoCAD users) is itself a competitive advantage. CAD software is technical and tricky to learn, and therefore switching costs are high. As the defacto standard, most new professionals who need to use CAD software learn AutoCAD.

The company has grown revenues by convincing customers to switch to a subcription model for AutoCAD software. In this model, customers get automatic updates and new features in exchange for a recurring fee. The model is much more profitable for Autodesk - only 22% of Autodesk's customers buy software in this way, but they account for nearly half of the revenues.

[edit] Company Overview

Since 2003, Autodesk has shown constant growth in their revenues and kept the same hold on the market. AutoCad happens to be the standard in the market, primarily because it takes time to unlearn the design software and learn a new standard. Moreover, Autodesk has traditionally focused on the mid market segment,the largest segment in the market, whereas their nearest competitors have been focusing on the higher end segment. The company has focused on converting their customers to a subscription plan as well, so that they can make more revenue per client. This focus on subscription has boosted revenues by 49% from 2002 to 2007.

As a result, Autodesk has benefited in a number of financial areas; sustained 20%+ annual sales growth with a 5% increase in gross margins. ^[1]In revenue, Autodesk has shown significant increase in its revenues in the past years, growing by 19.7% last year.^[2]

Autodesk Annual Report^[3]

[edit] Trends and Forces

[edit] Industry wide Transition from 2D to 3D

Autodesk is trying to increase the adoption of “next generation” 3D software products as compared to the 2D market. It recognizes that the 3-D segment would be a key driver for growth for the company in the future.^[5] The 3-D segment made up 21% of the total revenue for the third quarter of fiscal year 2007. Over the past three years ending October 2006, 3-D revenue grew at a growth of 73.5% versus 28.6% for core AutoCAD growth. This would definitely provide Autodesk with the opportunity to up-sell its massive 2-D installed base into higher average sales price (ASP) 3-D software and to boost growth. However, the segment growth slowed down to 37% in 2007 as compared to posting over 60% the two previous years, pointing to competition in the market and challenges for long term growth.^[6]

[edit] Dominance of AutoCad in the market

Competitors in 2-D CAD are quite small, with none exerting significant independent threats to Autodesk’s position. AutoCad and AutoCad LT continuously drive up the sales for the company. They are touted to be the “crown jewels” of Autodesk, accounting for approximately 44% of revenue and 36% of licensing revenue last fiscal year. Until now, the products have doing well in the market. However, an increasing focus on this segment by their competitors, namely UGS who is commoditizing its 2-D software and allowing users to download it online, highlights a trend that might catch on in the future, and prove harmful to Autodesk.

[edit] Piracy and Counterfeiting problem

One of the major problems faced by many IP holding companies is the issue of their products being copied and being sold for a cheaper price in the markets, more so in the developing world(see concept: China's Piracy & Counterfeiting Problems). Since the country is unable to safeguard the Intellectual Property rights of many companies, Autodesk happens to be one of those to be hit by such infractions as imitators come up with cheaper versions of their products.

[edit] Slowing US economy

Autodesk has become increasingly subject to the risks arising from adverse changes in domestic and global economic and political conditions. As economic growth in the United States and other countries slows down, many customers may delay or reduce technology purchases. Since Autodesk controls a lions share of the market, they would be more prone to the market changes in US.

[edit] Possible acquisitions for the future

Autodesk has been known to acquire various companies in order to expand its businesses. It is estimated that this continue so in the future. They acquired Alias Corporation in Jan 2006 and is estimated that made a difference of approximately 25% in revenue growth in the first nine months of 2007. ^[7] In order to improve their functionality in the 3-D segment, they have acquired NavisWorks, Opticore and Skymatter. Such transactions would embolden Autodesk to go forward with more acquisitions.

[edit] Competition

Autodesk controls over 85% of the market, primarily because of the fact their competitors have been focusing on a more premium market segment. Recently, Dassault and UGS have made forays into the mainstream or mid-market with product level CAD software selling in the $4,000-$5,000 per seat range, which is Autodesk’s core market.

A comparison of the sales of CAD units for the main competitors portrays Autodesk's position in the market. Competitors in 2-D CAD are quite small, with none exerting significant independent threats to Autodesk’s position.

However, one of the main development in this market has been, UGS (Siemens) has indicated that there have been over 33,000 downloads of the Solid Edge 2- D drafting tool in the four months since its introduction. While the number of downloads does not pose any major threat, UGS’s decision reflects a belief by some that basic 2-D tools will become commoditized and could be given away for free in an effort to help drive 3-D adoption.

[edit] Notes

1. ↑ Autodesk 10-K Report Item 6, Pg 30
2. ↑ Autodesk 2007 10K, Item 6 Pg 30
3. ↑ Autodesk 2007 10K, Item 6 Pg 30
4. ↑ Autodesk 10-K Item 7A. Pg 51
5. ↑ Autodesk 10-K Item 7, Pg 39
6. ↑ Autodesk 10-K Item 7, Pg 53
7. ↑ Autodesk 10-K Item 7, Pg 51
8. ↑ Autodesk Website
9. ↑ Parametric Technologies Website
10. ↑ Hoovers Financial Report
11. ↑ Hoovers Financial Report
12. ↑ Hoovers Financial Report