Update: ADSK: I Piggyback BofA’s Recent Downgrade

by Dan November 16, 2011 9:29 am • Commentary

Update Nov 16th, 2011:  ADSK is up 2.5% in the pre-market after a slight beat and raise qtr.  Will be interesting to see if this rally can get some legs, as of now it is dramatically under-performing the implied move of about 7%.   I think there is a decent potential this stock could reverse these gains and offer an opportunity to salvage some of the premium from this put spread, stay tuned.  Here are some quick thoughts from Merrill Lynch BofA analyst Kash Rangan on ADSK in a note to clients this morning:

Solid results benefit from Suites adoption
Following multiple Suites release in end of F1Q, ADSK is benefiting from
customer adoption (27% of F3Q revs from Suites, albeit slightly lower than 29% in
2Q which had launch related spike). Total F3Q revs/EPS of $548.6m/$0.44 beat
our est of $542/$0.40 and cons ests of $544m/$0.41. Concerns from our reseller
survey did not impact the Q but some developments like longer sales cycle in
manufacturing and AEC from the survey are worth monitoring. The top-line upside
was shared by better license and subs revenues while op margins at 24.6% (est
of 23.1%) drove EPS (variance analysis on pg 3). Maint installed base tracked up
to 3.12m (+131k q/q driven by commercial seats), with billings (forward indicator)
up 18% y/y. Revs from Americas (+12% y/y) and APAC (+19% y/y CC) registered
solid growth however EU at roughly 37% of revs lagged growing 8% y/y CC.

Raise FY13 estimates, but maintain EU haircut
Suites are expected to account for 100% of revenues over the long term. In-line
with our thesis laid out earlier this year, we believe this should grow subs revs
(80% attach to Suites) and drive OM towards 30% goal. While management sees
revs growing at least 10% y/y in FY13, EU macro risks and recessionary outlook
from BofAML European economics team lead us to model 8.9% y/y revs growth.
We expect EU revs growth to decelerate in FY13 to roughly 6% y/y offset only
partially by APAC and Americas. Our revs/EPS ests go up to $2.40b/$2.03 from

Solid franchise for the LT, EU risk lingers; Neutral, $38 PO
ADSK is a CAD software leader gaining share through better tech + broader
distribution + lower price point. In addition, new Cloud based PLM offering to be
launched at Autodesk University in 2 weeks can increase ADSK’s recurring revs
and is not factored into F13 guide. But with potential EU risks percolating on the
horizon, upside to the stock multiple from current levels appears limited. Our $38
PO is based on 16x C12E EPS of $1.99 (ex-interest income) + $6/share of cash.{##34##}



Original Post Nov 15th, 2011: ADSK: Report Q3 After the Bell, I Piggyback BofA’s Recent Downgrade

ADSK report their Q3 after the bell and the options market is implying about a 7.25% move vs the 4 qtr average move of about 7.25%.  (in this instance with the stock at 34.00 just take the Nov 34 straddle which is offered at 2.50 and divide by 34.00 gets you about 7.2% move that you would need to make money on that structure by Friday’s close.)

-Wall Street analysts fairly mixed on the name with 9 Buys, 12 Holds and No Sells.

-Short interest has ticked up of late to almost 2.75% of the float.

-Company has a clean balance sheet with almost 20% of their market cap in cash, and no debt.

Stock has been all over the place this year and is currently down 12.5% ytd, down about 28% from the 52 week highs made in the spring and up 43% from the 52 week lows made in August.

Last week Bank of America software analyst Kash Rangan downgraded ADSK from a buy to a neutral but left his 12 month price target at $38.00.  The primary driver of his downgrade from his note to clients issued Nov 9th 2011:

Channel sales account for roughly 80-85% of ADSK revenues and our recently conducted reseller survey (sample size=13, total CAD software revenue= roughly $175mn) indicates a slow-down in the momentum seen in last qtr.

The number of resellers with customers buying more design software from ADSK in Oct Q dropped to 46% from 80% q/q, with 38% indicating sales were down >10% (vs. 0% in prior survey).

Europe exposure can drag on growth – ADSK has roughly 40% revs coming from EU.  ADSK performance in EU has been stable thus far, however we see potential risk from tighter fiscal policy and uncertainty over the Eurozone sovereign crisis to macro sensitive manufacturing (30-35% revs) and AEC (45-50% revs) verticals that ADSK operates in.

Expect in-line Oct Q and guidance

While our survey indicates that fewer customers purchased design software from ADSK, 67% resellers still appeared to have met their quotas (slightly lower than 70% in prior qtr)…….we expect revs/EPS to be in-line with our ests of $542m/$0.40 vs. cons at $544m/$0.41. In addition, we expect – 1) normal seasonal patterns to hold for ADSK’s seasonally strong Jan Q; and 2) color for FY13 growth to be roughly inline with cons (revs at +10% y/y). However, the upside to guidance that ADSK has delivered in the past (guided FY12 initially to 10% y/y and we est can deliver +13%y/y) may be muted given macro concerns.

MY VIEW: I can’t tell you that I have any strong insight into ADSK’s fundamentals, because I don’t, but reading through a few quarterly previews this morning I can’t tell you that this is a stock that should be bought prior to this evenings earnings report.  When I here things like 405 of revs come from Europe and 80% of sales go through channel and the stock is up 44% from the summers lows I just get a little geeked up.  Software has been a bit of a mixed bags….some act very well, while others can’t get out of their own way.

MY TRADE: ADSK ($34.49) Bought Nov 33/31 Put Spread for .42

-Bought 1 Nov 33 Put for .68

-Sold 1 Nov 31 Put at .26

Break-Even on Nov Expiration:

Profits btwn 32.58 and 31 make up to 1.58,  max gain 1.58 stock 31 or below.

Losses btwn 32.58 and 33 lose up to .42 and max loss is .42 stock 33 or above.

TRADE RATIONALE: I Like the against the grain thinking of the BofA analyst and think that any lack of visibility going forward as it relates to their sales in Europe could cause the stock to re-trace a portion of the recent rally.  I like the almost 4 to 1 payout on a move of 10% to the downside.