Chit Chat Stocks - Fundamental Analysis: AutoDesk (ADSK)

Episode Date: October 11, 2020

Hosts, Ryan Henderson and Brett Schafer, take a look at AutoDesk. According to AutoDesk their software is meant for architecture, engineering, construction, manufacturing, media, education, and entertainment industries. Brett, having a degree in engineering, gives us a sneak peak into the education realm. Let's see if Brett and Ryan can agree on what they think AutoDesk is capable of. Catch your hosts after the break (9:42) to learn more about AutoDesk's potential. Watch this episode on YouTube: https://youtu.be/Ye5r0o2WfHw Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Visit our website to see more from your hosts Ryan and Brett. https://www.chitchatmoney.com --- Support this podcast: https://anchor.fm/chit-chat-money/support Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one, so you don't have to worry about malware. Or when your kid downloads a song from a shady link. And now all your computer can play is... Red color, red color, where are you? Ah, all blocked, thanks to advanced security, included with Cox Panoramic Wi-Fi. Advanced security must be enabled in the Panoramic Wi-Fi app.

Restrictions apply. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investment. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation.

Now please enjoy this episode. Welcome in everyone. This is the Fundamental Analysis Show. Our Sunday episode where we do 20 minutes on a single stock. Today we're talking Autodesk, a leader in the AEC market. And if you don't know what that is, Ryan's going to explain what they do and the history of the stock and the company. I think we need to start with more small talk on these shows. Even this one, even though we've been small talking all day you never ask how i am how you're well how are you ryan i'm doing all right but let's get to the show autodesk okay now you get right to the show autodesk is a global leader in 3d design engineering and entertainment software and services so their

software allows customers to design visualize and simulate the real world performance of their designs so if i'll just give the real world application so an obvious example i'm running an architecture firm and our job is to build a school i would subscribe to autodesk get access to their software so that I could use AutoCAD, I believe in this example, to design and visualize what I want that school to look like. That is essentially what Autodesk is providing and they're doing it on a subscription basis. I know they still have a portion of their revenue that isn't subscription, but it's a very small portion. Yeah, sorry. My degree was in engineering, so I kind of know how the market works where it starts with architects and then it flows to the

engineers and then eventually it'll flow to the construction managers and the actual construction sites so autodesk works with all three of these so everyone can work in tandem on sending documents back and forth because that's one of the hardest things is the workflow within these projects because it might work from architecture firm to engineering firm to another middleman to another middleman to another middleman and then finally to the construction project okay and then i'll get into the history in the 1970s a guy named mike riddle built and developed the first cad program or computer aided design and that eventually got spun into autocad and was sold to auto or was sold as autodesk's first product but riddle was really just a coder he wasn't interested in being a

salesman so a guy named john walker had heard about this cad this cad program that riddle uh had built and so he approached him he offered him eight thousand dollars to acquire it only eight thousand wow riddle riddle was like no i want fifteen thousand and they couldn't agree on one And so he said, I'll tell you what, I'll sell it to you for $1, but I get 10% of the profits from all the sales. John Walker agreed. He went back up. I think he was in the Valley. So I think he went back up to Silicon Valley, built together a team of coders to sort of enhance the product, a team of salesmen.

They started selling, and Riddle ended up making a whole lot more money than $8,000. And they completed their IPO in 1985. Since then, Autodesk has constantly upgraded and built out their entire product suite. As far as where they get revenue from, most of it, 43.5% of it comes from architecture, engineering, and construction. Around 30% comes from AutoCAD, and then 20% is manufacturing, and then a little bit, 5.8% is media and entertainment. Yep, that about sums it up. I'll get into the valuation then and then the balance sheet numbers. so their enterprise value as of our recording is 51.8 billion tickers adsk and the stock price

233.88 ev to sales is 14.6 which is high at least it's not above 20 in this software environment it seems a little low but in an absolute basis it's still high they are profitable which you know that's good i guess ev to free cash flow 54.6 on a trailing 12 month basis again quite high so you're pricing in a lot of growth there. No dividend. They spend money on buybacks only to offset stock-based compensation, so you're not going to get any share reduction.

