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Computer-aided software provider Autodesk (ADSK) benefitted from larger-than-expected expansions of enterprise business agreements (EBAs) in Q3, fueling a top and bottom-line beat, but tepid guidance for Q1 and FY25 is weighing on the stock.

• Despite the high interest rate environment, ADSK saw growing momentum in its construction end market, especially among its larger customers. In fact, ADSK secured its largest ever EBA during the quarter and received record contributions from its construction and water verticals.
• However, when excluding the impact of that record-setting EBA, ADSK's underlying results don't look as strong. While remaining performance obligations (RPO) were up by 12% yr/yr, to $3.5 bln, RPO actually slightly decelerated from last quarter if that EBA is excluded.
  • The qtr/qtr decrease is mainly due to a lower mix of multi-year contracts in FY24 compared to FY23 -- a trend that has been slowly building over the past couple of quarters.
• Relatedly, ADSK is in the process of transitioning from upfront to annual billings for multi-year contracts, thereby eliminating the upfront discount that it previously offered. This shift is negatively affecting ADSK's RPO and billings growth rates, as well as its free cash flow.
  • Specifically, billings decreased by 11% to $1.2 bln, following a decline of 8% last quarter, while free cash flow plunged to $13 mln from $128 mln last quarter.
  • Although this transition is creating a significant short-term headwind, ADSK believes that in the long run it will create more predictable and sustainable recurring revenue and cash flow.
• As this transition plays out, ADSK is also implementing a new transaction model for its indirect business across all of its major markets. In this new model, ADSK's partners will now provide a quote to customers, while the actual transaction still occurs directly between ADSK and the customer.
  • This shift will add another layer to the near-term headwinds that are impacting ADSK's financials, but the optimization created by this transition is expected to boost revenue, operating income, and free cash flow over time.
• Beyond these business model shifts, macroeconomic headwinds are another factor behind ADSK's downside Q4 EPS guidance and tepid FY25 revenue growth forecast of about 9%+. In particular, demand from medium-sized customers is softening, while momentum in the media and entertainment vertical has also deteriorated.

Overall, there are many moving parts to consider, making for a complex story that market participants are trying to digest. The bottom line is that these changes to ADSK's business model will have a significant impact on its financials in the near-term, while at the same time, macroeconomic pressures are taking a toll on its smaller and medium-sized customers.