Dec 14 -
Summary analysis -- Autodesk Inc. --------------------------------- 14-Dec-2012
CREDIT RATING: BBB/Stable/-- Country: United States
Primary SIC: Computers,
Mult. CUSIP6: 052769
Credit Rating History:
Local currency Foreign currency
05-Dec-2012 BBB/-- BBB/--
The rating on San Rafael, Ca.-based Autodesk Inc. reflects the company's "satisfactory" business risk position in design, engineering, and entertainment software solutions, a significant recurring base of revenues, and solid free cash flows generation. Although the company holds a leading position in several submarkets, the ratings are tempered by its niche focus, a highly competitive marketplace that includes larger, well-capitalized participants, and the potential for a moderate revenue and earnings impact during weak macroeconomic cycles.
With last-12-month (LTM) revenues of about $2.3 billion, Autodesk is a leading provider of design software solutions for architectural, engineering, and construction (AEC; 28% of fiscal-year 2012 net revenue), manufacturing (24%), Platform Solutions and Emerging Business (38%) and Media & Entertainment (10%). Its products are used to reduce the time-to-market and cost of the product design process. We believe the company has a defensible position in its markets based on its installed base and commitment to innovation--it consistently dedicates at least 20% of revenues to research and development (R&D), and has a recurring revenue base of about 40% from annual maintenance agreements. We expect recurring revenue as a portion of total revenue to increase further, as the company transitions over time to a subscription-based model that would provide for greater earnings visibility. Revenues are diversified, with about two-thirds derived internationally with little customer concentration.
Autodesk's products are generally sold at lower price points, mostly through indirect channels (about 85%), and are less specialized than its competitors' offerings. Additionally, Autodesk does not customarily provide systems integration and professional services. Thus, competitors can gain market share by winning new projects in existing accounts by offering packages with superior features, offering additional services that Autodesk does not provide, and through new account development. However, the installed customer base tends to be loyal, using internal databases developed around the software and often requiring extensive training. The customer base is also familiar with the products.
In our assessment, the company's management and governance is "satisfactory." Autodesk has an "intermediate" financial risk profile. Profitability and cash flow measures are solid; the company has relatively stable EBITDA margins in the mid-20% area, in line with its peers'. Capital expenditures are modest at about 2.5% of revenues, and Autodesk has averaged above $480 million in free cash flow annually over the past five fiscal years. Debt to EBITDA is in the mid-1x area and we expect the company to maintain total debt to EBITDA at less than 2.2x over time as it pursues its growth objectives, which could entail acquisitions funded with some additional debt or by reducing existing liquidity. However, we do not expect it to pursue large transformational acquisitions.
Autodesk has "strong" liquidity. Our assessment of Autodesk's liquidity profile is based on the following:
-- We see sources to be in excess of uses for the next 24 months, in part reflecting no near-term debt maturities.
-- We expect that net sources would be positive in the next 12 months, even with a 50% decline in EBITDA from LTM levels.
-- $1.7 billion of cash and securities (as of Oct. 31, 2012);
-- A $400 million revolving credit facility that expires in May 2016; and
-- Expected free operating cash flow generation in the $500 million area.
The rating outlook is stable. We expect Autodesk to maintain its market position and financial profile in line with the current rating in the intermediate term. We do not currently expect to consider a higher rating based on the company's relatively narrow market focus, highly competitive industry conditions, and its potential use of financial flexibility to support its growth objectives, which could include debt-financed acquisitions. Debt to EBITDA staying above 2.2x could lead to a rating downgrade.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Temporary telephone contact number: Phil Schrank (516-503-1164).