It's kind of, they're hoping for, or at least what they say in their conference calls is that they're going to have just a steady share count and it's not going to get inflated or diluted over time. Forward EV to EBITDA, 37.3 versus a trailing EV to EBITDA, 70.1. So, you know, the estimates are that they're going to increase their margins

or grow so much that that EV to EBITDA level is going to come down in the next year um they have negative 400 million in working capital but this is a kind of an interesting situation with autodesk since they sign multi-year contracts and they have all these subscription products under the new accounting terms they have to have over two billion dollars in deferred revenue and that is as as of the last quarter and that has to be put down as a liability even if the cash has already come in until they perform the life of that contract and they perform the service for their customers so that's going to be up and it seems like the liabilities are higher but in reality it's not that big of a liability of

them having to repay that money although if you are paying it limits how much you can do in price raises or how effective a price raise would be because if you've had all those contracts paid for up front a price raise might not be as effective because it would have to be only new contracts so you do kind of want to keep an eye on that number it hurts you yeah it could hurt you if you're trying to raise prices because it's not going to take into effect for a long time if the contract cycle is so long. Right.

Do you have anything else? Yeah, I guess on the balance sheet, they have $1.6 billion in long-term bonds right now. They like to use these, and they've said they want to take advantage of low interest rates, which, I mean, I don't really have an opinion on that. You can kind of take that with what you will. $2.5 billion in goodwill currently.

That is a high number, and you might expect that for a company like this, but just you always got to investigate that stuff because there's a history, right, Ryan? people hiding um stuff in goodwill when they want to try to trick uh customers we're not saying that yeah autodesk is trying to trick investors but that's what you know and not all goodwill is just a zero but yeah yeah there's there are a lot of fund manager a lot of fund managers that are running a short book pay attention to the goodwill number because some of the legacy companies can

sort of prop up their revenue by acquiring new companies above their net asset value and so So you want to pay attention – you want to sort of separate out organic revenue from what else came from acquired businesses. And typically you don't want to see people way overpaying for the businesses they have. A little different. There's a little nuance to it when you have a software business where a lot of the value of those assets is intangible. So it's a little hard to tell. Yeah, with a low – tangible assets aren't very high for this business. So it's a lot of intangibles and that's stuff that you can't really physically see.

So it's just you got to assume that this stuff is worth it. And it's like brand name, like how valuable is that? And there's a lot of subjectivity to pricing that stuff. All right, I'll get into the earnings though. In the second quarter, Autodesk had $913 million in revenue. That was up 15% year over year. Their gap operating income was $146 million, up 97% year over year. And that's an operating margin of around 16%.

I believe the year before it was 9%, so great increase there. And then $129 million in earnings before interest and taxes for the second quarter. That was up 94% as well. So that profitability, the margins are growing impressively. They're almost doubling year over year. And then they have 91% gross margins. That's high. When you see 90-plus percent gross margins, it's an impressive business.

Yes. If you believe that the margin conversion can be really high here, if you ever believe the operating margins are going to be able to get closer and closer to those gross margins, that's sort of what you're looking for here. Because if you can find that that is true and that will happen, then this is going to be a good business for a long time. Stock-based compensation expense increased 19%. I thought that was a little concerning. Goodwill accounted for 43% of total assets. 80% of current liabilities, like you mentioned here, comes from deferred revenue, which is just customers prepaying for their subscriptions. And that's about it for my earnings.

All right. Well, we're going to hit the second half of the show then, hit the ad break. Probably just going to be one and then back for further reading and our highlights and lowlights. All right. Welcome back. We do digging trenches here for the competitive advantage compared to the deep dive. It's a little different. Keep it shorter.

What's your rating for them, zero through three? It's a three, probably. I think a lot. And you would probably know better because you have been a customer for this. Yeah, a student customer mainly, but yes. Right. And so it seems like this is pretty ingrained in those industries like architecture, engineering, and construction. I guess Dassault Systems would be their biggest competitor,

but that's a little more niche, right? Yeah, Dassault is more, and I guess this might just be from personal experience, but I think they do focus more on aerospace and mechanical, although Autodesk has said that they've won some contracts for aerospace. But Autodesk itself focuses on architects, civil engineers, and construction management, which is a big market within itself, but it's just different products.

You need different things with those different engineering backgrounds. So, yeah, they compete with Dissolve, they compete with Procore, which is a smaller company we like a little bit, and they compete with Adobe a little bit. But those don't, I mean, they don't overlap too much. Yeah, I'm curious if maybe there could be some sort of disruption from the gaming engines potentially. Maybe, maybe, but they're just partnering with each other, though, remember?

So it's like they would want to work together because Unity maybe could do back-end stuff with Autodesk, but Autos has that expertise and all that technological development they've built up over decades that's really built AutoCAD and all their other products like Reddit and stuff like that. Yeah, I mean, architects, engineers, they're usually not also developers. I mean, there are probably cases where they are, but a lot of them like a simpler tool to use and they don't have to write their own code like they might with a gaming engine. Okay, further reading, what are you looking for?

