Autodesk Q2 Preview: Activist Pressure Should Turn Things Around

Core Viewpoint - Autodesk is a software platform for 3D design across various industries, but it has underperformed compared to the S&P 500 and Nasdaq 100 year-to-date. The company is expected to report Q2 FY25 earnings with revenue growth of 10% and non-GAAP EPS growth of 5% year-over-year, while facing pressure from activist investors for management changes and improved margins [2][8]. Financial Performance - In Q1 FY25, Autodesk reported revenue of $1.42 billion, a 12% year-over-year increase, with subscription revenue constituting nearly 94% of total revenue. The AEC segment accounted for approximately 48% of total revenue, growing at 16% year-over-year, while other segments grew at slower rates [3][4]. - The company generated $490 million in non-GAAP operating income in Q1 FY25, reflecting a 21% year-over-year increase and a margin expansion of 300 basis points. Operating expenses grew only 6%, allowing for operating leverage [5]. Strategic Initiatives - Autodesk is implementing a new transaction model aimed at enhancing customer relationships and streamlining sales processes. This model has led to a 20% year-over-year growth in direct revenue, which now represents 38% of total revenue [4][5]. - The company is focusing on product innovation through its GenAI initiative, Project Bernini, which aims to automate low-value tasks and improve design efficiency [5]. Management and Governance Issues - Activist investor Starboard, holding a $500 million stake, is urging significant changes in Autodesk's management, including the potential removal of CEO Andrew Anagnost, due to concerns over misleading sales tactics and poor financial performance [6][10]. - Recent accounting issues have raised concerns about the company's governance practices, with a review of processes related to free cash flow and operating margins initiated after delays in financial disclosures [6]. Future Outlook - Autodesk is projected to achieve total revenue of $1.48 billion in Q2 FY25, with a full-year revenue target of $6.05 billion, reflecting a 10% growth rate. The new transaction model is expected to provide a 1-percentage point tailwind to revenue growth [8]. - The company anticipates non-GAAP operating margins of 35-36% for FY25, although the transition to the new transaction model may create short-term accounting challenges [8]. Valuation and Market Sentiment - Consensus estimates suggest Autodesk could generate approximately $7.5 billion in revenue over the next three years, with non-GAAP EPS projected to grow at a faster rate than revenue. The current price target based on valuation models indicates a potential downside of about 10% from current levels [9][10]. - Despite a majority of Wall Street analysts rating the stock as a "buy," uncertainties surrounding management practices and governance issues lead to a cautious stance on initiating new positions [10].