Macro Headwinds Threaten Autodesk's Growth Story

On November 24^th, Autodesk Inc ADSK showed its business is still resilient but despite exceeding expectations for the reported quarter, its stock plummeted 15% due to mixed fourth-quarter guidance.

Healthy Headline Numbers

The design software company's core businesses are still growing with revenue rising 18% YoY to $1.13 billion, beating estimates by $10 million. Adjusted earnings also topped estimates by seven cents as they grew 28% to $1.33 per share. Pricing power and efficient cost management resulted in improved adjusted operating margin YoY from 29% to 31% in the first nine months of fiscal 2022.

Like Adobe ADBE, Autodesk's businesses weathered the pandemic beautifully because the company previously underwent a major transformation of its desktop software business into cloud-based subscription services. Consequently, it managed to lock in customers with sticky subscriptions.

Mixed Fourth Quarter Guidance

CFO Debbie Clifford expects the robust demand is expected to stay in the picture for the undergoing quarter. Yet, the midpoints of revenue and earnings guidance for the fourth quarter slightly missed Wall Street's expectations, even though its full-year guidance still matched their estimates. For the full year, the adjusted operating margin is expected to be around 31% compared to 29% in fiscal 2021.

Clifford attributed its slowdown in the fourth quarter to the near-term challenges posed by supply chain disruption, the resulting inflationary pressures, a global labor shortage, and the COVID dynamic that is still shaping the business landscape. It seems that investors expected Autodesk can do a better job at managing those macro headwinds better.

Outlook

Just as Adobe's suite of creative software services are considered indispensable to many graphic designers and media professionals, Autodesk's software portfolio made from AEC (Architecture, Engineering, and Construction), AutoCAD and AutoCAD LT, MFG (Manufacturing), and M&E (Media and Entertainment) is considered as the industry-standard tool for architects, engineers, and designers. That "best in breed" reputation gives Autodesk plenty of pricing power but inflationary headwinds will make it harder for all tech companies to be in ‘full swing'.

The Verdict

Autodesk did narrow its revenue and profit guidance as well as lowered its billings outlook for the year but its 15% post-earnings drop seems to be an overreaction. The design software company is not ailing or failing in any fundamental way and its margins are holding up and it did manage to deliver a better-than-expected bottom line. But margins are shrinking under the pressure of global supply chain disruptions and labor shortages in the U.S.

All in all, the company issued a good release and provided solid guidance which only means that investors are afraid its growth story won't hold up. Only time will tell if their concerns are justified.

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