Okay, I know that they're big in the AEC industry, but that's a broad market. and it's architects engineering and construction which there's just thousands and thousands of workers millions worldwide i want to know what specific parts of the aec industry actually like or dislike autodesk so it seems like they are big with civil engineering they kind of nice base there no complaints and they're investing a lot of capital into the construction industry but they mentioned that architects have been complaining that they haven't revamped their products and they're trying to do that so i want to know like are they waiting for people to complain are they trying to be proactive and move into new markets stuff like that and also they

have a big product that we're not going to mention on this show that people probably need to look into it's called fusion 360 and i think it's kind of their bundle subscription product but i'm not sure and that's something you definitely need to look into before buying the stock yeah um for me i'm gonna look at where the rest of the goodwill is coming from i guess this was more just a lapse on my part because i didn't see i didn't dig into the older 10ks but they have acquired i think since 2017 they've acquired three businesses assemble systems plan grid and building connected and the goodwill from all those transactions amounts to 1.1 billion and that's less than half of their total goodwill so i'm curious what they paid up for prior to these acquisitions

because there's 50 of goodwill sitting out there somewhere so that's something i definitely want to pay attention to and the risk for that as investors is that goodwill if the asset isn't performing it will need to be written down during the audit or whatever they have to do their earnings and stuff like that so that's just a risk if you have a right down to the assets um you know your your equity is going it's not worth as much yeah all right uh future growth opportunities you want me to go first or you you can go first because we'll just flip back and forth okay my growth opportunity is pricing power and that's basically a perpetual growth opportunity because it's always there um they clearly have it something that we always like

to see is when the software is embedded in the university system which for technical stuff so right yeah so which means firms tend to keep using like the firm level if we're talking about professional not university they tend to keep using autodesk because their incoming employees are recent graduates who have gotten acclimated to this software and then the universities continue to subscribe because the firms expect them to be acclimated to that software and so they've basically got a moat in there where and universities take forever to switch anything oh i went through that process those are not switching anytime soon it's i mean it's a lock in that it would be extremely hard to change and it would take a decade or so for them to reverse this moat if

someone poured in a ton of capital just to destroy auto like if they just had beef with autodesk or something it's not even like you're talking about engineering architecture construction management those uh those fields all use it and then interior design uses autocad manufacturing as well manufacturing is a subset of engineering but it's large and they have specific products for that that they teach for those specific um engineering degrees there's there's a lot of fields that are taught in the university system that are forced to use autodesk yeah autodesk products and their competitors like uh desalt and um ansys i think is another one but still autodesk is the biggest player i'll get into my future growth opportunity they acquired a company called pipe p-y-p-e this

is supposed to help with their push into the construction cloud offerings um it's like management things like that um if you ever heard of procore they're kind of going to that direction but ryan is kind of an expert on procore he's telling me it's not exactly the same if that's uh i was paying more attention to the plan grid um if we just people have made the comparison or the uh they they've said that pro core and autodesk are directly competitors autodesk is primarily catered to the building and the designing and then as they they have workflow as sort of a secondary part of their business but they're trying to expand pro core is straight workflow and it's mostly just for the construction business you take a picture of something that's

going on on the work site send it back to the office um and but yeah they uh autodesk apparently with their recent acquisitions is trying to make a jump to that space as well yeah maybe they acquire procore that wouldn't be i would not be opposed to that using that uh nice sales ratio nice valuation multiple to do that all right let me just if you're confused on what this is this is what pipe said in their press release um just so you know what the product actually does so pipe is to provide solutions that automate manual construction workflows for increased productivity and reduced risk and we are proud to join our powerful set of solutions with autodesk blah blah blah blah so they're combining that with autodesk um and so that could be a nice add-on to boost

that pricing power with the subscriptions yeah i mean just think about if you're trying to understand where this applies in the real world imagine that there's people on the site and then there's imagine there's people in the office and you're sharing files the best way to do that is through cloud and doing it by via your mobile connected devices yeah it's better like you want to do it through one specific platform too you don't want to just be using your email you want something designed for this stuff because the documents are all specific you know like email doesn't really work for this it doesn't work for it's the uh bim whatever like you have to send bims i think it's building information something message i don't know but it's uh it's it's not

you can't just use Slack. You can't just use texting. Everyone needs to be on the same platform. Exactly. All right. Last segment, highlights and lowlights. What do you got? Yeah. I mean, they're a high moat business. They certainly have the ability to raise prices at a sustainable rate. They also had a very successful transition from manual to subscription business. So they went from, I think it was in 2015 or 2016, they had around two and a half billion in revenue. They slowly declined into 2018, and then as this SaaS model has taken off, they've done really, really well, and that's obviously going to lead to higher margin conversion. And they were early to SaaS, like trying to transition to that model way before it was popular. And it's been very successful for them.

