Autodesk will be allowed to hold its board vote next month after the Delaware Chancery Court rejected Starboard’s claim on June 20.
engages in three-dimensional design, engineering and entertainment technology solutions. Its product offerings are focused on the following categories: Architecture, Engineering and Construction, AutoCAD and AutoCAD LT, Manufacturing, and Media and Entertainment. Its products include AutoCAD Civil 3D, Building Connected, Autodesk Build, Revit, Computer-Aided Manufacturing Solutions, Fusion 360, ShotGrid and 3ds Max.
With 90%+ gross margins and 35% operating margins, Autodesk is a leader in AEC software. The company's gross margins are best in class, a reflection of its value add and pricing power. Further, its operating margins are not much worse than those of its peers at first blush. However, Starboard correctly does not judge the company's operating margins on the mean of its peer set, but by the potential embodied in its gross margins and market position.
While the findings of the investigation alone are worrisome, there are two things in our mind that could elevate it from an acute accounting issue to a much more serious governance issue. First, while Autodesk reports free cash flow as a key operational metric, it was alsoin executive compensation. Second, how the board and management responded to this investigation might be an even bigger problem. Here, the board seemed to determine that Deborah Clifford could no longer remain as CFO.
Once that is resolved, a reconstituted board and management team to the extent necessary can focus on improving operating margins and trading multiples. Improving margins by 1,000 basis points by itself could greatly increase shareholder value, but applying a bigger multiple to that will have an exponential effect. Presently, Autodesk trades at an EV/CY2025E earnings before interest, taxes, depreciation and amortization multiple of 19.4x versus some peers above 30x and a peer average of 23.5x.
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