My low light, it feels like they're getting maybe a little loose on the leverage side. Like you said, they have those long-term notes. Obviously, with the low interest rates, it might be in their best interest, and people will typically say, well, they have such a stable business model. It's fine if they increase leverage, but it's never a problem until it's a huge problem. And we saw that with like Starbucks and COVID. Starbucks, I remember saying like, oh, they're smart. I mean, who cares if their balance sheet is a little off? They're a stable business.

Well, when shit hits the fan for your business, suddenly you owe money to a lot of people. That can be a problem. I don't know what catalyst would drive that for Autodesk, but I don't know. I don't like seeing too much leverage. basically a global depression if no one's doing construction and engineering projects that's really the big risk but to note on that the leverage and the bond payments are basically they have one more due i think it's 350 million dollars due before 2025 and the rest of their debt is not due till post 2025 so i mean you know they could add more but it's not a giant concern

currently okay uh what about your highlights highlights i still have you know the recurring revenue stuff they're going all cloud in 2021 they're cutting the not they're literally cutting the cord um like they're saying no no we're not doing any of the manual stuff if you want to switch over fine they may lose a little bit of revenue in the short term but in the long run it should be better for their business i love the educational funnel um you know the civil engineers the construction management majors are ingrained with the products asia pacific is seeing usage above pre-covid levels i think korea japan um and taiwan i believe in their conference called They mentioned that those numbers are already above pre-COVID, which is great.

It shows that as the markets are just getting back to normal, they're going to get to growth and get bigger than they were even in 2019. Low lights, only thing I had here that you didn't have was their net revenue retention number. They don't give an exact number. They give a range of 100% to 110%. I don't think that's a good sign because they're not giving out a specific number. Also, that's a really wide range. It's a very wide range, so I don't think it's that great.

It's like saying revenue increased somewhere between 0% and 10%. That doesn't help us. Yeah, if they give out a specific number in the future that knows, that's an indicator to me that they're doing better over time. And if it goes above 110%, they'll probably give out a specific number just so they can brag about it. What about this reseller business? Does that go down as a low light for you? I don't think it's a bad low light.

They said in the long run they want to have, I think, 30% to 35% in-house sellers, so direct on Autodesk website so maybe they're trying to slowly transition to more direct to consumer which in this case is direct to business D to B yeah but they do use a lot of the resellers and I don't think it's an issue in the past they said they have a big relationship with a few of them I think one it's called tech data makes up 35 percent of their revenue so they want to keep that relationship they don't want to end it I know it just seems weird as they turn to the sass model to have people reselling you know i feel like this is something that a lot of people come to and automatically subscribe like you don't need the middleman there i would rather invest in

autodesk than tech data i can say that for sure yeah okay uh are we more or less interested in autodesk after today i'm definitely more interested i think it's a quality business valuations a little tough but not crazy uh so i haven't researched it enough to know that i would want to buy it yet but i'm going to definitely do more research um and it it seems like a great business yeah i agree i'm going to do probably some digging into the operating expenses and see what i can find that is maybe stuck like what's going to scale with the business what won't what's sort of uh going to diminish its scale because if there's a lot in there that uh goes away as they scale that's going to lead to high margin conversion it's going to be much better business

I mean, with those gross margins, if they can convert to the whatever cash flow margin, it could be 40% if they're good at it. But if they're hiding a lot of that cost of revenue in the operating expenses, it means that that sales multiple that they're trading in currently might not be as justifiable. Yeah. All right. We good? Yeah. Cool. That's going to do it for this episode.

Remember, as always, email us, show suggestions at chitchatmoneypodcast at gmail.com. and just tweet at us at ChetChatMoney for any show suggestions or critiques. We do get critiques. We get the YouTube comments. Those are – We've been getting some hate. Yeah, and all YouTube comments are ridiculous. But remember, we are not financial advisors.

Anything we say on this episode is not formal advice or recommendation. Thank you all for listening. We'll see you on our next episode. Thank you. Thanks for watching!